New Jersey’s Not-So-Palatial Xanadu

The retail and entertainment development formerly known as Xanadu Meadowlands—recently renamed The Meadowlands—has been plagued with problems since the planning stage. The East Rutherford megamall is located on the site of the Meadowlands Sports Complex, about seven miles west of Midtown Manhattan in Bergen County, and would be the largest retail and entertainment complex in the United States. In addition to the shopping mall, Xanadu was to include an indoor ski jump, a basketball arena, a ballpark, a luxury hotel, and office towers. When the project was announced, it was hailed as the most innovative and expansive economic development public-private partnership ever to be undertaken in the United States.

The 4.8 million square foot project was expected to cost $1.3 billion when developers Mills Corporation—which had originally proposed the mall in 1998—and Mack-Cali Realty Corporation won the winning bid in February 2003. In March 2003, losing developers Hartz Mountain and Westfield America Trust both sued the New Jersey Sports and Exposition Authority (NJSEA), the state agency that owns the Meadowlands property, in an attempt to halt the deal. These lawsuits were ultimately unsuccessful, but the initial optimism over the project was already waning.

The NJSEA and Mills/Mack-Cali originally estimated an opening two years after groundbreaking, which occurred after the development consortium secured a 175-year lease from NJSEA in 2004. In 2005, the New York Giants, a Meadowlands Sports Complex tenant, filed suit in New Jersey Superior Court in an attempt to halt construction of Xanadu. The Giants claimed the project violated their lease agreement by obstructing views from the stadium, among other reasons. This lawsuit was also unsuccessful, but Mills was already in deep financial trouble. In the spring of 2006, Mills laid-off 15 percent of its staff, shareholders had filed suit, and the company was being investigated by several state attorneys general and the Securities and Exchange Commission. The company soon announced it was looking for buyers.

Mills was eventually sold to Indianapolis’ Simon Property Group, which abandoned the project after major lender Lehman Brothers collapsed and other lenders pulled out of what they viewed was a doomed development. Xanadu was then taken over by a new consortium led by Colony Capital, a California real estate investment firm. The project continued to suffer from financing difficulties, which led to ongoing work stoppages. By this time, the budget had ballooned to $2.3 billion. Dan Fasulo, managing director of real estate analysis firm Real Capital Analytics, described the Xanadu project as “too big to fail,” citing massive sunk costs and public liabilities.

In February 2010, it was announced that billionaire Bob Ross’ Related Companies, a major Manhattan developer, was taking over the project. This followed the release of a report authored by the transition team of Governor Chris Christie (R), which attacked Xanadu for its “failed business model” and which called on the state of New Jersey to tell the developers to “open or surrender the property” back to NJSEA. The report concluded:

There is no leasing plan making material on-site progress. The physical activities of construction are at a standstill, if not abandonment. The construction loan is out of balance. There are no monies readily available to finish construction of public areas or tenant improvements. Most, if not all, of announced major tenants have an ‘escape clause’ solely dependent on leasing—or lack thereof.

Officials were confident that Ross would be able to secure $500 million to $700 million in new financing and that an opening date could be expected as soon as mid-2011. However, in early July 2010, the role of Related Companies was still unclear, and the state was mulling the option of providing $180 million in emergency financing in a last-ditch attempt to save the project. Officials are considering tax increment financing (TIF), a method of public financing in which construction debt is financed by expected future tax revenue increases (the increment) that occur as a result of the property included in the TIF district becoming presumably more productive in the future. This, however, carries significant risk—public services may be over-provided, development investment may never materialize, and the likely possibility of harmful real estate market distortions, such as real property malinvestment, should concern local policy makers. A lot.

Regardless of whether or not Xanadu–sorry, The Meadowlands–is ever completed, New Jersey taxpayers will still be on the hook for the stupid mistakes of their unaccountable and shameless public officials. In the future, when “public-private partnership” and “economic development” are uttered in the same breath by some official or developer, New Jerseyites should run the other way. Fast.