Whither Xanadu?

Seeking to untangle the mess in the Meadowlands

The incomplete western façade of the entertainment and shopping complex in East Rutherford, where work halted in 2009.
Jerry McCrea/The Star-Ledger.

You can see it in the distance, crouching alongside Route 3 with its multicolored, Lego-like exterior glinting in the sun. From afar, the more than 2.2 million-square-foot shell of Xanadu looks like a gargantuan, fanciful toy picked up by an easily distracted toddler and carelessly tossed aside, left behind in the Meadowlands sports complex for somebody else to clean up.

In a way, that’s precisely what Xanadu has become. Conceived more than a decade ago in the feverish, unbridled optimism of an economy fueled by debt and the confidence that the fat times would never end, Xanadu was designed to be a monument to conspicuous consumption. It was planned as a retail and entertainment fantasy, meant to dazzle with excess. It wasn’t just going to draw shoppers; it was going to draw tourists to East Rutherford, luring them away from the attractions of New York City. To do that, it would boast an indoor ski slope, an aquarium, a movie theater designed to mimic the grandeur of ancient Egypt and a gigantic Ferris wheel that would rival any ever built.

The promise was intoxicating. It was a project that couldn’t fail.

And then it did.

You know what happened to the economy. In 2007 and 2008, the house of cards collapsed, taking with it not just the financing for the project and forcing the original developer, the Virginia-based Mills Corporation, to walk away from Xanadu, but also changing the fiscal climate of the country, ushering in what some economists have described as an era of austerity, a period of extreme caution among consumers who would likely view the excesses of Xanadu with embarrassment.

Today, Xanadu is an empty shell. Major construction stopped in August 2009. At that point, $2 billion in private money had been plunged into the project. Yet hundreds of millions more are needed to open the doors—perhaps supplemented by cash, low-interest financing and other incentives from the state. By early 2010, Xanadu’s most important would-be tenant, the hunting and fishing megastore Cabela’s, all but abandoned its association with the project. Since then, Xanadu has languished in controversy.

Further darkening this bleak picture is an investigation by federal prosecutors out of the Southern District of New York into alleged influence peddling. The probe only tangentially touches on Xanadu, but the feds have subpoenaed records about the project from both the New Jersey Sports and Exposition Authority (NJSEA), the agency under whose auspices Xanadu was born, and Democratic members of the state Senate, demanding to see “all records relating to endorsements by lawmakers of any proposals submitted by Mills Corporation or Mills Meadowlands to the New Jersey Sports and Exposition Authority.”

Still, Xanadu is not dead. Not yet, anyway. In August, a group of five creditors, among them Credit Suisse Group AG and Capmark, wrested control of the project away from its post-Mills owner—Colony Capital—and have declared their intention to find a developer to finish the project. (At press time, the New York Times reported that the lenders and the state were talking to at least three possible new partners to rescue Xanadu.)

Even Xanadu’s most ardent opponents, like Emanuel Stern of Hartz Mountain Industries, who more than 10 years ago launched a protracted—and ultimately failed—legal battle to block the development, now contends that Xanadu is a fact on the ground and must be completed. “It’s here now,” Stern told the Record of Hackensack in September. “And we need to make it work.”

But that, industry experts say, may take more than a new developer. It may take a miracle. As Kenneth Leonard, an analyst with the Gerson Lehrman Group, a New York-based consultancy, put it: “I have never seen a project so poorly conceived or executed as this one. The fact that it was proposed to be located within the…most heavily retailed area of the country and probably the world…was conveniently overlooked by a whole series of original developers, all of whom should have known better.”

To understand precisely how the project, now derided as the biggest white elephant in the state’s history, came to be, you have to go back to the mid-1990s. At that time, the fortunes of the NJSEA seemed bright, but the seeds of the agency’s current economic woes—it requested $32.9 million from the state in operating expenses for 2010—were taking root. The heavily state-subsidized harness-racing industry, once a major lure to the Meadowlands, was beginning to decline, and that decline was starting to weigh on the authority, which supported it.

