Jones Lang LaSalle
How a Mall in the Meadowlands Is Bleeding a Company
April 16, 2006
New Jersey
By LAURA MANSNERUS
EAST RUTHERFORD
NORTHERN New Jersey is to shopping centers what the Napa Valley is to wineries. Paramus registers higher retail sales than any other ZIP code in the United States. And still there has always been room for more.
So the Mills Corporation — the acquisitive Virginia-based developer of shopping centers and megamalls — got a piece of Bergen County, with the help of the State of New Jersey, and named it Meadowlands Xanadu. With a price tag put at $1.2 billion, it was by far the most extravagant vision of a company that aimed to entice Americans to shop amid a swirl of entertainment, in this case a multistory fun palace ringing the Continental Arena in the Meadowlands Sports Complex.
Xanadu is now under construction, and Mills, whose accounting practices are under investigation by the United States Securities and Exchange Commission, is in the middle of a financial meltdown, looking for a buyer and running out of cash.
Last week, the company's lenders gave it a new lease on life, but a very short lease, under terms that most stock analysts said would probably leave an unfinished Xanadu in the hands of a new owner or a court. Some analysts said that in all likelihood the company would be sold by the end of the year.
Xanadu's landlord, the New Jersey Sports and Exposition Authority, was already worried that Mills might not deliver the recreation and entertainment facilities that were promised for the site, since those enticements are more expensive to build and less profitable to run than retail stores.
But now the authority cannot even be sure that it will have a successful shopping mall, given doubts about the project's potential profitability. Although the names of several potential buyers have been floated in recent weeks, the authority certainly cannot know who will eventually become its partner and tenant on one of the most valuable pieces of real estate between Washington and Boston.
It is entirely possible that the project will open on schedule in late 2007, although engineering plans are being rewritten daily and only 4 or 5 tenants of about 200 are known to have signed leases. "It's not in anybody's interest to have partially built structures without ongoing construction activity," said Carl Goldberg, the chairman of the sports authority, who is a real estate developer himself.
As to whether Xanadu left Mills overextended financially, opinions differ. "It's probably no one thing" that paralyzed Mills, said Barry Vinocur, the editor of Realty Stock Review, a California-based newsletter. "They believed they were masters of the universe. They wanted to grow the company, grow it more rapidly, and they didn't have the controls in place."
But others say Xanadu became a huge tail wagging a shrinking dog. "They bet the whole company on this project," said David Lichtenstein, the chief executive of the Lightstone Group, a Lakewood-based privately held national mall owner that is one of Mills's potential buyers.
In either case, there is little question that Mills compromised itself when it signed on to build Xanadu, demonstrating that even with a choice site five miles from Central Park, reach can exceed grasp.
Xanadu was to be the biggest and most spectacular of Mills's approximately 40 malls around the world. The company, building on a base of successful if unexceptional off-price centers like Franklin Mills in Philadelphia and Potomac Mills in Prince William County, Va., was pitching a newer idea that it called "shoppertainment" when in 2002 it won the contract to be the lead developer of 104 acres of parking lots and wetlands at the sports complex.
Its partner in the joint venture, the Mack-Cali Realty Corporation, a major developer with headquarters in Cranford, has proposed to put up office buildings on the site, although it is not obligated to do so.
Mills had wanted a place in New Jersey so badly that over 10 years it had invested at least $100 million — the exact figure is now the subject of an auditors' inquiry — in another Meadowlands site, where it ultimately was not allowed to build. As for the sports complex site, expenses totaled more than $500 million by the beginning of this year, and, according to sports authority officials, Mills was spending about $20 million a month on construction.
Cracks Start to Show
But as Mills was pouring money into Xanadu, the company was flying apart. Early this month, its stock was hitting a new 52-week low every day or two, sinking into the 20's after a high of $66.44 last August. It laid off about 15 percent of its staff, including some top executives, and became the subject of more than a dozen shareholder suits in which the plaintiffs include the attorneys general of at least three states.
Soon the company was looking for a buyer, but its finances were in such chaos — prompting the investigations by the S.E.C. as well as its own auditors — that its assets could hardly be priced.
The problem was that Mills, highly leveraged already, had been caught with too little income and too much in the pipeline. The big item in the pipeline was Xanadu — and Mills was running out of cash for it.
In the reprieve disclosed last week, Mills's lenders agreed not to declare the company in default and to reopen some lines of credit, while Mills refinanced its best asset, the Sawgrass Mills mall in Sunrise, Fla.
