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At $2.3 Billion, This Mall Could Be Too Big to Fail

The chair lifts, fans and snow guns are in place, which means that the 800-foot indoor ski slope, the only one in the country, is ready to be covered with manufactured snow. The floor tiles, including some with intricate mosaic patterns and others that sparkle like fireflies, have been laid. The anchor restaurant, a Cheesecake Factory, looks as if it could be welcoming customers before long.

Xanadu
Photo by: LancerEvolution
Xanadu

But although its common areas are nearly completed, the 2.4-million-square-foot Meadowlands Xanadu is eerily quiet.

The opening of the $2.3 billion entertainment-and-shopping center, originally scheduled for last November and then postponed until this summer, has been delayed again until some unspecified date next year. Work has slowed considerably at the project, which occupies state-owned land in the Meadowlands Sports Complex, at the intersection of Route 3 and Interstate 95, where the Giants and Jets are building a football stadium.

Even when the economy was robust, some New Jersey politicians and many Wall Street analysts derided Xanadu as a bloated extravaganza. Its ballooning cost helped bring down its original sponsor, the Mills Corporation, which was sold in 2007 to the Simon Property Group . A few months before that sale, private investors led by Colony Capital of Los Angeles took over the project.

Now, however, Meadowlands Xanadu, like many other projects, is enmeshed in the fallout from the banking crisis. In March, the developers accused one of its construction lenders, Xanadu Mezz Holdings, described in court papers as “a nonbankrupt affiliate of Lehman Brothers Inc.,” of defaulting on its loan obligations in recent months. The default “has caused, and is likely to continue to cause, substantial and irreparable damage” to the developers and could threaten the entire project, the complaint said. By this week, Xanadu was $22.9 million short, according to a motion filed on Monday.

Carl J. Goldberg, chairman of the New Jersey Sports and Exposition Authority, which controls the site, said his agency was working with Colony Capital to try to find another lender, a difficult proposition given the credit squeeze. Another option would be “some rearrangement of the debt” with additional capital coming from Colony and its partners, Mr. Goldberg said.

Xanadu Mezz Holdings has sought to have the case dismissed on technical grounds by claiming it was not bound by the contract provisions it is accused of violating. Describing that motion as "patently frivolous,” lawyers for the developers say that the Lehman affiliate had agreed to lend the project $208 million, or 20 percent of the total. Of that sum, $125 million has yet to be delivered. Among the project’s primary lenders are Credit Suisse and Capmark.

Neither Colony nor Lehman would discuss the lawsuit.

Financing is not the project’s only obstacle. In the midst of what Colliers International, a real estate services company, recently described as “the most challenging retail landscape of the past 50 years,” Meadowlands Xanadu is still seeking tenants.

Spring Real Estate Guide 2009 | A CNBC Special Report
Spring Real Estate Guide 2009 | A CNBC Special Report

That task is more challenging now that tenants have the upper hand. National retailers are demanding rent reductions or shorter lease terms and are closing more stores than they are opening. Even more ominously, sales are slipping faster in high-quality malls than in lesser ones, according to Green Street Advisors, a Newport Beach, Calif., company that specializes in real estate investment trusts. Another round of retail bankruptcies is expected this summer, Green Street said.

Because of the legal battle and the construction delay, Real Capital Analytics, a research company that tracks real estate investments, has listed Meadowlands Xanadu as the largest of $9.2 billion worth of troubled assets in the New York area. But Dan Fasulo, a managing director of the research group, said he did not think the center would be suspended indefinitely. “In my opinion, the project is too big to fail at this point and will be completed,” he said.

Laurence C. Siegel, the former chief executive of Mills, who remains the creative force behind the project as president of Meadowlands Xanadu, ascribed the slowdown in construction to a desire by the anchor tenants to postpone opening until the economy began to recover. The sporting goods chain Cabela’s announced in March that it would not open its 202,000-square-foot store before next spring. “It was crazy to go at the burn rate we were going if we were going to delay the project until next year, anyway,” Mr. Siegel said last week. “This was the more prudent thing to do.”

During a recent fast-paced tour of the project, Mr. Siegel, 56, showed off the common areas, which he described as “88 percent” complete. The varied flooring and eye-catching lighting effects help distinguish the building’s five sections. Bright multihued light-emitting diodes mark the section devoted to young people, for example, and fluorescent lighting in soft colors washes over the fashion section. Other sections are dedicated to sports, entertainment and the home.

Though the industrial-looking exterior of the project has been widely attacked, retail specialists have praised the interior. “It’s a lot more dramatic and exciting on the inside than on the outside,” said Richard J. Brunelli, the president of R. J. Brunelli & Company, a retail brokerage firm in Old Bridge, N.J.

Drawing tourists from Manhattan

Mr. Siegel said that the project was 70 percent leased, but he declined to identify most of the tenants apart from the anchors. Mr. Brunelli said it was likely that many leases could be nullified or modified if the project opened without the expected mix of tenants.

Mr. Siegel did disclose a few fresh names, however: the trendy Spanish clothing retailers Zara and Mango, and Deichmann, a German footwear chain, which plans to open a 20,000-foot store, he said. Previously announced tenants include the clothing chains Forever 21, H&M and Children’s Place; Muvico, a movie theater chain; a Zeytinia Gourmet Market; and activities like a children’s museum called Wonder Works and a Legoland Discovery Center.

Casting a wide net, Mr. Siegel said he was going after South American and European brands that were likely to be unfamiliar to most American shoppers. As many domestic retailers look for opportunities overseas, so too are foreign retailers chasing low rents and favorable deals in the United States, he said.

While Xanadu is stalled, other projects at the Meadowlands are nearing completion. The football stadium will open in 2010. Starting in August, a train will whisk visitors from Manhattan to the Meadowlands in 23 minutes.

But last month, the automobile dealer who tried to bring a minor-league baseball park to the Meadowlands abandoned that effort, saying the initial $20 million cost had doubled. “The Bergen Cliff Hawks were a point in time, and that point has passed,” said Steve Kalafer, who owns the Somerset Patriots, an Atlantic League team.

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Despite Xanadu’s problems, Mr. Goldberg of the sports authority said there was no danger that it would fail. “This horse has left the barn,” he said. “It’s far too near completion. The only questions are when will it open, and what will the tenant mix look like.”

David M. Fick, a managing director at Stifel Nicolaus & Company in Baltimore, who was chief financial officer for Mills in the early 1990s, predicted that Xanadu would ultimately be a tourist destination.

“Larry creates leading-edge projects that are very architecturally special,” he said. “A project like that goes with a time risk, though. You don’t know what economy is going to look like when it is finished.”

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