The R&D Tax Credit Aspects of A&E Firms Repurposing Shopping Malls
Shopping-Malls
American architecture and engineering (A&E) firms are presented
with a major business opportunity to redesign dying shopping malls.
Daily Amazon and U.S. Postal Service deliveries at our doorstep serve
as reminders that large sectors of what was once brick-and-mortar
retail has shifted to the Internet and it's ever improving supply
chain. Savvy real estate developers are recognizing that instead of the
inevitable decline to zombie properties, malls are prospective treasure
troves for future real estate development. A&E firms that embrace
these changes and new design concepts have the opportunity to
participate in a growing practice area while also generating federal
and state R&D tax credits.
The Research & Development Tax Credit
Enacted in 1981, the federal Research and Development (R&D) Tax
Credit allows a credit of up to 13% of eligible spending for new and
improved products and processes. Qualified research must meet the
following four criteria:
- New or improved
products, processes, or software
- Technological in nature
- Elimination of
uncertainty
- Process of
experimentation
Eligible costs include employee wages, cost of
supplies, cost of testing, contract research expenses, and costs
associated with developing a patent. On December 18,
2015, President Obama signed the bill making the R&D Tax Credit
permanent. Beginning in 2016, the R&D credit can be used to offset
Alternative Minimum tax and startup businesses can utilize the credit
against payroll taxes.
Understanding the Challenge of Mall
Repurposing
Due to the widespread success of Amazon and
online shopping, retail has been improving; however, mall traffic has
been on a rapid decline. In November 2016, mall traffic decreased 6.4%
and 9.9% in December 2016, during the peak of holiday shopping. It was
found, on the other hand, by Cowen & Co. analyst John Kernan that
non-store retail sales increased 15.3% year-over-year in 2016 to 30.1%
of total sales. Kernan explains, “This is the first time since
January 2014 that non-store retail sales have accounted for 30 percent
of total sales…and we expect it to continue to accelerate as consumers
shift buying preferences to e-commerce.”
In the past, American malls have accredited
much of their success to anchor tenants, or large retail chains, that
typically draw traffic and business to the mall. However, since 2013,
five of the biggest American chains closed more than 750 stores, or 20%
of their total locations. This ongoing decline of department
stores is perhaps the largest challenge that mall owners face today.
These statistics are worrying to mall
landlords who now require new anchor tenants to spur traffic. As a
result, malls are looking to bring in non-retail related attractions,
such as fitness centers and grocery stores, to remain afloat. Such
repurposing calls for new and innovative design concepts that might
even be able to tap into the power and profitability of renewable
energy sources.
New Mall Design Concepts
While some landlords see a sinking ship in underperforming malls,
investors see a treasure chest full of possibilities. Now, retail
investors strategically purchase underperforming malls and repurpose
them into high-performance retail assets. For example, retail investor
Vintage Real Estate bought California’s SouthBay Pavilion in 2009. At
the time of purchase, sales were at $220 per square foot. Vintage
invested $28 million in repurposing the mall, including the addition of
numerous major anchors. By doing so, sales immediately skyrocketed, so
that by the middle of 2015, sales were at $390 per square foot. By
2016, foot traffic improved by 25% and sales increased to $430 per
square foot. The inclusion of a 13-screen movie theater
attributed to the largest improvement in overall success, primarily
because attending a movie showing is an activity that is
nontransferable to the Internet.
The secret to success, as identified by Vintage Real
Estate and other retail investors, is to turn malls into retail
destination hotspots with ease of access to everything one might need.
That is why mall repurposing is pursuing the route of replacing vacant
renting spaces with fitness centers, food courts, grocery stores, as
well as extra space for events, classes and activities for all ages.
Grocery
Stores
Create
the
New
Mall
Experience
The traditional anchors of massive retail chains are
quickly being replaced within shopping malls, and most notably by
grocery stores. American millennial shoppers have become more
comfortable with the idea of everything being at the tips of their
fingers. Thus, being able to go to a mall to purchase clothing, shoes,
and weekly groceries is creating more hype. It also constitutes an
attempt to save malls.
There is no doubt that grocery stores in shopping
malls will increase foot traffic. It was reported in the Chicago
Tribune that a Kroger marketplace would potentially generate $50
million in sales at its mall location in comparison to the $10 to $15
million traditionally seen in revenue. Because grocery shopping
is a basic necessity, people have no choice but to pass the other
stores in the mall. This will undoubtedly benefit the mall as a whole
and could potentially save it from closing.
Revolutionizing
Malls
with
Transportation
While
the future of most malls is going downhill,
malls in urban landscapes, such as New York City, are bustling. The
Oculus, a dinosaur-like
architectural
masterpiece
in
the heart of
downtown Manhattan, has revolutionized urban malls with tourism and
transportation.
