New
investor gives hope to Xanadu
Xanadu lives.
An investment firm has agreed to pump up to $500 million
into the Meadowlands Xanadu development and secure additional
financing. The firm, Colony Capital Acquisitions, is expected
to complete the project by 2008 with the retail and entertainment
mix promised by Mills Corp. in 2003.
"This creates a new sense of excitement for prospective
tenants who now know, without ambiguity, that the project
will be completed," said Carl Goldberg, chairman
of the New Jersey Sports and Exposition Authority, which
is the project's landlord. "Colony is an extraordinarily
capable real estate investor."
Goldberg said the deal means Xanadu will have an indoor
snow dome and a minor league baseball park, plus "enough
other entertainment components to live up to the terms
of the developer's agreement." The project is also
expected to include a huge movie complex, a kids' entertainment
village and numerous restaurants.
Goldberg said he will meet with Colony soon to discuss
the role the company will play in the development.
Mills, which began construction on Xanadu last year,
has already invested almost $400 million in the project
and is expected to invest another $90 million or so before
the Colony deal is finalized. Mills is essentially giving
away its majority stake to relieve itself of a burden.
Mills has announced leases with only three tenants, and
the company said on Aug. 10 that the project would cost
$2 billion, compared with an earlier estimate of $1.2
billion. Mills blamed the rising price tag on design changes
and the cost of building materials, but was punished by
Wall Street as its shares plummeted.
Morningstar analyst Ryan Dobratz said privately held
Colony is well-financed and well-respected, and added,
"It seems likely more retailers will flock to this
location now that this seems quite viable."
Under the deal with Colony, expected to close in late
September, Mills will become a minority partner in the
project, with the understanding that it would have no
further financial obligations after the deal closes.
Kan Am, an existing financing partner in the project,
invested about $342 million and Mack-Cali Realty Corp.
of Cranford has already put in $32.5 million.
Both Kan Am and Colony would be entitled to substantial
returns on their investment before Mills would get back
any of its $485 million, Mills said in a news release
Tuesday. Also, Colony and Kan Am could gain a combined
4.5 million shares of Mills through the deal.
Until Tuesday, many observers, including Wall Street
analysts, wondered whether the project could go forward
with Mills in shambles, having announced it would restate
earnings downward by $210 million from 2003 to 2005. The
company is also facing a probe by the Securities and Exchange
Commission.
Barry Vinocur, editor of REIT Wrap, an online newsletter
for the real estate industry, called Tuesday's announcement
"great news" for New Jersey. "Governor
Corzine must be feeling like somebody just delivered a
huge Excedrin pill to his office," he said. "Last
week, you couldn't imagine how the project could go forward."
Still, elected officials, who have been nearly unanimous
in saying they want the development to be more than a
shopping mall, say the state has to make certain the new
investors live up to Mills' obligations -- something that
Kan Am and Colony will do, according to the Mills release.
Assemblyman Gary Schaer, D-Passaic, said finding a partner
with "deep pockets" is only part of the solution.
"It would be a mistake to think that all of the issues
have been solved here, because it still is incumbent on
the sports authority to review who the new party is and
any possible changes they might suggest," he said.
State Sen. Richard J. Codey, D-Essex, a longtime Mills
critic, mentioned an indoor ski slope, a Formula One-style
racing attraction, and a minor league baseball park among
the components previously touted by Mills that he wants
to be delivered by Colony.
George Zoffinger, the sports authority president and
a frequent foe of Codey, said he had been frustrated by
not being able to reply to critics due to confidentiality
requirements.
"I hope that now everyone will get behind this new,
expanded partnership, and work together for the best interests
of New Jersey," said Zoffinger, who said construction
on the snow dome will begin next month.
Rich Moore, analyst with RBC Capital Markets, said he
isn't surprised the funding problems with Xanadu appear
to have been resolved. It's in nobody's interest, he said,
to have a partially built structure rusting in the Meadowlands.
"When you have high-profile real estate projects,
they almost always get resolved through negotiations,"
Moore said.
Irwin Horowitz, chief counsel for Hartz Mountain Industries,
which submitted a losing bid to develop the site, suggested
Colony may hope to benefit if the state someday permits
video lottery terminals in the Meadowlands.
"Their track record is not in shopping centers;
it's gambling," Horowitz said. "They've never
built anything like this."
Colony bought the Resorts Atlantic City in 2001 and the
Atlantic City Hilton in 2004. Later that year, company
founder Thomas J. Barrack Jr. told quarterly newsletter
Hotels Investment Outlook that he is bullish about Atlantic
City in spite of the pending arrival of slot machines
at Pennsylvania racetracks.
"Those slots will educate people about gambling
and make them more likely to want to try the Atlantic
City experience," Barrack said.
Colony, which said in a statement it is looking forward
to the retail and entertainment project, would not comment
Tuesday on possible VLTs in the Meadowlands.
In the Xanadu developer's agreement signed in 2003, a
hotel can be built at The Meadowlands Racetrack "only
in the event that video lottery terminals are installed"
at the track. Xanadu developers would have the right of
first refusal to build the hotel if VLTs are approved.
State Sen. Paul Sarlo, D-Wood-Ridge, said he was unsure
if Colony's role at Xanadu would boost the chances of
Meadowlands VLTs.
"This is a company that understands the importance
of gaming as an economic boost for the state," Sarlo
said.
The sports authority sent out requests for proposals
to develop the Continental Arena site in 2002, anticipating
the Nets and Devils would move. The Xanadu project --
4.8 million square feet of entertainment, retail, office,
and hotel components -- was chosen by the authority board
in 2003. The 2.2 million-square-foot first phase of entertainment
and retail has been under construction since March 2005.
Shares in Mills, which were trading in the $58 range
a year ago, gained 15 percent Tuesday to close at $19.28.
Many now expect the company, which owns The Shops at Riverside
in Hackensack and about 40 other properties, to be sold
soon.
