Colony Capital Advances Mall Plan
With $1.5 Billion in New Financing

With $1.5 billion in new financing, Colony Capital Acquisitions LLC is moving "full speed ahead" with Meadowlands Xanadu -- which will be the most expensive mall built in the U.S., complete with many of the same glitzy entertainment options promised two years ago.

And back on board is Larry Siegel, the former Mills Corp. chief executive officer who oversaw the original development and is blamed in part for the delays and cost overruns that have bedeviled the project. Xanadu now offers Mr. Siegel a chance to answer his critics.

"Larry needs the grand opening," says David Fick, an analyst with Stifel Nicolaus and a former Mills chief financial officer who signed the check on the initial land purchase for the Xanadu project 15 years ago. "He needs some sort of vindication. He needs to say the public markets screwed up and trashed Mills when they shouldn't have."

At the same time, Mr. Siegel's new role -- he resigned as Mills chairman last week to join Colony Capital and help oversee Xanadu -- has raised eyebrows, because the initial deal was struck while he was still CEO of Mills. As a result of its problems with Xanadu, Mills likely will have to write off at least $600 million in spending on the project.

Mr. Siegel couldn't be reached for comment. Mark S. Ordan, Mills' new CEO, says, "Larry was not part of any of the negotiations with Colony. Colony made it clear that they would only do this deal if Larry joined them. I think I would have been violating shareholder interests by saying 'no.' "

Analysts also question whether Colony Capital and its partners Dune Real Estate Funds and KanAm USA Management XXII LP can earn a decent return, because the $1.5 billion in new financing for the project will require relatively expensive rents and sales per square foot across a large amount of space.

Still, even critics agree the mall has huge potential because of its location five miles from Manhattan. A rail link is scheduled to be in place by early 2009 to whisk New Yorkers to the Meadowlands from Penn Station in less than half an hour.

The cost of the 2.2 million-square-foot project soared in the past couple of years on Mr. Siegel's watch. Originally estimated to cost $1.2 billion two years ago, Mills disclosed this summer that the cost had increased to $2 billion. Colony Capital, which took over the project last week, says the final tab could reach $2.3 billion. About $800 million already has been spent on the development.

Construction, which began in March 2005, ground to a near halt in recent months as the future of the project became uncertain. Colony Capital will ramp up construction and get the project done by the end of 2008, says Richard Saltzman, president of the Los Angeles-based private-equity firm.

Mills, a Chevy Chase, Md.-based mall real-estate investment trust, announced a tentative deal in August to transfer ownership of the development to Colony Capital. In the deal closed last week Mills agreed to pay Colony Capital $175 million to take over the project, which had drained tens of millions of dollars from Mills' coffers over the past year. In early October, Mr. Siegel resigned as chief executive after more than 11 years as head of Mills.

"We view Larry as somebody very critical and important to our team, for continuity and the ability to get the job done in accordance with how the job was originally conceived," Mr. Saltzman says.

Mr. Fick, the analyst, acknowledges Colony Capital had good reason to bring in Mr. Siegel. As CEO of Mills, and in a previous role as head of anchor leasing, Mr. Siegel was seen as one of the most creative forces in the mall business, responsible for bringing the first Virgin Megastore and the first Ikea to a U.S. mall, as well as driving retailers to create concepts such as Off Fifth -- Saks Inc.'s discount outlet that serves as a big draw for Mills' core malls.

Overpromises also helped get him in trouble on Xanadu. In October 2004, after a glitzy party, Mills announced it had tenants committed to nearly half of the mall's space, or a total of one million square feet. But two years later it still had signed leases for just 300,000 square feet, in part because the rents it required to make the project profitable were too high for most retailers.

Last week Colony Capital said it has now leased 500,000 square feet.

Mr. Saltzman says that Mr. Siegel and several other former Mills executives who joined Colony Capital will be able to see the project through.

"Everything is full speed ahead now," Mr. Saltzman says. "We don't really want to dwell on the past at all. That's totally behind us."

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