The Oculus, both the focal point and transportation
hub of the Westfield World Trade Center mall, strategically intertwines
business men and women with the retail industry. With over 100 stores,
connections between office buildings and PATH transportation to Jersey
City, it is estimated that more than 50,000 commuters frequent the
halls of the Oculus on a daily basis, not accounting for tourists
visiting the iconic mall for its Instagram-worthy view.
Regardless, all
of this foot traffic has become beneficial to the
mall’s tenants.
The Westfield World Trade Center mall’s tagline is
as follows: “The New New York Place
to Be. Shop. Eat. Drink. Play. All
Under One Magnificent
Roof.” The
level of success displayed by the
Oculus due to repurposing demonstrates that a dying mall can be saved
when all necessities are combined under one roof. No longer are anchor
tenants stressed to ensure their sales remain afloat. The mall
experienced success because it was urbanized, which suburban, sprawling
malls are unable to accomplish.
As such, the Oculus has become a location where
people can commute to work, go to
the post office, buy gifts, eat food,
and even get laundry done. This concept is known as a transit-oriented
development hub (TOD), which is beginning to pop up around the world.
More and more American malls can look to other countries that have
repurposed malls into TODs for inspiration. The Oculus, for example,
was inspired by Scandinavian TODs, in which “the transit station is not
just a logistical node, but also a place to go, in and of
itself.” It has become the norm in modern society to go to one
location to accomplish personal tasks and professional services.
Diminishing transportation by centralizing all necessities in one
location may just be the future of all dying malls.
A
Mall
of
Micro-Apartments
Providence, Rhode Island hosts the oldest shopping
mall in America, the Arcade Providence, dating back to 1828. However, despite the elegance of the old
building, the mall closed in 2008 due to a drastic drop in sales, largely in part due to
the
elevators that did not connect the three floors together, which
dissuaded shoppers from visiting the second and third floors. Six years
later, private investors swooped in, purchased the mall, and repurposed
it into the micro-apartment complex it is today. It now houses shops,
restaurants, professional services, as well as 48 miniature apartments
on the upper level. Ranging from 225 to 775 square feet, which is only
marginally bigger than a one-car garage, the apartments immediately
rented out, and there is now a waitlist of over 4,000 people, despite
the somewhat costly rent ranging from $800 to $1,800 per month.
Texan
Mall
Converted
into
a
Learning
Facility
In Austin, Texas, the Highland Mall was purchased by
Austin Community College after most of its stores became vacant in
2010. ACC signed an agreement with Barnes Gromatzky Kosarek Architects,
who turned a JC Penny building into a learning facility, housing 604
computers, an instructional space, library, and offices. Similarly, ACC
received $386 million in funding to change the mall into a
“regional-workforce center, a STEM simulator lab, a digital-media
center, and a culinary and hospitality center.” It is anticipated
that such development will spur academic endeavors and real-world,
practical experience for the students at ACC, but also promote new
business in the local neighborhood.
Repurposing
Malls
into
Medical
Centers
In Jackson, Mississippi, a dying mall was
transformed into a medical center called the Jackson Medical Mall.
Although the conversion’s central purpose is to aid low-income
residents, the facility also offers specialty clinics, a college of
public service, a restaurant and smoothie bar, as well as meeting
spaces for community events. Therefore, these residents can enjoy the
traditional aspects of going to a mall while also getting any necessary
medical attention.
Other malls have been repurposed into medical
centers that still incorporate a traditional mall culture. Not only
does this boost mall sales, but it also ensures that people
get the healthcare they require. A Nashville, Tennessee mall was
recently converted into a medical center by Vanderbilt University. The
entire second floor is now a health facility, where patients receive
pagers, allowing them to amble in the mall on the first floor as they
wait to see a doctor.
A
Mall
of
Tourist
Attractions
The Mall of America located in Minnesota is
considered the largest mall in the United States, with over 520 stores
and more than 40 million visitors per year. Despite such success,
the
mall continues to pursue methods to improve the experience offered to
its frequenters. The mall received a $325 million initiative to add a
hotel, office tower, as well as more stores, and restaurants to its
already sprawling expanse. The mall even went as far as
introducing an underwater aquarium, dinosaur walk museum, and theme
park into the mix, thus driving more tourists to visit the mall and
increase sales. Because of the improvements, some stores have
seen double-digit sales increases and high-end brands staking their
territory.
Mall designers explain that even the simplest of
changes
such
as lighting and flooring can drastically impact the
direction of a mall. Architectural and engineering designers are taking
a different approach to revitalizing the Mall of America. When the mall
was built in 1992, each wing had a theme. Now, the themes are replaced
by a simple aesthetic that makes the stores pop to the consumer.
Everything is toned down to a blank slate of white tiles, paint, and
silver finishing touches. Tall LED light fixtures are mounted on
columns and a skylight offers natural light and a more open feel to the
entire mall. As much as these changes are in the right direction
towards pursuing renewable energy efforts in repurposing, they also
promote sales, increase consumer satisfaction, and save malls from
extinction.
