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When poet Samuel Taylor Coleridge wrote about Xanadu as a mystical, romantic place, a giant shopping complex outside of Madrid is probably not what he imagined. Still, the twenty-first-century Xanadú is a magical display of consumerism: a 1.4 million-square-foot complex with an indoor ski slope, a go-cart track, and a panoply of high-end international and local Spanish retailers. Xanadú is the brainchild of The Mills Corporation, an Arlington, Virginia — based real estate investment trust, and it opened to much fanfare in May 2003. But behind its glitzy debut was five years of time-consuming work: selecting the land, obtaining the correct licenses, and building the site. Mills’s massive project, which cost about $450 million to construct, set a new standard for foreign retail developers. Big retail developments were once the sole province of local development and construction companies. But international entities like Mills, ING Real Estate Development Ibérica, and AM Multi Development Corporation Spain, S.A., now constitute leading players in the Spanish market for shopping centers. They are part of the reason why retail space has increased 60 percent in the last four years, according to Chicago and London-based real estate consultancy Jones Lang LaSalle. Malls have opened in and around large urban areas like Madrid and Barcelona as well as, more recently, in small and medium-sized cities and towns. The real estate boom has been fueled, in part, by a thriving Spanish economy. The European Central Bank has kept the cost of money low; the benchmark refinancing rate was 2 percent at press time. That’s helped keep Spain’s GDP strong — it grew 2.4 percent last year — and consumer spending high. It edged up 3.2 percent in 2003, according to Spain’s National Statistics Institute. As Colin Campbell, director of London-based asset manager Pradera AM PLC, which has invested about $800 million in real estate in Spain, puts it: “You have richer people with new houses and new cars. They need somewhere to go. They drive around on E.C. — funded highways to new shopping centers.” But even in the best of times, doing business in Spain is only for the intrepid. Local governments, which grant construction permits, can be unpredictable, and a tangle of zoning and development laws make embarking on massive development projects a protracted, sometimes cumbersome, process. “It is a difficult market to do business in,” says Roger Cooke, head of the Madrid office of real estate consultancy Cushman & Wakefield Healey & Baker. “It’s partly pricing, partly attitude, partly where the assets are held, and partly cultural as well.” Foreign developers have smoothed their way by partnering with local businesses that know the terrain, literally and legally. “This is a business in which a foreign investor would have a high degree of difficulty of entering into in Spain if he went alone,” says Jesús Martín-Dávila, in-house counsel for corporate affairs at Grupo Lar, a Madrid-based developer. Martín-Dávila should know: His company currently has about 20 joint ventures going, the largest with Grosvenor Group Holdings Limited, a British property group. Mills first began looking at Spain in the late 1990s. After doing market research and following the advice of its business strategists, the U.S. developer decided that it first had to find a joint venture partner. Through a third party, Mills linked up with Parcelatoria de Gonzalo Chacon, S.A. (PGC), a privately held Spanish company that owns the land Xanadú sits on. (PGC has a 33 percent stake in Xanadú.) PGC helped Mills secure vital permits, work with local authorities, and explain how business was done, says Edward Vinson, executive vice president — international development at Mills. “They understood how business is conducted [in Spain], and Mills doesn’t. And quite honestly, Mills doesn’t need to,” says Vinson. Mills’s strategy isn’t unique. ING Real Estate Development, an arm of ING Groep N.V., the massive Dutch bank and insurance company, also decided that partnering was the way to enter Spain’s booming retail market. The predecessor company to ING Real Estate Development first came to Spain in 1993 in the hopes of building shopping centers there, as it had successfully done in the Netherlands. But it wanted to test the market first. “I worked for about a year trying to find the proper joint venture partners,” says Jan Eijkemans, general manager of ING Real Estate Development. ING’s first Spanish partner was Filo, a development company with which it built shopping centers in Santander and Barcelona. ING collaborated with Filo several more times and acquired the company in full in 2001. The Dutch company formed other local alliances, too. In 2000 Grupo Promodeico, a Spanish company, approached ING about a joint venture to build a shopping mall in Alicante, on the booming Costa Blanca, south of Barcelona. While Promodeico “understood the market for shopping centers,” says ING’s Eijkemans, the company was also willing to tap into ING’s expertise when it came to design, marketing, and strategy. This was a winning combination, he says; ING took a 30 percent stake in Promodeico, buying the rest of the company two years later. The joint ventures, and eventually acquisitions, were motivated by a desire “to build our own structure