Looking for a way to breathe new economic life into the Meadowlands complex, the authority began casting about and invited Kajima International, a Japanese development company with offices in Rochelle Park, to come up with an idea. In 1996, Kajima proposed what was described as a “pleasure dome.” The idea was to create an extravagant entertainment and shopping complex that would boast many of the features that would appear in later incarnations of Xanadu, including the indoor ski slope, the staggeringly ornate movie complex and 1.1 million square feet of retail space.

But in their exuberance, Kajima executives overlooked some critical challenges. First, there was insufficient space for parking and no direct rail link to the Meadowlands. Then there was opposition from local municipalities, principally Carlstadt, concerned about the impact the project would have on the region’s already overburdened infrastructure and services. In 1997, Kajima abandoned its plans.

But there was another interested party. As early as 1994, the Maryland-based Mills Corporation, a major developer of mega-malls, had been toying with the idea of a project much like the one Kajima had envisioned, and had selected as its site the 750-acre Empire Tract, which is next to the NJSEA land. (Mills acquired the Empire site from Terminal Construction Corporation of Wood-Ridge, whose project list includes work on several Meadowlands facilities, including the Izod Center and Xanadu.) But the Empire Tract, already a graveyard for big dreams—the debris from the destruction of New York’s old Penn Station is rumored to have been dumped there—presented its own problems. In 1999, the Army Corps of Engineers, citing drainage and environmental issues, effectively declared more than half the Empire Tract off-limits for development. “They were saying, ‘You ain’t going to build nearly what you think you’re going to build here,’” says one source familiar with the negotiations.

Mills was not ready to give up on its big idea. Armed with an array of lawyers and lobbyists, the company began seeking an alternative location. By 2001, its focus had shifted to the NJSEA property. From a political point of view, the timing could not have been better. A few miles away in Newark, then mayor Sharpe James was pushing for the development of a sports arena to help boost revenues in that city, and the Nets and Devils, longtime mainstays of the arena at the Meadowlands, were planning to leave the East Rutherford complex. Though acting governor Donald DiFrancesco opposed the idea of building a mall in the Meadowlands, he and state lawmakers knew that the sports complex needed something. They pushed to budget money to build the long-sought rail link that would make possible a project like the one that would ultimately become Xanadu.

But it wasn’t until the following year, after the election of Jim McGreevey as governor, that the project took hold. It was, says state Senator Richard Codey, a triumph of politics over practicality. The way Codey sees it, the real power behind the throne at that time was an assemblage of powerful Democrats led by former state Senator John Lynch. With Lynch’s backing, businessman George Zoffinger was installed as president of the NJSEA. The dream of developing an extravagant entertainment and retail project at the Meadowlands began to take shape. (In 2006, in an unrelated land-development case, Lynch pleaded guilty to fraud and tax evasion. It was one of then U.S. attorney Chris Christie’s most celebrated prosecutions.)

Going ahead with a mall project was, Zoffinger tells New Jersey Monthly, a necessity at the time. The deal that the state had struck with the Giants and Jets in an effort to keep them in the Meadowlands, which effectively gave the football teams control over the stadium and its vast parking lots, had been disastrous, Zoffinger says. It was an example, he says, of politicians having been blinded by the glamour of sports.

“Politicians like to sniff jocks,” he says, somewhat inelegantly. “They like to be close to all these people, and at the end of the day they just give away state assets, and nobody’s really holding them accountable.”
The deal with the teams “amounted to a giant giveaway,” Zoffinger says. On top of all that, the once-lucrative horse-racing business had become a drain on the NJSEA, he says. “The state had to bail out the authority. When I went there in 2002, there was an $18 million appropriation the year before; I knocked it down $5 million the first year I was there.” Part of Zoffinger’s strategy was to hack off what he saw as dead wood. Under his leadership, the authority struck a deal with a Canadian company to sell off the race track, a deal that Codey and later Jon Corzine scuttled, he says. But the way Zoffinger saw it, the best way to dig the authority out of its hole was to rebrand it, and the best way to do that was by building what would become known as Xanadu.

