Jones Lang LaSalle


Xanadu or 'no can do'?
As Mills battles problems, state fears for its Meadowlands project
Friday, February 03, 2006

BY MATTHEW FUTTERMAN
Star-Ledger Staff
During a 30-plus-year career in finance and real estate, George Zoffinger says he has never been flat- out wrong on a major decision, and he has the bank account and several vacation homes to prove it.

But three years ago, Zoffinger, the chief executive of the New Jersey Sports and Exposition Authority, led the drive to award Mills Corp. the right to build Xanadu, a massive retail and entertainment center at the Meadowlands Sports Complex.

Now, Zoffinger is wondering whether tapping the Virginia-based real estate investment trust over two other deep-pocketed developers could turn out to be the biggest blunder of his career.
"I actually said that in a meeting with our lawyers the other night," Zoffinger said during a recent interview. "What if I turn out to be dead wrong about these guys?"

Mills, which has a multibillion- dollar portfolio of mega-malls and entertainment complexes around the world, stunned Wall Street last fall when it delayed its third-quarter earnings report. Since then, the news from the company has included an accounting scandal, lay- offs of top executives and second thoughts about major development projects.

All of this has rankled top state officials who promised the $1.3 billion Xanadu project would be an economic engine for northern New Jersey.

Today, Zoffinger and Carl Goldberg, the sports authority's chairman, will question the chief executives of Mills and its development partner, Cranford-based Mack-Cali Realty, during a meeting in the Meadowlands. The state officials will press Mills CEO Larry Siegel and Mack-Cali chief Mitchell Hersh to show they can raise enough money to build what they promised.

But with concern about Mills' finances rising, Zoffinger confirmed state officials have already begun gauging the interest of other developers about taking over the Xanadu project.

Last month, Mills announced for the second time in three months that it would have to restate earnings, this time going back to 2000. The move triggered a flurry of shareholder lawsuits.
Meanwhile, the company is abandoning 10 developments it says it no longer can afford, including a high-profile project on San Francisco's waterfront. The company has announced it will write off $77 million for the fourth quarter of 2005.

Mills' top financing agent, the German company KanAm, which has put $250 million into Xanadu, recently stopped allowing withdrawals on two of its funds after the bad news about Mills sparked a run on deposits.

FUTURE IN DOUBT

Add it all up, says Greg Andrews, an analyst with GreenStreet Advisors in Newport Beach, Calif., and it's anybody's guess whether Mills will be able to survive and complete Xanadu. The total square-footage of Mills' projects worldwide has tripled since 2000, leading some analysts to suggest the real estate investment trust, or REIT, may have grown too fast.

"You don't expect companies to come and go," Andrews said. "REITs are supposed to be stable, because most of their income comes from collecting rent. But this is a company that was always underwriting more risky investments and always had accounting that was more aggressive than its peers."

Here in New Jersey, leasing activity at Xanadu has been slower than expected. Plans for several of Xanadu's entertainment features that helped Mills' bid carry the day -- a rooftop roller-coaster, a House of Blues, a miniature auto racing course -- are either dead or dying.

Bob Sommer, a spokesman for Mills, declined to say how many tenants have signed leases for Xanadu, but said "86 percent of anchors had signed or are with letter proposals."

While Sommer acknowledged the developers have abandoned several proposed entertainment venues, he said attractions such as North America's first indoor ski mountain, the Wanna-Do children's center and a major movie complex remain in the works.

"We're going to have a good meeting tomorrow," Sommer said yesterday.

A minor league ballpark is still in the plan, too, though no deal has been reached on that either, and the original partner in the ballpark has sued the company.

BUILDING PROGRESSES

Construction on Xanadu, which is being built around the Continental Airlines Arena, has been underway since last spring. So far, a $70 million parking garage has risen and a steel frame for part of the retail complex is being erected. But nearly two years of work remains before the first phase of the complex opens.

Mills' supporters note the company's stock price is up about $3, or roughly 7 percent, in the past week following a meeting with the banking community. The company has said a forensic accounting investigation by the Securities and Exchange Commission will not turn up any more bad news that could do further damage to Mills' overall value.

But over the past six months, Mills shares have dropped by more than a third.

Mills' critics say state officials should have seen Mills' woes coming years ago. Executives at Secaucus-based Hartz Mountain Industries, which lost out in the bidding to develop the sports complex site and sued to stop the project, have maintained since 2002 Mills would find a way to wiggle out of its commitments.

"The time for sophistry and disguises is over," said Irwin Horowitz, general counsel for Hartz. "For Mills to continue, they ought to have to put up a letter of credit or a construction bond for the remainder of the project, but given the state of the company, I don't think they could get it."
Industry experts say Mills' ability to sign tenants to expensive leases at Xanadu will make or break the project. The company raised $500 million in cash to pay for the first half of construction, with Mack-Cali contributing $30 million. But banks will only lend Mills the rest of the money if they can see tenants signing leases that will provide enough money for Mills to pay off its debt. The Catch-22 is that tenants may be hesitant to sign leases with a company with so many internal problems.

Goldberg said the leases will be the major topic of discussion at today's meeting.

"We've got to examine the leases and determine the activity is where it should be at this stage of construction, and that it will supply a sufficient amount of cash flow to complete the project," he said.

But with at least $250 million already spent on the project and another $250 million committed for supplies and work that that has already been contracted out, Zoffinger said he remains certain Xanadu will be completed -- by someone.

"There is too much money in the ground already," Zoffinger said. "Either Mills gets its act together and finishes, or somebody else will take it over. But it will get done."