That move netted $246 million for Mills, and the company said it planned to refinance two other properties.
The waivers and credit lines expire by the end of the year, however, and the lenders — who will be overseeing Mills's every move — will allow only very limited borrowing until the company has a buyer or buyers lined up.
Mills is not allowed to pay a dividend for the fourth quarter of the year, and can pay in the third quarter only if it has an agreement to sell all or most of its assets by Dec. 31. The first-quarter divided was declared last week — but reduced by 60 percent.
The reaction on Wall Street to Mills's announcement was mixed. While its stock ticked upward, many analysts said they were relieved only because the company was being forced to make its assets more marketable and then unload them.
In addition to the LightstoneGroup, others who have expressed interest in Mills, according to the financial press, include the Vornado Realty Trust, the Simon Property Group, the Westfield Group and General Growth Properties.
It was not immediately clear what effect the new financial plans would have on Xanadu, where work was slowing on the skeleton of the behemoth "entertainment and retail center."
Mills officials in Virginia did not respond to requests for information, but Michael Turner, a spokesman for the Meadowlands project, said: "This arrangement will provide the company with the liquidity it needs to continue pursuing some of our core development projects. This includes, certainly, Meadowlands Xanadu."
Still Mr. Turner said that he could not say how much of the funds would be available for Xanadu.
Mr. Goldberg also said he was relieved by the series of financial moves made by Mills because they would allow the company more time to find tenants and secure the leases required for construction financing.
But Mr. Goldberg said he still planned to get together with Mills executives on Wednesday to demand more information on their leasing prospects — a point he already made in a February meeting that he described as difficult.
Some stock analysts say the financial arrangements contribute little if anything toward the approximately $800 million — estimates very wildly — needed to finish Xanadu.
"I don't think they freed up anything," Mr. Vinocur, the real estate editor, said, adding that he believed Mills needed the money just to pay the first-quarter dividend.
A Value That's Hard to Determine
Like the value of the entire company, the amount any buyer would pay for Xanadu is hard to determine, especially since Mills needs to restate earnings for at least the last five years and to straighten out its accounting for the immensely complicated Meadowlands deal.
Greg Andrews, an analyst with the Green Street Advisors, a research firm in Newport Beach, Calif., that has followed Mills closely, recently estimated Xanadu's value at $127 million.
"How much do you want to pay for the right to build plus a parking garage?" Mr. Andrews said. "You can build a whole mall for $150 or $200 million."
Xanadu also faces competition from the sports complex's principal tenants, the Giants and Jets, whose recent agreement with the state for a new football stadium allows the teams to build more than 500,000 square feet of retail store and restaurants — just across the road from Xanadu.
Still, the few tenants known to be signed up for Xanadu account for about 400,000 square feet of the 2.2 million square feet that Mills must lease, and a number of real estate experts are optimistic that the developer will be able to fill the rest.
'A Very Viable Project'
"I know Mills is having its problems," said Chuck Lanyard, a principal in the Goldstein Group, a retail brokerage firm in Glen Rock. "But it's a very viable project."
As Mr. Lanyard put it: "You can't beat New Jersey demographics. So many of the big retailers are coming into New Jersey because of the concentration of population and income dollars."
So far, Xanadu has leases signed by Cabela's, a sports outfitter; Muvico, a movie theater, and two or three smaller tenants. Cabela's and Muvico will each occupy 150,000 to 175,000 square feet, roughly the size of a typical Home Depot store.
In addition, the president and executive director of the sports authority, George R. Zoffinger, said Mills was close to reaching a leasing agreement on Wannado City, an amusement center where children play-act in grown-up careers, although the company's only other project, at Sawgrass Mills in South Florida, has had financial problems.
Of the other entertainment and recreation attractions that Mills promised, most — including a roller coaster and Ferris wheel, a miniature drag-racing park and a home for the Meadowlands Area YMCA — have dropped away.
Fighting for a Ballpark
State officials are still fighting for an indoor ski slope called the Snow Dome and a minor league ballpark. The Bergen Cliff Hawks, the team originally designated to play there, has sued Mills over its failure to offer the club a lease.
Mr. Goldberg and Mr. Zoffinger say they will insist on both attractions, even though the developer's agreement does not obligate Mills to build them. Mr. Goldberg said a new owner also cannot modify the agreement "in any meaningful way" without the authority's consent.
"I'm trying to make everybody in the universe of prospective purchasers aware of that fact," he said.