In spring 2002, the NJSEA issued a request for proposals. Among the six bids were two that called for the construction of a NASCAR track; one by the owners of Mall of America to develop a giant mall; and one by Hartz Mountain for a convention center. After a series of closed-door sessions, it was the proposal from the politically well-connected and seemingly financially solid Mills Corporation—a proposal that envisioned a mix of entertainment and retail that mirrored the Kajima project—that got the nod.

Zoffinger insists that there was no political pressure applied at those meetings, and that, while Mills’s lobbyists and influential Democratic supporters did not hurt the process, the contract was awarded for purely practical reasons. That may be—though the possible role of Mills’s connections is among the factors that the U.S. attorney’s office in New York plans to examine, law-enforcement and Democratic sources say.
It is a matter of record that, as part of the deal, the Mills Corporation paid $160 million up front to NJSEA, covering 15 years’ rent on the property. “Not a cent of state money went into Xanadu,” Zoffinger insists. That’s true to a degree, says analyst Leonard. But it doesn’t take into account the money that the state spent to get the ball rolling, like the $185 million for the rail link to the complex, or the approximately $26 million that the state paid Mills for the Empire Tract, which was subsequently placed into an environmental trust, making development impossible. Environmentalists such the Sierra Club’s Jeff Tittel deride the sale as a sweetheart deal for Mills.

From the beginning, there were those who objected to the proposal, including former Republican state Senator Ray Bateman, who in 2001 resigned as chairman of the NJSEA. At the heart of the opposition was the argument that Xanadu, as proposed, was little more than a glorified shopping mall. Although it billed itself as a destination for tourists and boasted what the developer insisted were entertainment amenities that would draw crowds from hundreds of miles around, the skeptics maintained that the promise was overstated. Apart from the ski lift, the Ferris wheel and the Egyptian-themed movie complex, they argued, the vast majority of the so-called entertainment space was little more than gussied-up retail. A planned kitchen store, for example, would provide cooking classes. If Xanadu were built, they said, the best that the tenant stores could hope for would be to draw shoppers away from established malls like Garden State Plaza.
Mills and state officials remained convinced that the Xanadu concept was sound. Perhaps part of the reason for that, says James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers, is that lawmakers appeared to have been intoxicated by the same potent elixir of unbounded optimism about the economic future that had addled the rest of the nation—an optimism fueled by bottomless credit. “From 2000 to 2007 we were on the greatest spending binge in the history of the planet.

It was an unprecedented era of overspending,” Hughes says. “In essence, we maintained—we increased our standard of living—the old fashioned way, by borrowing off of our core set of economic assets. We had a world awash in cheap global capital that drove interest rates low. It caused the housing-price bubble—households were able to use their house as an ATM machine, continually taking out home-equity loans and refinancing and the like, and all at historically low interest rates. At the same time, they stopped saving, and at times during that period we had a zero savings rate in this country.”

As Mills threw money at the project, some of it splattered outside the perimeter of the proposed mega-mall. In addition to the hundreds of millions Mills spent on construction costs, engineering studies and legal fees, the developer shelled out $113 million on improvements to the local infrastructure, including $97 million to widen Route 120 and exit 18W on the New Jersey Turnpike and roadwork on the NJSEA site itself.

But by 2006, Mills, dogged by accounting scandals and with Xanadu far over budget, had lost half its market value and was facing possible bankruptcy. The company had fallen victim to the delusion of the era, a sense that whatever mistakes it made would be corrected by the ever-expanding value of its assets. It didn’t work out that way, and Mills bailed out. What was left behind was a burgeoning fiscal hole in the Meadowlands. The project, then fast approaching the $2 billion mark—far above the original expected cost of $1.3 billion—was turned over to a consortium led by Colony Capital, which had been part of the investment group backing the project. Colony, along with fellow lenders Credit Suisse Group and Capmark Financial Group, agreed to pump out another $500 million and pledged to funnel $1.5 billion into the project as needed. It may have seemed like a good bet at the time. After all, the project—the exterior at least—was nearly completed, and several key tenants, including anchor tenant Cabela’s, had signed on.

