(Bloomberg) — Since its groundbreaking nearly two decades ago, the megamall built in New Jersey’s Meadowlands has done little except hemorrhage cash. Now, less than two years after its much-delayed opening, the complex known as American Dream is threatening to dash the lofty ambitions of yet another developer.
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The Ghermezian family, which runs some of the biggest and most successful malls in North America, can’t keep up with the bills on the shopping and entertainment megaplex, which helped drive its original developer to the brink of bankruptcy and later was seized by lenders from the team that came next.
Revenue from the stores has been so scarce amid the surging pandemic that the Ghermezians have hired legal and financial advisers to help them ease the crushing $3 billion debt load, and perhaps retain some role in running the project, according to people with knowledge of the matter.
The family members aren’t the only ones who stand to lose big money. Lenders including JPMorgan Chase & Co., Goldman Sachs Group Inc., Soros Fund Management and Starwood Property Trust Inc. could face losses on $1.7 billion in construction loans. About $1.1 billion of municipal debt is also backing the project.
“It’s been like watching a train wreck that goes on forever,” said Neil Shapiro, a New York real estate attorney and senior partner at Herrick Feinstein. “There aren’t a lot of projects that lose at least $3 billion that we’re still talking about as projects,” said Shapiro, who’s not involved with the mall.
Outwardly, the 3-million-square-foot shopping and entertainment complex on about 90 acres in New Jersey’s Meadowlands is almost fully opened, charging weekend crowds as much as $115 for day passes to the DreamWorks Water Park and $80 for its Big Snow indoor ski slope. Luxury stores including Hermès, Tiffany & Co. and Dolce & Gabbana are coming in September.
But it all may be too little, too late for the Ghermezians and their company, Triple Five Group. They’ve hired financial adviser Houlihan Lokey Inc. and the law firm of Weil Gotshal & Manges to represent them in restructuring talks, said the people, who asked not to be identified discussing the private negotiations. This month, American Dream dipped into reserves to make a $9.3 million municipal bond payment.
With the pandemic still making shoppers wary, sales at American Dream amounted to just $139 million in the first two quarters of the year, public disclosures show. At that pace, the mall is poised to fall far short of the nearly $2 billion that a 2017 study projected it would bring in during its first year of operations.
That’s jeopardizing the family’s hold on their $548 million equity stake. And they’ve already forfeited 49% stakes in two other megamalls — Mall of America outside Minneapolis and Canada’s West Edmonton Mall — that they pledged as collateral to American Dream’s lenders. Those holdings, valued at $680 million in bond documents, were seized back in March when the loans defaulted.
Representatives for American Dream and Triple Five declined to comment.
Given their experience with giant retail-and-entertainment complexes, one possible outcome would see the Ghermezians surrender ownership of American Dream while continuing to operate it, said some of the people with knowledge of the situation. After all, few others are qualified to run the behemoth enterprise, said Anjee Solanki, director of retail sales for Colliers, the real estate services company.
“It’s a beast of a project,” Solanki said.
A likely scenario is that the lenders grant another 18 to 24 months for sales to increase, if Triple Five kicks in hundreds of millions of dollars of its own cash or gets it from a new equity partner, according to Shapiro.
The saga began in 1993 when Mills Corp. was seeking to build a massive shopping, office and hotel complex on 200 acres of wetlands a few miles outside of Manhattan. Environmental opposition killed that effort. But Mills’ plans were revived a decade later when New Jersey green-lighted a proposal to redevelop another nearby piece of land — the vast parking lot surrounding what was then known as Continental Airlines Arena.
Mills, which called the project Xanadu, broke ground in 2004; two years later, it was teetering near bankruptcy. Colony Capital Inc., led by Trump ally Tom Barrack, took control in 2007 and fared little better: lenders seized the property in 2010.
By the time Triple Five took over a year later, the unfinished project had already consumed $2 billion, bond documents show. The Ghermezians, who immigrated to Canada from Iran in 1960, came with their vision of a tourist hub that would lure 40 million visitors a year. Never mind that malls were steadily losing shoppers to online rivals, or that it would have to compete with Manhattan for tourists. Their plan featured 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 the attractions are positioned to push traffic through retail, which is what we’re experts at doing,” American Dream President Don Ghermezian said in a July phone interview.
Financially, though, the Ghermezians need a different kind of expertise as they grapple with the mall’s layers of debt 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 advanced $175 million of the 2017 senior construction financing. Other lenders included Goldman Sachs, CIM Group and iStar Inc., said people familiar with the matter.
At the top of the debt pile are municipal bonds that include about $800 million of so-called PILOT notes — backed by payments the developers make to bondholders in lieu of paying property taxes. Another $290 million of muni bonds are backed by a pledge of 75% of the sales tax receipts on mall purchases. Both were sold by JPMorgan and Goldman.
The PILOT bonds are senior to the construction loans, and the holders could foreclose on the property if the PILOT payments aren’t made, according to John Miller, the head of municipal investments at Nuveen, the biggest holder of American Dream muni bonds. That makes it likely the senior and mezzanine construction lenders would step in and make the payment to keep their holdings from being wiped out, said Miller, whose firm holds $685 million of the debt.
Discussions between Triple Five and its creditors could result in a forbearance or extension of terms to give the developer breathing room, said Miller, who’s not involved in the talks. “It’s in everybody’s best interest to keep those PILOTs current,” and find a way to solve the problem by fixing the mall’s operations, Miller said.
Whether that would work isn’t clear. Andy Graiser, co-president of the advisory firm A&G Real Estate Partners, doubts American Dream could compete as a tourist mecca with Manhattan just eight miles away. “You’re generally not coming to New York and having American Dream be in your top three or four things you want to do before you leave,” Graiser said.
The lenders and financial advisers either declined to comment or didn’t respond to messages. Starwood Chief Executive Officer Sternlicht is confident his company will come out whole. “We were the first mortgage lender alongside some of the nation’s largest money-center banks,” he said during an Aug. 5 earnings call. “I’m certain that our investment is sound.”
Despite the setbacks and Covid disruptions, the Ghermezians are getting tenants. About 100 retailers are open and more than 100 others are coming this year, according to Nuveen, which said in July that American Dream “appears to be gaining momentum.”
State Senate Majority Leader Loretta Weinberg, who has long expressed concerns about the public investment in the project, said the Ghermezians “seem to have done everything they can against all kinds of odds.” This included junking and replacing the exterior of Xanadu, which was widely ridiculed as an eyesore. The New Jersey Democrat had said it looked like something a 4-year-old made of Legos.
“It’s not nearly as assaulting on the eyes as the prior one,” Weinberg now says. “It’s a much better view from the turnpike.”
(Corrects story dated Aug. 19 to reflect that only the PILOT bonds are senior to the construction loans.)
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