For now, state officials emphasize, Mills has satisfied its obligations and made $160 million in payments for its development rights and future rent.
But Irwin Horowitz, general counsel of Hartz Mountain Industries, which lost out to Mills in bidding for the development rights at the site, said Mr. Goldberg and Mr. Zoffinger had consistently failed to enforce Mills's responsibilities.
"The first thing they should do is start acting like a sports authority, cut our losses, stop construction and try to make it a true sports venue," Mr. Horowitz said. "From where I sit, it's possible. It's not possible if you keep saying, 'Mills is a good partner.' "
Opponents File Suits
Hartz, the biggest commercial developer and landlord in the Meadowlands, is suing Mills and the sports authority over the project, although it has failed to stop construction; Hartz does not want shoppers at Xanadu, since it has competing centers, but it does want the entertainment, and the millions of out-of-state visitors that Mills projected, because Hartz owns a number of hotels in the area.
Mills is also defending itself against lawsuits filed by the Sierra Club and the New Jersey Builders Association, a couple of the project's original opponents, and the company's downward spiral has energized them as well as some Bergen County Republicans, including State Senator Henry P. McNamara, who have asked Gov. Jon S. Corzine to intervene.
Last week, State Senator Loretta Weinberg of Teaneck, a Democrat who initially supported the project despite reservations, said, "What they promised was an entertainment destination with ancillary retail, not a mall."
"I asked very specific questions of Carl Goldberg and received answers that seemed satisfactory," Ms. Weinberg added. "I'm assuming that the authority then carried out what we all thought they were going to carry out."
Corzine Sorting It Out
While Mr. Corzine has generally supported the project, his administration is only now sorting through the immense deal engineered by former Gov. James E. McGreevey, who appointed Mr. Goldberg and Mr. Zoffinger and lobbied heavily on Mills's behalf.
Gary Rose, the chairman of the governor's Council on Economic Development and a former investment banker, has been meeting with lawyers from the governor's office and reviewing the agreement and ground leases, Anthony Coley, the governor's press secretary, said on Thursday.
"These documents are a legally binding contract," Mr. Coley said, "and we expect the Mills Corporation to comply with its obligations."
How a Mall in the Meadowlands Is Bleeding a Company
April 16, 2006
New Jersey
By LAURA MANSNERUS
EAST RUTHERFORD
NORTHERN New Jersey is to shopping centers what the Napa Valley is to wineries. Paramus registers higher retail sales than any other ZIP code in the United States. And still there has always been room for more.
So the Mills Corporation — the acquisitive Virginia-based developer of shopping centers and megamalls — got a piece of Bergen County, with the help of the State of New Jersey, and named it Meadowlands Xanadu. With a price tag put at $1.2 billion, it was by far the most extravagant vision of a company that aimed to entice Americans to shop amid a swirl of entertainment, in this case a multistory fun palace ringing the Continental Arena in the Meadowlands Sports Complex.
Xanadu is now under construction, and Mills, whose accounting practices are under investigation by the United States Securities and Exchange Commission, is in the middle of a financial meltdown, looking for a buyer and running out of cash.
Last week, the company's lenders gave it a new lease on life, but a very short lease, under terms that most stock analysts said would probably leave an unfinished Xanadu in the hands of a new owner or a court. Some analysts said that in all likelihood the company would be sold by the end of the year.
Xanadu's landlord, the New Jersey Sports and Exposition Authority, was already worried that Mills might not deliver the recreation and entertainment facilities that were promised for the site, since those enticements are more expensive to build and less profitable to run than retail stores.
But now the authority cannot even be sure that it will have a successful shopping mall, given doubts about the project's potential profitability. Although the names of several potential buyers have been floated in recent weeks, the authority certainly cannot know who will eventually become its partner and tenant on one of the most valuable pieces of real estate between Washington and Boston.
It is entirely possible that the project will open on schedule in late 2007, although engineering plans are being rewritten daily and only 4 or 5 tenants of about 200 are known to have signed leases. "It's not in anybody's interest to have partially built structures without ongoing construction activity," said Carl Goldberg, the chairman of the sports authority, who is a real estate developer himself.
As to whether Xanadu left Mills overextended financially, opinions differ. "It's probably no one thing" that paralyzed Mills, said Barry Vinocur, the editor of Realty Stock Review, a California-based newsletter. "They believed they were masters of the universe. They wanted to grow the company, grow it more rapidly, and they didn't have the controls in place."
