(Bloomberg) – Since the groundbreaking almost two decades ago, the megamall in New Jersey’s Meadowlands has done little besides losing money. Now, less than two years after its heavily delayed opening, the complex known as the American Dream threatens to undo the lofty ambitions of yet another developer.
The Ghermezian family, who run some of the largest and most successful malls in North America, can’t keep up with the bills of the shopping and entertainment megaplex that pushed its original developer to the brink of bankruptcy and was later seized by lenders from the next team.
Revenue from the stores was so tight amid the swelling pandemic that the Ghermezians hired legal and financial advisors to help them ease the stifling $ 3 billion debt burden and possibly play some role in the execution of the project keep so the people with expertise.
The family members aren’t the only ones who will lose a lot of money. Lenders such as JPMorgan Chase & Co., Goldman Sachs Group Inc., Soros Fund Management, and Starwood Property Trust Inc. could suffer losses from $ 1.7 billion in construction loans. The project is also supported by around $ 1.1 billion in municipal debt.
“It was like watching a train wreck that went on forever,” said Neil Shapiro, a New York real estate attorney and senior partner at Herrick Feinstein. “There aren’t many projects that are losing at least $ 3 billion that we still talk about as projects,” said Shapiro, who is not involved in the mall.
Externally, the 3-million-square-foot shopping and entertainment complex on 90 acres in New Jersey’s Meadowlands is almost fully open and charges up to $ 115 for day passes to DreamWorks Water Park and $ 80 for Big Snow indoor skiing on weekends Tilt. Luxury stores like Hermès, Tiffany & Co. and Dolce & Gabbana are coming in September.
But it could be too little, too late for the Ghermezians and their company Triple Five Group. They have hired financial advisor Houlihan Lokey Inc. and the law firm Weil Gotshal & Manges to represent them in restructuring talks, said the people who asked not to be named in the private negotiations. That month, American Dream stepped into reserves to make a $ 9.3 million payment on municipal bonds.
With the pandemic still making buyers suspicious, American Dream sales were just $ 139 million for the first two quarters of the year, publications show. At this rate, the mall will lag well behind the nearly $ 2 billion a 2017 study forecast that it would bring in in its first year of operation.
That puts the family’s ownership of their $ 548 million equity stake at risk. And they have already forfeited a 49% stake in two other mega-malls – the Mall of America outside Minneapolis and Canada’s West Edmonton Mall – which they pledged as collateral to American Dream’s lenders. These $ 680 million holdings in bond documents were seized back in March when the loans defaulted.
American Dream and Triple Five officials declined to comment.
Given their experience with huge retail and entertainment complexes, a possible outcome would be for the Ghermezians to give up ownership of American Dream and still operate it, said some of the people familiar with the situation. After all, few others are qualified to run the gigantic company, said Anjee Solanki, director of retail at real estate services company Colliers.
“It’s a project animal,” said Solanki.
A likely scenario is that if Triple Five brings in hundreds of millions of dollars in its own money or receives it from a new equity partner, lenders will allow an additional 18 to 24 months to grow sales, according to Shapiro.
“There will be at least one way to have the Ghermezians work this out,” he said, using the theory that “they will do as well as everyone else.”
The saga began in 1993 when Mills Corp. tried to build a huge shopping, office, and hotel complex on 200 acres of wetland a few miles outside of Manhattan. The opposition to the environment has ruined these efforts. But Mills’ plans were revived a decade later when New Jersey gave the go-ahead to a proposal to redevelop another nearby piece of property – the huge parking lot around what was then the Continental Airlines Arena.
Mills, who named the project Xanadu, broke ground in 2004; two years later it was on the verge of bankruptcy. Colony Capital Inc., led by Trump’s ally Tom Barrack, took control in 2007 and fared little better, with lenders confiscating the property in 2010.
By the time Triple Five took over a year later, the unfinished project had already consumed $ 2 billion, loan documents show. The Ghermezians, who immigrated to Canada from Iran in 1960, came with the vision of a tourist center that would attract 40 million visitors annually. No matter that shopping centers are constantly losing buyers to online competitors or that they have to compete with Manhattan for tourists. Their plan was for a year-round ski slope and an indoor water park with slides, wave pools and tube rides. They added a trampoline park, go-karts, and virtual reality entertainment.
“All attractions are positioned to guide traffic through retail, and we are experts at that,” said Don Ghermezian, President of American Dream, in a phone interview in July.
Financially, however, the Ghermezians need a different type of expertise when dealing with the mall’s debts and powerful lenders.
The construction loans included $ 1.2 billion in senior debt and $ 475 million in mezzanine debt from lenders led by JPMorgan, according to a 2017 American Dream statement. Barry Sternlicht’s Starwood has provided $ 175 million in 2017 senior home finance. Other lenders were Goldman Sachs, CIM Group, and iStar Inc., said people familiar with the matter.
At the top of the mountain of debt are municipal bonds, which contain around $ 800 million in so-called PILOT notes – supported by payments the developers make to bondholders instead of paying property taxes. Another $ 290 million in Muni-Bonds is covered by a commitment of 75% of sales tax revenue for shopping mall purchases. Both were sold by JPMorgan and Goldman.
Both the PILOT and sales tax bonds take precedence over the home loans, and the owners could foreclose the property if the PILOT payments fail, according to John Miller, director of community investments at Nuveen, the largest holder of American Dream muni bonds . That makes it likely that the senior and mezzanine construction lenders would step in and make the payment to keep their holdings from being destroyed, said Miller, whose firm holds $ 685 million in debt.
Talks between Triple Five and its creditors could result in a deferral or extension of terms to give the developer breathing space, said Miller, who is not involved in the talks. “It is in everyone’s best interests to keep these PILOTs updated” and find a way to resolve the problem by fixing the mall’s operations, Miller said.
It is not clear whether that would work. Andy Graiser, co-president of consulting firm A&G Real Estate Partners, doubts that American Dream could compete as a tourist mecca with Manhattan, which is only eight miles away. “You generally don’t come to New York and have American Dream about your three or four most important things you want to do before you go,” Graiser said.
The lenders and financial advisors either declined to comment or did not respond to messages. Starwood Chief Executive Officer Sternlicht is confident that his company will come out as a whole. “We were the first mortgage lender alongside some of the largest money market banks in the country,” he said during a conference call on August 5th. “I’m sure our investment is solid.”
Despite the setbacks and Covid disruptions, the Ghermezians get tenants. According to Nuveen, who said in July that American Dream “seems to be picking up steam,” about 100 retailers are open this year and more than 100 more are to be added this year.
Senate Majority Leader Loretta Weinberg, who has long voiced concerns about public investment in the project, said the Ghermezians “seem to have done everything in their power against all odds”. This included scrapping and replacing the exterior of Xanadu, widely ridiculed as an eyesore. The New Jersey Democrat said it looked like something a four-year-old made out of Legos.
“It’s not nearly as eye-catching as the previous one,” Weinberg says now. “From the barrier you have a much better view.”
–With support from Elise Young, Gillian Tan, and Rachel Butt.
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