Monmouth
Mall
to
be
Converted
into
a Mini Village
New
Jersey’s Monmouth Mall gained approval for a
plan to repurpose the mall with Rouse Properties, a company known for
changing the
current face of American malls. They plan to create 700 residential
units along the mall’s perimeter, with medical space, indoor and
outdoor dining options, a food hall, an entertainment venue for
concerts, indoor sports center, and even a bowling alley The
intention is to provide locals with everything required in one
location. This will save the mall, but also local businesses and
neighborhoods.
The team takes the construction plan a step further
by modernizing the common space and making it more open to promote
communal activities. There speculated floor plan includes “an
undulating stairway and curving glass monument at the entryway and
walking paths and terraces with water features.” The ground will be
broken immediately, with an opening date expected in 2020.
Mall
Revitalized
with
Environmental
Restoration
Project
The Northgate Mall in Seattle, Washington, which is
still in business and thriving, had its parking lot repurposed into the
Thornton Creek Water Quality Channel. The purpose of this facility is
to take storm-water runoff and reroute it to locations that require
water for plant growth. Its greatest accomplishment is in filtering out
various pollutants from the runoff, which has saved the local salmon
population from possible extinction. Apartments are also located
along the channel, and business flourish in comparison to the previous
mall experience.
At a construction cost of $10.7 million, this
project boosted growth in the surrounding apartment complexes,
restaurants, retailers, and movie theater. The channel became the
heart of the community, offering a green and open space in an otherwise
urban setting. People can mingle and enjoy the landscape from the
various paths, bridges, and overlooks that are incorporated into this
green design. The repurposed Northgate Mall demonstrates another way by
which landscape architecture and civil engineering firms can save a
dying mall, all while benefitting consumers and the environment.
Energy Resiliency
Most existing malls were built in the pre-renewable energy era.
Therefore, they are more likely to consume more energy per square foot
than modern buildings, and utilize a limited amount of modern-day
onsite renewal energy generation. In the traditional business model,
the mall landlord was only responsible for common space energy costs.
The vast majority of usable space was accountable to tenants who
shouldered their own space-related energy costs. Harvard University’s
professor of architectural technology Ali Malkawi supports the fact
that malls made from the 1950s and on were a waste of energy, and that
the retail villages many malls are being repurposed into “typically
[have] a smaller ecological footprint.” Not only are they implementing
more renewable energy sources, but they also help reduce CO2 emissions
by decreasing the need to drive everywhere to accomplish daily consumer
activities.
In the past, the mall’s overall energy management
and performance was not transparent to tenants. Now, most malls are in
population-dense areas that are subject to mandatory energy
benchmarking laws. For example, NYC’s 2010 Building Energy Benchmarking
Project helped landlords compare their commercial buildings to others.
As a result, if a building benchmarked at 75% or lower, the landlord is
then motivated to explore more energy efficient equipment and processes
to increase their rating. Thus, prospective mall tenants have a
way to evaluate a mall’s energy performance before agreeing to rent
space. Malls with a higher rating and use of renewable energy will
attract tenants and also consumers.
With regards to renewable energy, architecture and
engineering firms should consider providing mall owners with design
input that relates to a wide range of renewable energy technologies,
including solar, geothermal, combined heat and power, micro grids, and
energy storage. It seems that mall repurposing is beginning to follow
this trend, as evident by some of the previously mentioned malls.
Upgrades that incorporate LED lighting and high performance HVAC
systems are moving in the right direction in promoting mall repurposing
to include renewable energy aspects.
If A&E firms provide crucial input related to
appropriate building energy control and monitoring systems, revitalized
malls can optimize on performance of the overall energy systems as well
as experience growth in sales and consumer satisfaction. Finally, in
many jurisdictions, implementing the appropriate energy control and
measurement systems can enable the mall to earn demand management and
smart grid revenue streams.
Conclusion
In
a modern world where consumerism is dominated by the Internet and
e-commerce, American malls are on the decline. Landlords are scrambling
to find ways to reuse the space with things that are not transferable
to the Internet. Thus, we see a rebirth of old, outdated malls into
miniature villages, transportation hubs, medical facilities, schools,
and community centers. Companies such as A&E firms that engage in
these transformations should take advantage of R&D tax credits
available to support their innovative efforts.
Malls are not dying—they are merely being repurposed
to accommodate the needs of the millennial generation which prefers
everything being conveniently located—whether it incorporates a morning
commute, a doctor’s visit, a lunch break workout, a dinner date, or a
quest to find a birthday gift. The modern mall fuels our consumerism,
seemingly makes life easier, and explores new ways to incorporate
renewable energy into architecture and engineering designs.