But others say Xanadu became a huge tail wagging a shrinking dog. "They bet the whole company on this project," said David Lichtenstein, the chief executive of the Lightstone Group, a Lakewood-based privately held national mall owner that is one of Mills's potential buyers.
In either case, there is little question that Mills compromised itself when it signed on to build Xanadu, demonstrating that even with a choice site five miles from Central Park, reach can exceed grasp.
Xanadu was to be the biggest and most spectacular of Mills's approximately 40 malls around the world. The company, building on a base of successful if unexceptional off-price centers like Franklin Mills in Philadelphia and Potomac Mills in Prince William County, Va., was pitching a newer idea that it called "shoppertainment" when in 2002 it won the contract to be the lead developer of 104 acres of parking lots and wetlands at the sports complex.
Its partner in the joint venture, the Mack-Cali Realty Corporation, a major developer with headquarters in Cranford, has proposed to put up office buildings on the site, although it is not obligated to do so.
Mills had wanted a place in New Jersey so badly that over 10 years it had invested at least $100 million — the exact figure is now the subject of an auditors' inquiry — in another Meadowlands site, where it ultimately was not allowed to build. As for the sports complex site, expenses totaled more than $500 million by the beginning of this year, and, according to sports authority officials, Mills was spending about $20 million a month on construction.
Cracks Start to Show
But as Mills was pouring money into Xanadu, the company was flying apart. Early this month, its stock was hitting a new 52-week low every day or two, sinking into the 20's after a high of $66.44 last August. It laid off about 15 percent of its staff, including some top executives, and became the subject of more than a dozen shareholder suits in which the plaintiffs include the attorneys general of at least three states.
Soon the company was looking for a buyer, but its finances were in such chaos — prompting the investigations by the S.E.C. as well as its own auditors — that its assets could hardly be priced.
The problem was that Mills, highly leveraged already, had been caught with too little income and too much in the pipeline. The big item in the pipeline was Xanadu — and Mills was running out of cash for it.
In the reprieve disclosed last week, Mills's lenders agreed not to declare the company in default and to reopen some lines of credit, while Mills refinanced its best asset, the Sawgrass Mills mall in Sunrise, Fla.
That move netted $246 million for Mills, and the company said it planned to refinance two other properties.
The waivers and credit lines expire by the end of the year, however, and the lenders — who will be overseeing Mills's every move — will allow only very limited borrowing until the company has a buyer or buyers lined up.
Mills is not allowed to pay a dividend for the fourth quarter of the year, and can pay in the third quarter only if it has an agreement to sell all or most of its assets by Dec. 31. The first-quarter divided was declared last week — but reduced by 60 percent.
The reaction on Wall Street to Mills's announcement was mixed. While its stock ticked upward, many analysts said they were relieved only because the company was being forced to make its assets more marketable and then unload them.
In addition to the LightstoneGroup, others who have expressed interest in Mills, according to the financial press, include the Vornado Realty Trust, the Simon Property Group, the Westfield Group and General Growth Properties.
It was not immediately clear what effect the new financial plans would have on Xanadu, where work was slowing on the skeleton of the behemoth "entertainment and retail center."
Mills officials in Virginia did not respond to requests for information, but Michael Turner, a spokesman for the Meadowlands project, said: "This arrangement will provide the company with the liquidity it needs to continue pursuing some of our core development projects. This includes, certainly, Meadowlands Xanadu."
Still Mr. Turner said that he could not say how much of the funds would be available for Xanadu.
Mr. Goldberg also said he was relieved by the series of financial moves made by Mills because they would allow the company more time to find tenants and secure the leases required for construction financing.
But Mr. Goldberg said he still planned to get together with Mills executives on Wednesday to demand more information on their leasing prospects — a point he already made in a February meeting that he described as difficult.
Some stock analysts say the financial arrangements contribute little if anything toward the approximately $800 million — estimates very wildly — needed to finish Xanadu.
"I don't think they freed up anything," Mr. Vinocur, the real estate editor, said, adding that he believed Mills needed the money just to pay the first-quarter dividend.
A Value That's Hard to Determine
Like the value of the entire company, the amount any buyer would pay for Xanadu is hard to determine, especially since Mills needs to restate earnings for at least the last five years and to straighten out its accounting for the immensely complicated Meadowlands deal.
Greg Andrews, an analyst with the Green Street Advisors, a research firm in Newport Beach, Calif., that has followed Mills closely, recently estimated Xanadu's value at $127 million.
