The developer of the Malibu Lumber Yard has gotten a financial break from the city, because the upscale shopping center has leased up slower than expected while costs of an elaborate on-site wastewater treatment system have run higher than anticipated.

The break could be worth $100,000 or more annually by allowing developer and owner Malibu Lumber LLC to defer a portion of its rent for the city-owned land. The revised deal was approved by the Malibu City Council on Sept. 29 in a 5-0 vote.

The 31,000-square-foot center has been a high-profile one, even before it opened in April with a star-studded party. That's because it was the first such retail center to open in development-averse Malibu in two decades. What's more, the project at Pacific Coast Highway and Cross Creek Road is near the celebrity hangouts of Malibu Country Mart and Malibu Colony Plaza.

However, project co-developer Richard Weintraub and a broker who has handled leasing at the property acknowledged that the recession has hurt the $25 million shopping center and forced them to trim asking rents.

"The fact that it's a new project in Malibu, it creates new energy in the area," said Matthew May, a retail broker and president of May Realty Advisors who is not affiliated with the project. "But no matter how perfect the opportunity is and how pretty the real estate is, it still doesn't trump the economic times."

The project, which was co-developed by Weintraub and ValleyCrest Cos. Chief Executive Richard Sperber, includes high-end clothing shops such as James Perse, Intermix and Kitson, along with a handful of smaller local retailers. Getting the retail center approved and built was a big task for the developers, who had to contend with development-wary factions in the city. Significantly, they also had to meet tough requirements set out by the Los Angeles Regional Water Quality Control Board.

Costly sewage

The agency required the installation of an advanced wastewater system, which takes the sewage from the property and recycles it for other uses and pumps treated water to an adjacent field where it can seep into the ground. The system wound up costing $4 million, not the $500,000 the developers had planned on, and it costs $250,000 to operate annually five times more than projected, Weintraub said.

Then there's the economy. The retail sector has been ravaged by the recession, which has forced consumers even in the wealthy set to slash discretionary spending. Trendy retail strips such as L.A.'s Robertson Boulevard have cooled and landlords across Los Angeles County have lowered rents.

According to Weintraub, the two-story project has about 5,300 square feet of vacant space, which means it is about 17 percent vacant.

That's higher than Beverly Hills, for example, which has a citywide retail vacancy rate of less than 10 percent, May said.

But Weintraub, president of Weintraub Financial Services Inc., said he's pleased with the project.

"The reality is that while we have leased up quite well, obviously in this environment, things for everybody are not as rosy as everybody projected," he said.

Malibu City Manager Jim Thorsen, who approved a staff report that recommended the council approve the rent concessions, said that the economy and the developer's large investment in the property made the assistance appropriate.

"We recognize the economic climate people are in," he said.

Under the original deal, the developer has a 54-year ground lease with the city and pays $925,000 annually in base rent, which escalates every five years by 5 percent. Additionally, the developer must pay the city 30 percent of all rental income greater than $2.27 million a year.

Under the new plan, the developer will continue to pay the base rent but the portion tied to the property's rental income known as "participation rent" will be deferred for as many as 10 years. The revised deal takes effect next year.

According to Thorsen, the city had projected the 2010 participation rent to be more than $100,000, and it was expected that the amount could grow over the years. Of course, the developer still must pay the participation rent eventually, but no interest will be added to any deferred payments.

The developer must start repaying the deferred amount when the total rent at the property hits $4.8 million, Thorsen said. In any case, the developer must start repayments in 2020 and has until 2025 to pay back all the money. The agreement allows it to defer a maximum of $1.5 million in rent.

"The participation rent that's a tremendous benefit for the city, and we are very happy with that," Thorsen said.

Giving concessions

The city staff report on the deferment plan said the economic downturn has "slowed the leasing of the site."

But broker Jay Luchs of CB Richard Ellis Group Inc. said that given the economic climate, things aren't so bad.

"We are very fortunate to have not only so much of the center leased, but to also have such incredible brands," say Luchs, who has leased space to several of the tenants.

Still, asking rents at the property have dropped, with Weintraub noting he has given "concessions" to some tenants. He said that the asking rent for first-floor space is $12 to $20 per square foot per month and $7 to $11 per square foot on the second floor. In the spring, he told the Business Journal that normal rents at the property were in the $18-$20 range.

But Weintraub said that the wastewater facility was more of a determining factor in asking for the deferment plan. Malibu wastewater is pumped through septic systems and the Regional Water Quality Control Board required the construction of an advanced system that can treat up to 17,000 gallons a day. Weintraub said that the water board kept increasing the requirements of the system. As a result, it is one of the "most advanced systems in the United States" but also one that was costly to build and is expensive to operate.

The system is so complex that the developer had to hire an on-site engineer to run it.

Thorsen acknowledged that the water board took a "high interest" in the Malibu Lumber Yard development, adding: "We didn't anticipate that there would be these types of requirements on such a small development."

Water board officials could not be reached for comment.

Despite the cost overruns on the wastewater treatment system and the impact of the recession, Weintraub said he is happy with the project, adding that he believes some of the vacant space will soon be leased.

"No one can say the world is perfect, but all things considered, this measures up pretty good," he said.

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