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PALO ALTO, CA -Stanford University’s decision this week to pull the plug on a major expansion of Stanford Shopping Center is more than just that to the City of Palo Alto and Simon Property Group. Simon, the largest US retail REIT, owns the existing center, leases the underlying land and wants to make sure the asset remains one of the top retail destinations in the region. The city agrees, and very much wanted the additional tax revenue.

The expansion was to add 240,000 square feet of retail space and a 240-room hotel to the existing 1.4-million-square-foot [net rentable], 70-acre development. Simon tells GlobeSt.com that it “certainly understands” the University’s decision and acknowledges the school’s rights as landowner to withdraw the application. It’s just not at all happy about it. Neither is the City of Palo Alto.

“Simon is very, very disappointed in the outcome because we believe it’s important to expand Stanford Shopping Center to be competitive [given] the expansion of other shopping centers in the area,” Simon spokesman Les Morris says. City officials also “expressed disappointment with the University’s decision” to shelve the retail center expansion, according to a statement released by the city.

Stanford says in a prepared statement that by shelving the project it could better focus on the 1.3 million-square-foot expansion of Lucile Packard Children’s Hospital and the Stanford University Medical Center. The shopping center expansion and the hospital expansions were applied for as a combined project in early 2007, however; unlike the retail center expansion the university has a state-mandated 2013 completion deadline for the hospital—a deadline it hopes to have extended to 2015 because it is running behind schedule.

“Stanford officials believe that the combining of the hospital renewal projects with the Stanford Shopping Center expansion has caused confusion and distraction—diverting the focus from the urgent need to provide quality healthcare to Palo Alto and surrounding communities,” the University stated. “Stanford officials have decided to withdraw the shopping center application in order to allow expedited processing of the more critical hospital renewal project. In addition, removing the shopping center expansion from consideration will help reduce environmental impacts, addressing some expressed concerns that the combined projects are too large.”

The University then proceeded to lay the blame for the delays squarely on the city. It states that the City of Palo Alto approached Simon in 2006 about expanding the center to help increase the city’s tax revenue and that, at the time, the university’s position was that any discussion of shopping center expansion should occur only after hospital permissions were obtained.

“However, in order to assist the city in pursuing its goals, Stanford reluctantly agreed to have the projects considered concurrently, but separately,” states the University. “Instead, over the last almost 30 months of public review and hearings, City Council members and Planning and Transportation commissioners have implied, or even expressly stated, that the shopping center and hospital renewal projects should be considered as one large project.”

The City of Palo Alto was in the process of finalizing an Environmental Impact Report that covered both the hospital and retail expansions when Stanford withdrew its application for the retail piece. In the City’s press release on Stanford’s decision to shelve the retail project, Palo Alto City Manager James Keene stated it was the University that requested that the Environmental Impact Report for both the hospital and shopping center be processed together. A City planner tells GlobeSt.com it is not yet clear whether the final EIR will incorporate the retail center expansion as previously planned.

The University says the City has been blending the projects’ development conditions and that they are being disproportionately assigned” to the hospital renewal project rather than the shopping center expansion. For example, it said the city has proposed requiring the hospitals to build 594 affordable housing units on land the hospitals don’t own and that is outside the city’s jurisdiction, when by law the hospitals are exempt from such housing requirements.

“Even if they were not, a comparable commercial project would be required to provide only 63 units, according to the university,” the University stated. “Another example is that both the shopping center and hospitals produce traffic impacts, but only the hospitals are identified for millions of dollars of traffic-related project conditions, such as running or paying for the Palo Alto cross-town shuttle.”

Regardless of the University’s reasons for shelving the project and who is to blame for the hospital expansions being behind schedule, Simon remains committed to the project. “We are hopeful we can revisit the issues of expanding the center with Stanford at the appropriate time,” Morris says.

City officials no doubt also are hopeful. City staff estimated that an expanded Stanford Shopping Center with a hotel would generate $2.3 million in annual sales and property tax revenue for the city.

“The shopping center and a new hotel represent a significant percentage of the city’s sales tax base,” James Keene, Palo Alto City Manager, said in the statement. “Protecting the center from any economic decline due to increased regional competition is vital to maintaining the city’s financial health and the city services our community expects.”

Stanford is one of the top upscale retail districts in the region along with Union Square in San Francisco and, in San Jose, the adjacent Westfield Valley Fair and Santana Row developments. Stanford Shopping Center, built in phases beginning in 1956, is anchored by five major department stores–Neiman Marcus, Nordstrom, Bloomingdale’s, Macy’s, and Macy’s Men’s Store. Specialty retailers include Pottery Barn, Williams-Sonoma, Coach, Tiffany and Cartier.

Expansion plans called for the bulk of the additional retail to be in multiple buildings facing El Camino Real, where there is currently a sea of surface parking. The design of the expansion would be similar to that of Santana Row in San Jose. The hotel was slated to go toward the other end of the center, at the corner of Quarry and Arboretum roads. Additional structured parking was to replace the lost surface parking.

SPG acquired Stanford Shopping Center with a $220-million, 3.60% interest-only five-year fixed-rate mortgage arranged by Credit Suisse First Boston. It is now encumbered by a five-year, $240-million, variable rate loan that matures in 2013. As of the end of 2008, the interest rate was 2.59%.

Worldwide, SPG owns or has an interest in approximately 324 properties comprising 246 million square feet of gross leasable area. In the greater Bay Area, SPG owns five regional malls and five outlet properties. In addition to Stanford Shopping Center its regional malls are Stoneridge in Pleasanton; Hilltop Mall in Richmond; Great Mall of the Bay Area in Milpitas; and Coddington Mall and Santa Rosa Plaza, both in Santa Rosa.

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