in Spain; to become a developer in Spain,” says Angel Rodríguez, managing director of ING Real Estate Development Ibérica. But even with a local partner, multinationals must still navigate Spain’s labyrinth of local planning laws. While all countries have their real estate quirks, Spain is particularly tricky, due to a decentralized federalist system, strong state and local rights, and a staunch small-business lobby wary of large developments. Every development requires a new round of permits and contracts. “Each plot of land is a world,” says Martín-Dávila, Grupo Lar’s in-house attorney. For a typical U.S. or U.K. lawyer or executive, who is accustomed to long leases and intense contract negotiations, Spain’s business practices can be disorienting. The country is short on detailed contracts (commercial leases are often only two to three pages), but long on other paperwork and notarized documents. The true linchpin of any large-scale development project in Spain is the prized commercial license. Granted by regional authorities, the license certifies that a development will benefit the community and will not unfairly crowd out small businesses. The commercial license “is absolutely crucial. It has nothing to do with [urban] planning. It assesses whether a large retail [development] will have an impact on mom-and-pops,” explains Rafael Molina, a real estate partner in the Madrid office of Linklaters. For AM Multi Development Corporation Spain, S.A., the Spanish arm of Dutch real estate giant AM NV, obtaining a license for its 850,000-square-foot El Cañaveral retail-entertainment project took more than four years. The process started in 2000, when a community board in the suburbs of Madrid solicited bids for a project that would combine retail and leisure space near a development of 15,000 new homes. AM won the preliminary bid contest, but it still needed to obtain a commercial license to go forward with the project. To get one, AM had to negotiate with the community board, which represented nearly 200 landowners, about compensation for the landowners, individually, and for the community as a whole. AM representatives attended local meetings, an integral part of the process. At these gatherings, many of the landowners spoke their mind, with some opposing the project. “Obviously, there are always differing opinions in the system of urban democracy,” says AM’s managing director, Víctor-Manuel Gómez. Eventually, AM came to an agreement with the community board and got its license. In addition to compensating the landowners, AM gave the community money to build new roads (AM declines to disclose how much it paid). The company is now set to begin construction on the El Cañaveral center, which will require about a $366 million investment and include a supermarket, sports facilities, movie theaters, and an outdoor garden. A 2006 opening is planned. While the process for obtaining permits can be slow, Gómez says that the current investment and political climate is generally favorable to granting them. AM has five commercial centers, all with permits, in the pipeline. The company expects to invest about $1.12 billion in Spain over the next four years. Once the financing and licenses for their retail developments are in hand, multinationals then need to build a project that looks and feels Spanish. Experts say that consumers in Spain are drawn to developments with a familiar style. Mills, for example, didn’t duplicate the malls that it has built across the United States. In building Xanadú, Mills sought to avoid the mistakes made by U.S. corporations like The Walt Disney Company, which tried to transplant an American theme park outside of Paris with Euro Disney. “We built a European, Spanish-themed property,” says Vinson. Departing from its typical mall layout — one floor with an indoor “racetrack” with stores around it — Mills instead built a two-level mall, in a terrazzo-style, stone-clad building. Mills also brought together an array of top-end Spanish and international retailers. “The merchandise is from Spain; the retailers are Pan-European,” says Vinson. And while Xanadú pulled in well-known international brands like French Connection and Nike, its tenants also include, in the words of Mills’s leasing director, Richard Kingston, “the A to Zed of Spanish retailers.” The center’s first shop was the country’s best-known department store chain, El Corte Inglés. Xanadú also has Spanish retailers for baby goods, women’s wear, and housewares, as well as Real Madrid’s merchandising outlet for the powerhouse soccer team. Mills also secured permission for something that few businesses in Spain, local or international, have been able to achieve: the right to remain open for business seven days a week, 365 days a year. Vinson says Mills will likely announce another project in Spain by the end of the year, probably in the outskirts of a large city. He says that while it may not necessarily re-create Xanadú, Mills will use a similar formula: find a local partner, use its international expertise, and market to local tastes. “We are trying to take American ingenuity with a European patina,” Vinson says. “We don’t wear a lot of Yankee hats when we’re working there,” says Vinson. Hiding — not flaunting — American roots seems to be the Spanish road to success.

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