Substitute Lenders Sought for Xanadu Project

After several lenders balked at fulfilling commitments, a Colony Capital partnership is seeking up to $500 million of replacement funding to complete a giant entertainment and retail complex next to the Meadowlands sports complex in New Jersey.

A Credit Suisse syndicate originally agreed to provide roughly $1.1 billion of construction financing for the much-delayed Xanadu project, whose first phase is now scheduled to open in the second half of next year. The other syndicate members are Lehman Brothers, Capmark, NorthStar Realty Finance and Newcastle Investment, a REIT managed by Fortress Investment.

After about $600 million of the loan was funded, Lehman failed to meet a call for $125 million of additional cash. That event, following the investment bank's bankruptcy filing last fall, set off negotiations between the Colony partnership and the other syndicate members, which were also reluctant to pump more cash into the project.

The Colony team ultimately agreed to release the other lenders from their remaining commitments. In return, the lenders agreed that the roughly $600 million they had already funded would be subordinate to the replacement financing.

The arrangement is enabling the Colony team to shop the new five-year loan assignment as senior debt that equals only about 20% of the project's overall $2.6 billion cost - a low loan-to-cost ratio for construction financing. Still, the group could face an uphill battle, given the dearth of available construction financing, the weak retail-sales market and the troubled history of the project, which is in East Rutherford.

The Colony partnership wants to line up $475 million to $500 million of debt by yearend. Marketing materials distributed to prospective lenders described the loan as "high yield," but didn't specify a proposed interest rate.

In conjunction with the new loan, Los Angeles-based Colony and its partners - Dune Capital of New York and German syndicator KanAm - are pledging to put another $100 million of equity into the project, bringing the total equity to $1.5 billion.

The new loan and equity would pay for the last stage of the project. The marketing materials described the construction risk as minimal because the base building is "90% complete and watertight." The construction loan would have an unusually long five-year term to give the ownership team time to stabilize the complex, which is 65% pre-leased.

"Fit it out, open it up, stabilize the property and then sell it," is how one person who heard the pitch for the loan described the Colony team's strategy.

The hunt for the loan is the latest twist in a saga that dates back to 2003, when Mills Corp., a REIT in Arlington, Va., was tapped to build a sprawling complex that would include retail space, a roller coaster, a minor-league ballpark and a host of other entertainment venues. KanAm was brought in as an equity partner.

Over the years, the project was downsized as cost overruns mounted. Mills ran into financial trouble, which was magnified by the Xanadu project. That led to its forced sale in April 2007 to a joint venture between Simon Property and Farallon Capital. Simon and Farallon quickly flipped Mills' interest in Xanadu to Colony, a fund shop headed by Tom Barrack, and Dune, an investment firm founded in 2004 by former Goldman Sachs executives Steven Mnuchin, Daniel Neidich and Chip Seelig.

According to marketing materials for the loan, the original Mills partnership injected $861 million of equity into the project, while the Colony team has supplied $522 million and intends to put in another $100 million.

The complex is now slated to encompass 2.2 million square feet, including an indoor ski slope, an "observation wheel" offering views of Manhattan, a 2,200-seat concert hall and a giant store operated by Cabela's, the retailer specializing in hunting, fishing and outdoor equipment.

Xanadu sits next to the Izod Center, home to the New Jersey Nets, as well as a stadium scheduled to open next year for the New York Giants and New York Jets.

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