People in the mall industry joke that American Dream, the 3.3-million-sq.-ft. experiential retail project in East Rutherford, N.J., should be called American Nightmare, given its long history of trouble.
Yet Triple Five Group, which owns American Dream, as well as Mall of America and West Edmonton Mall, has somehow managed to hang onto all three of its megamalls, despite pandemic-related closures and decreased foot traffic. Faced with never-ending financial struggles and an expected decrease in consumer spending, however, one has to ask: has the Canadian company finally run out of luck and money?
Defaulting on bond debt
Led by the Ghermezian family, Triple Five finally opened American Dream in October 2019 after more than two decades of planning. Located within the Meadowlands Sports Complex, the $5 billion project went through multiple iterations before Triple Five gained control of it in 2011.
To complete the American Dream, Triple Five took on more than $1 billion in bond debt, including $290 million in municipal debt and $800 million in PILOT debt (payment in lieu of taxes). The bond debt is senior to roughly $1.7 billion in senior and mezzanine construction loans.
Recently, Triple Five missed the May quarterly PILOT payment, compelling the bondholder trustee, U.S. Bank National Association, to file a notice to bondholders on EMMA (Electronic Municipal Markets Access). The notice warned that the developer didn’t have enough funds held in Indenture to pay the $13.87 million interest payment and that the trustee had to take $11.35 million out of a reserve account to make the payment.
On June 8, independent research firm Municipal Market Analytics issued a note that said it’s “increasingly likely” that roughly $1.1 billion of American Dream’s municipal bond debt will be restructured. However, on June 15—one day before the deadline to avoid default—Triple Five paid the May PILOT payment in full, except for the late payment interest. To that end, the trustee says that the developer still hasn’t fully cured the default.
Per the financial agreement, Triple Five has a year to cure the default before American Dream would be subject to tax foreclosure. In addition, subordinate lenders can cure the default before foreclosure, though that happens very rarely, according to Fred Meno, who serves as president and CEO of asset services for The Woodmont Company, as well as a receiver for creditors of commercial property.
Born under a bad sign?
The late PILOT payment for American Dream is just the latest financial calamity to befall Triple Five. In early February, the megamall developer nearly emptied a reserve account to make a $9.3 million payment on about $290 million of debt supported by sales tax receipts, leaving just $820 in the account, according to financial filings on EMMA.
In the same filing, bond servicer Trimont Real Estate Advisors notified Triple Five that it had not fulfilled its disclosure obligations under a grant agreement with the New Jersey Economic Development Authority. A continued “breach of its obligations” could mean the redemption of American Dreams’ bonds.
In 2021, Triple Five defaulted on American Dream’s construction loans and lost 49 percent stakes in Mall of America in Bloomington, Minn. and West Edmonton Mall in Canada, which were offered as collateral to obtain funds to get the American Dream construction going.
That same year, Triple Five’s also had to work through financial tangles for the Mall of America. The company fell behind on its mortgage payments several times in the early days of the pandemic. Fortunately, it was able to restructure the $1.4 billion loan just prior to having to surrender nearly half of its stake in the 5.8-million-sq.ft. property.
Experiential could be the hero
Looking forward, Triple Five has another payment due on August 1 for American Dream’s sales-tax based bonds. Experts say it’s unclear how Triple Five will come up with the money, given American Dream’s financial performance. The New Jersey megamall lost roughly $60 million in 2021, according to a financial filing. While the property generated about $173 million in revenue, expenses totaled more than $232 million.
“The mall’s strategy to dedicate a high portion of its space to experiential retail made a lot of sense before the pandemic, because experiential retail is less exposed to e-commerce competition and there was a lot of demand coming from experiential tenants,” says Kevin Cody, a strategic consultant with CoStar Advisory Services in Charlotte, N.C. “Unfortunately, the mall happened to open at a time when consumers were forced to avoid both experiential retail and malls in general.”
In April 2020, right as the pandemic took hold, the mall announced that it would be dedicating roughly 70 percent of its indoor space to new entertainment activities, up from the previously allocated 55 percent, according to consumer traffic research firm Placer.ai.
American Dream posted $305 million in sales last year, just a fraction of the $2 billion initially forecasted for its first year of operations. Meanwhile, the property has a whopping $2.6 billion in liabilities and just $500 million in equity.
Financial filings show that American Dream was 80 percent leased as of April 1, 2022. If you include leases under negotiation, it was roughly 85 percent leased.
CoStar Group, however, reports that the project is 100 percent leased. Cody says that’s a positive sign, given that occupancies for the overall mall sector remain well below pre-pandemic levels.
“While American Dream still may not have reached its full potential yet, I expect its financial troubles are primarily the result of its struggles in 2020 and 2021,” Cody notes. “I also expect its significant experiential retail offerings are benefiting the mall recently, as consumers are increasingly seeking out those types of offerings.”
Visits from the past year indicate that American Dream’s bet on experiential may be starting to pay off, according to Placer.ai. Using May 2021 visits as a baseline, the firm looked at the change in monthly visits for American Dream and found that the property has been consistently outperforming Placer.ai’s Indoor Mall Index.
In April 2022, visits to American Dream were 33.3 percent higher than they were in May 2021, compared to only a 2.3 percent increase for indoor malls. While this growth reflects its lower starting point compared to top tier malls, the increase does speak to the location’s potential as it continues to roll out new components and offerings, according to Placer.ai.
The research firm suggests that consumers are flocking to the mall, not only for its wide array of shops and food options, but also for its indoor entertainment offerings, including a climbing wall, hyper-realistic virtual reality cliff-diving and a recently re-opened ski slope.
That doesn’t mean, however, American Dream and Triple Five are completely out of the woods.
“I hope consumers continue to drive the recovery in experiential retail, but with rising prices and a likely slowdown in consumer spending, a potential pullback in discretionary spending is certainly a possibility, and that would be a new challenge for American Dream,” Cody says.