Unrated bonds for New Jersey's American Dream mall to test the market

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A bond deal to complete the long-stalled American Dream Meadowlands development is hitting the market amid uncertainty about the future viability of indoor shopping malls.

The $1.1 billion in unrated nonrecourse tax-exempt bonds are slated to price Wednesday. Developer Triple Five Group also secured $1.6 billion in private construction loans from JPMorgan in late May to jump-start the completion of the mega-mall next to MetLife Stadium in East Rutherford, N.J.

The Wisconsin-based Public Finance Authority is issuing the debt in two separate negotiated transactions on behalf of the New Jersey Sports & Exposition Authority, which operates the Meadowlands District where the project is situated. The large-scale retail-entertainment complex in Bergen County is slated for completion in 2019, 15 years after ground was broken on the original project, then called Xanadu.

“I believe there will be strong demand, primarily because the hunt for tax-free yield remains alive and well,” said Janney Capital Markets municipal analyst Alan Schankel. “The ambitious project will be located close to affluent population centers of both New York City and New Jersey, so in theory, demand for the variety of facilities should be solid.”

Goldman Sachs and JPMorgan are underwriters on the deal, which includes $800 million in bonds secured by payments in lieu of taxes from American Dream that will be determined by the Borough of East Rutherford’s tax assessment. A separate $300 million deal is backed by state-approved tax breaks on anticipated sales tax revenue derived from the property.

“We view it as an equity type risk,” said Triet Nguyen, head of public finance credit at NewOak. “It lacks a lot of the bondholder protections for a high-yield deal.”

Despite much uncertainty and more than a decade of delays, Nguyen says the American Dream bonds are hitting the market at an ideal time because of a recent tax-exempt rally and investor demand for yield. Nguyen notes that the tax-exempt momentum is driven largely by shrinking supply in the midst of steady fund flows into the sector.

“This is as good an environment as they could have for this type of deal,” said Nguyen. “There should be appetite.”

A June 6 report from Municipal Market Analytics noted that bond deals involving development projects such as the American Dream contain construction completion risks and have a complex underwriting process.

MMA partner Matt Fabian noted that bondholders won’t have any performance payment guaranties, with few legal remedies or rights if a default or nonpayment occurs. He also questioned if a large-scale mall can succeed given the growth of online shopping options and whether there is a market for American Dream’s entertainment concept just six miles from midtown Manhattan.

“We have yet to be convinced that a new, massive mall in one of New Jersey's most congested corridors is desirable or a good economic development bet,” said Fabian. “Indoor malls were popular 15-plus years ago when the original project was conceived, but retail outlets have been under pressure in recent years with many stores in New Jersey closing locations.”

Triple Five Group, which also developed Mall of America in Minnesota, a similar concept that is the largest mall in the United States, has been heavily promoting the entertainment aspect of American Dream, which will feature an indoor amusement park, water park, mini-golf course, ski facility, movie theaters, bowling lanes and a performing arts center. An observation wheel is also planned outside of the mall with views of Manhattan’s skyline.

“Assessing the likelihood and degree of success of a megamall or any one of these entertainment features would be hard enough, but the impact that the failure of one component might have on another makes this even more challenging,” said Fabian. “If demand for the retail portion is lackluster and stores shutter and shopping traffic decreases how does that affect the demand for the dining alternatives, the water park or the observation wheel?”

Triple Five Group president Don Ghermezian said in an investor roadshow presentation on June 2 that around half of visitors to its two existing megamalls, Mall of America and the West Edmonton Mall in Alberta, Canada, are tourists from outside the region due largely to their array of entertainment options.

Ghermezian said the large population in the New York City metropolitan region combined with an estimated 62 million annual tourists who may be compelled to visit American Dream’s attractions will make the project a financial success. He said the mall will be about 50% entertainment based, compared to around 15% in Edmonton and Minneapolis.

“We weren’t going to take it if it we were just going to build a retail center,” said Ghermezian. “We wanted to create something that would compel the 21 million people that live within this center to make American Dream their number one shopping and entertainment destination.”

Fabian noted that the project’s success will also be challenged by the Meadowlands area's lack of significant tourist amenities and accommodations compared to nearby New York City along with limited mass transit capabilities. He said absent “significant infrastructure investments,” transportation issues will likely cut down on time and money spent at American Dream.

The road show documents referenced an HR&A Advisors study that said the development would generate $2.1 billion in total sales taxes over the first 20 years of the project, of which 25% would be earmarked toward the state. The study also showed an expectation for $86 million in annual sales tax revenue.

Triple Five opted for a tax-exempt transaction through the PFA last year due to market shifts after it previously planned to issue $675 million in taxable bonds through the borough of East Rutherford and $350 million from the NJSEA. The PFA was formed by the Wisconsin legislature in 2010 and has issued more than $4 billion of bonds in 43 states. The agency originally had hoped to sell the American Dream bonds last September after New Jersey’s Local Finance Board approved the conduit transaction in August.

“It has been a long journey and we never gave up, but the PFA is thrilled to see this financing come to fruition and to finally get it done,” said Scott Carper, a program manager for PFA. This is a great project and going to create some significant and much needed economic development in the State of New Jersey.”

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Primary bond market Tax-exempt bonds Entertainment industry Sell side Public Finance Authority New Jersey Sports and Exposition Authority New Jersey