Cheesecake gets caught in middle of mall developers' $89m legal battle

Nation's Restaurant News, Dec 3, 2007 by Lisa Jennings

[ILLUSTRATION OMITTED]

LOS ANGELES -- A jury award exceeding $89 million in a scuffle between two Los Angeles area shopping malls over The Cheesecake Factory may teach chains a lesson about the high stakes involved in some tenancy negotiations with large developers.

In November, a Los Angeles Superior Court jury awarded $15 million in punitive damages and $74.23 million in compensation to mall developer Caruso Affiliated Holdings, whose $369 million retail and residential center, called The Americana at Brand, is scheduled to open next year in the Los Angeles suburb of Glendale.

Company principal Rick Caruso now stands to reap both that monetary reward and the benefits of a Cheesecake Factory tenancy in his Americana center.

Caruso filed the lawsuit in February 2004 against General Growth Properties Inc., one of the nation's largest mall developers, claiming it had attempted to scare The Cheesecake Factory away from signing a lease at The Americana.

Chicago-based General Growth, whose Glendale Galleria is one of about 200 malls it owns in 45 states, was charged with "fraud, malice and oppression" for allegedly telling Cheesecake Factory's brokers that signing a lease with Caruso Affiliated could hamper the chain's future chances for leases at General Growth properties.

In a statement, General Growth Properties' officials disputed the jury's decision and pledged to appeal. However, the company did not respond to requests for further comment.

An attorney close to the case indicated that the developer was believed to have tried to persuade The Cheesecake Factory to open a branch at the Glendale Galleria while also dissuading it from leasing an Americana space.

The case highlights how restaurant operators like The Cheesecake Factory can get caught in the crossfire when mall developers compete--a situation predicted to become more common as fewer real estate investment trusts, or REITs, control more of the nation's prime retail locations.

[ILLUSTRATION OMITTED]

The Cheesecake Factory, whose 137 restaurants tally average annual sales exceeding $10 million and which booked $1.3 billion in revenues last year, was attracted to the open-air Americana site for its debut in Glendale, next door to the enclosed Glendale Galleria mall.

Site specialists say national chains' decisions about new mall locations often depend on the metrics of the venue: the other retailers that are in the retail center and traffic projections and demographics of the neighborhood.

However, relationships with landlords of multiple properties also are key factors for chains to consider. Just as with such mall-anchoring department stores as Nordstrom or Macy's, high-volume restaurant tenants like The Cheesecake Factory are able to exert considerable sway in dealings with mall makers who depend on fielding an attractive mix of retail, dining and entertainment options.

However, real estate veterans familiar with the Glendale squabble say the large jury award is likely to cause some large developers to think twice about using hardball tactics with coveted foodservice tenants.

"It might have a chilling effect," said Howard Samuels, founder of the retail brokerage firm Samuels & Co. Inc. in Los Angeles. "It will likely have an influence as developers proceed. They'll probably proceed with caution."

The Cheesecake Factory, based in Calabasas Hills, Calif., was not a party to the lawsuit. In addition to its namesake restaurants, the company operates the 11-unit Grand Lux Cafe chain. About 80 percent of Cheesecake Factory's restaurants are in malls.

Howard Gordon, Cheesecake Factory's senior vice president for business development and marketing, was reluctant to discuss the case because of the potential for ongoing litigation, except to say that the chain has "a great relationship" with both developers.

Gordon estimated that Cheesecake Factory restaurants are in about 20 malls owned by General Growth Properties.

A Cheesecake Factory operates in The Grove, a break-the-mold outdoor lifestyle center owned by Caruso Affiliated in Los Angeles beside its landmark Farmers Market. The Cheesecake Factory at The Americana is among 17 new restaurants the chain is scheduled to open in 2008.

In a voicemail transcript from court documents in the case, an unidentified broker for The Cheesecake Factory described "threats and negativity" by General Growth Properties about "slowing down in their tracks on other deals" after learning of the chain's plans to open a location in The Americana. The Cheesecake Factory reportedly signed a letter of intent for The Americana site in 2003, but didn't sign a lease until earlier this year.

Originally scheduled to open in 2006, The Americana has been delayed by what Caruso Affiliates described as several attempts by General Growth Properties to derail the downtown Glendale project, seven miles north of downtown Los Angeles.

General Growth Properties raised questions about the environmental impact of The Americana in one failed lawsuit and later challenged the selection of Caruso Affiliated by the city's redevelopment agency for the project. Glendale's voters, however, upheld the choice of Caruso Affiliated in a citywide referendum.