But the fallout from the financial collapse was far from over, and when one of Colony’s key backers, Lehman Brothers Holdings, folded in September 2008, Colony and its consortium found itself mired knee deep in the swamps of New Jersey. A few months after construction ceased in August 2009, Cabela’s effectively pulled the plug, saying that, while the company might still be interested in opening a mega-store in the Meadowlands if and when the project was finished, for the moment that seemed unlikely.

Last July, Governor Chris Christie endorsed a plan by a panel he appointed that called for the state to commit $875 million to finish Xanadu. A month later, Colony handed over its interest in the project to its five creditors, who, like their predecessors, insist that the project someday will be completed. Only this time, it is likely that there won’t just be private capital at stake. Since then, the governor’s office and the NJSEA have been largely mum on Xanadu—other than voicing measured optimism that the project will someday be completed. The governor’s office did not respond to requests for comments on this story.

All of which begs the question, is Xanadu, as it has been envisioned, worth another $875 million, or is it, in the current economic environment, a dinosaur, a vestige of a bygone era of rampant consumerism? Should Xanadu, like the old Pennsylvania Station, be buried in the swamps?

Hughes, the dean of the Bloustein School, advocates the latter. The prevailing sense of thrift among the would-be visitors to Xanadu “is probably a major societal reset at this point,” Hughes says. “In the deep cynical recesses of my mind, I believe overconsumption is part of our DNA. But you can only do that when you can borrow or have excess income to spend.” Right now, and for the foreseeable future, he says, both are in short supply. But it may be that the project is so far along that politicians and developers will be unable to see any other option but to keep pressing on. Like so many of the state’s grand schemes, he says, like gambling in Atlantic City, like the original race track at the Meadowlands, Xanadu has “gone from the economic penthouse to the economic outhouse, and something [has] to be done. You can’t just sit by without trying.”

The Sierra Club’s Tittel fears it will be an endless process. “It’s just one of these things that has become sort of like the Viet Nam of shopping centers,” says Tittel. “We keep being told there’s light at the end of the tunnel.”

Even some of the project’s most vocal critics contend that the massive project has reached the point where it is creating its own economic weather. “If I had become governor six months earlier, this never would have been built,” says Codey, the former acting governor. “The question is, what do we do with it now? In the best of worlds I would make it a casino and build a conference center….I think politically right now, that’s almost impossible to do. I’m a realist. So the question is, do you let this ugly building stay empty?”

Codey believes that there are still some retail and real estate gamblers out there who have not gotten the memo that the fundamentals of the economy have shifted, that consumers, at least for now, are no longer enthralled by the concept of a gigantic mall with a ski slope and a Ferris wheel, a place built on borrowed money where they are invited to spend their own borrowed money. “Everything has a price,” says Codey. “So if the people who own it are willing to sell it at the right price, I think there’s somebody who would be willing to go in there and get it done without assistance from taxpayers.”

But that doesn’t mean that the long-term bet by the developers or the state will necessarily pay off, says Leonard, the mall analyst. The way he sees it, the mall and entertainment complex is destined to continue passing from hand to hand until a vastly scaled-down version of it is ultimately completed, or until someone kills the project altogether. “The thing is a white elephant. There’s $2.5 billion invested in it already, and what is the value? Who’s going to invest?” he says. “Well, somebody at some price is going to invest, and I can show you some other gigantic fantasies, wet dreams of developers around the country, that have opened to tremendous hype at tremendous cost and over the years have been sold and resold because people have been bankrupt or just wanted to get rid of it.”

And even if it does open, it’s doubtful that it will ever be the kind of draw that the state and the original developers envisioned, Leonard says. “I just don’t think that there’s enough entertainment component to attract busloads of tourists when you’re competing with the Statue of Liberty and the Empire State Building and everything else that New York has to offer.”

What’s more likely is that, if Xanadu were to open, it would be a sad and largely ignored venue, a place, in Leonard’s words, where divorced fathers would take their kids on weekends. But, he asks, “during the rest of the week, how’s that thing going to make money?”

Seamus McGraw is a former reporter for The Record.

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