The Man Who Invented the Modern Shopping Mall 50 Years Ago

Malcolm Gladwell, commenting on a new biography, Mall Maker by M. Jeffrey Hartwick, which tells the story of the man who invented the modern shopping mall; in the New Yorker (March 15, 2004):

[Victor] Gruen's most famous creation was his next project, in the town of Edina , just outside Minneapolis . He began work on it almost exactly fifty years ago. It was called Southdale. It cost twenty million dollars, and had seventy-two stores and two anchor department-store tenants, Donaldson's and Dayton 's. Until then, most shopping centers had been what architects like to call "extroverted," meaning that store windows and entrances faced both the parking area and the interior pedestrian walkways. Southdale was introverted: the exterior walls were blank, and all the activity was focussed on the inside. Suburban shopping centers had always been in the open, with stores connected by outdoor passageways. Gruen had the idea of putting the whole complex under one roof, with air-conditioning for the summer and heat for the winter. Almost every other major shopping center had been built on a single level, which made for punishingly long walks. Gruen put stores on two levels, connected by escalators and fed by two-tiered parking. In the middle he put a kind of town square, a "garden court" under a skylight, with a fishpond, enormous sculpted trees, a twenty-one-foot cage filled with bright-colored birds, balconies with hanging plants, and a cafe. The result, Hardwick writes, was a sensation:

Journalists from all of the country's top magazines came for the Minneapolis shopping center's opening. Life, Fortune, Time, Women ' s Wear Daily, the New York Times, Business Week and Newsweek all covered the event. The national and local press wore out superlatives attempting to capture the feeling of Southdale. "The Splashiest Center in the U. S. ," Life sang. The glossy weekly praised the incongruous combination of a "goldfish pond, birds, art and 10 acres of stores all . . . under one Minnesota roof." A "pleasure-dome-with-parking," Time cheered. One journalist announced that overnight Southdale had become an integral "part of the American Way ." ....

Under tax law, if you build an office building, or buy a piece of machinery for your factory, or make any capital purchase for your business, that investment is assumed to deteriorate and lose some part of its value from wear and tear every year. As a result, a business is allowed to set aside some of its income, tax-free, to pay for the eventual cost of replacing capital investments. For tax purposes, in the early fifties the useful life of a building was held to be forty years, so a developer could deduct one-fortieth of the value of his building from his income every year. A new forty-million-dollar mall, then, had an annual depreciation deduction of a million dollars. What Congress did in 1954, in an attempt to stimulate investment in manufacturing, was to"accelerate" the depreciation process for new construction. Now, using this and other tax loopholes, a mall developer could recoup the cost of his investment in a fraction of the time. As the historian Thomas Hanchett argues, in a groundbreaking paper in The American Historical Review, the result was a"bonanza" for developers. In the first few years after a shopping center was built, the depreciation deductions were so large that the mall was almost certainly losing money, at least on paper-which brought with it enormous tax benefits. For instance, in a front-page article in 1961 on the effect of the depreciation changes, the Wall Street Journal described the finances of a real-estate investment company called Kratter Corp. Kratter's revenue from its real-estate operations in 1960 was $9,997,043. Deductions from operating expenses and mortgage interest came to $4,836,671, which left a healthy income of $5.16 million. Then came depreciation, which came to $6.9 million, so now Kratter's healthy profit had been magically turned into a"loss" of $1.76 million. Imagine that you were one of five investors in Kratter. The company's policy was to distribute nearly all of its pre-depreciation revenue to its investors, so your share of their earnings would be roughly a million dollars. Ordinarily, you'd pay a good chunk of that in taxes. But that million dollars wasn't income. After depreciation, Kratter didn't make any money. That million dollars was"return on capital," and it was tax-free.