"How much do you want to pay for the right to build plus a parking garage?" Mr. Andrews said. "You can build a whole mall for $150 or $200 million."
Xanadu also faces competition from the sports complex's principal tenants, the Giants and Jets, whose recent agreement with the state for a new football stadium allows the teams to build more than 500,000 square feet of retail store and restaurants — just across the road from Xanadu.
Still, the few tenants known to be signed up for Xanadu account for about 400,000 square feet of the 2.2 million square feet that Mills must lease, and a number of real estate experts are optimistic that the developer will be able to fill the rest.
'A Very Viable Project'
"I know Mills is having its problems," said Chuck Lanyard, a principal in the Goldstein Group, a retail brokerage firm in Glen Rock. "But it's a very viable project."
As Mr. Lanyard put it: "You can't beat New Jersey demographics. So many of the big retailers are coming into New Jersey because of the concentration of population and income dollars."
So far, Xanadu has leases signed by Cabela's, a sports outfitter; Muvico, a movie theater, and two or three smaller tenants. Cabela's and Muvico will each occupy 150,000 to 175,000 square feet, roughly the size of a typical Home Depot store.
In addition, the president and executive director of the sports authority, George R. Zoffinger, said Mills was close to reaching a leasing agreement on Wannado City, an amusement center where children play-act in grown-up careers, although the company's only other project, at Sawgrass Mills in South Florida, has had financial problems.
Of the other entertainment and recreation attractions that Mills promised, most — including a roller coaster and Ferris wheel, a miniature drag-racing park and a home for the Meadowlands Area YMCA — have dropped away.
Fighting for a Ballpark
State officials are still fighting for an indoor ski slope called the Snow Dome and a minor league ballpark. The Bergen Cliff Hawks, the team originally designated to play there, has sued Mills over its failure to offer the club a lease.
Mr. Goldberg and Mr. Zoffinger say they will insist on both attractions, even though the developer's agreement does not obligate Mills to build them. Mr. Goldberg said a new owner also cannot modify the agreement "in any meaningful way" without the authority's consent.
"I'm trying to make everybody in the universe of prospective purchasers aware of that fact," he said.
For now, state officials emphasize, Mills has satisfied its obligations and made $160 million in payments for its development rights and future rent.
But Irwin Horowitz, general counsel of Hartz Mountain Industries, which lost out to Mills in bidding for the development rights at the site, said Mr. Goldberg and Mr. Zoffinger had consistently failed to enforce Mills's responsibilities.
"The first thing they should do is start acting like a sports authority, cut our losses, stop construction and try to make it a true sports venue," Mr. Horowitz said. "From where I sit, it's possible. It's not possible if you keep saying, 'Mills is a good partner.' "
Opponents File Suits
Hartz, the biggest commercial developer and landlord in the Meadowlands, is suing Mills and the sports authority over the project, although it has failed to stop construction; Hartz does not want shoppers at Xanadu, since it has competing centers, but it does want the entertainment, and the millions of out-of-state visitors that Mills projected, because Hartz owns a number of hotels in the area.
Mills is also defending itself against lawsuits filed by the Sierra Club and the New Jersey Builders Association, a couple of the project's original opponents, and the company's downward spiral has energized them as well as some Bergen County Republicans, including State Senator Henry P. McNamara, who have asked Gov. Jon S. Corzine to intervene.
Last week, State Senator Loretta Weinberg of Teaneck, a Democrat who initially supported the project despite reservations, said, "What they promised was an entertainment destination with ancillary retail, not a mall."
"I asked very specific questions of Carl Goldberg and received answers that seemed satisfactory," Ms. Weinberg added. "I'm assuming that the authority then carried out what we all thought they were going to carry out."
Corzine Sorting It Out
While Mr. Corzine has generally supported the project, his administration is only now sorting through the immense deal engineered by former Gov. James E. McGreevey, who appointed Mr. Goldberg and Mr. Zoffinger and lobbied heavily on Mills's behalf.
Gary Rose, the chairman of the governor's Council on Economic Development and a former investment banker, has been meeting with lawyers from the governor's office and reviewing the agreement and ground leases, Anthony Coley, the governor's press secretary, said on Thursday.
"These documents are a legally binding contract," Mr. Coley said, "and we expect the Mills Corporation to comply with its obligations."
posted by Jones Lang LaSalle NJ News Blog at 1:42 PM
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