Mills Waves White Flag

Struggling mall developer Mills Corp.(MLS Quote - Cramer on MLS - Stock Picks) threw in the towel on its controversial Xanadu development in New Jersey's Meadowlands, announcing a deal Tuesday that essentially allows the company to give away most of the project in return for not having to sink any more money into it.

The news sent Mills' stock roaring 16% to $19.44 in recent trading. The fate of Xanadu has been a black cloud over the company, as costs have come in higher than expected and the projected initial yield continues to drop.

Mills plans to issue 4.5 million shares of its stock to Colony Capital, a well-known privately held real estate investment firm, in exchange for a $500 million equity infusion into the site and construction financing necessary to finish the $2 billion entertainment and retail project.

Colony Capital and German investment fund Kan Am (Mills' existing equity partner at the Meadowlands and other projects) will divvy up the shares among themselves.

The deal will make Mills a limited partner in the Xanadu project, freeing the company from further financial obligations. The REIT, though, already has $485 million committed to the site.

Colony Capital and Kan Am will both receive preferred returns on their capital, senior to Mills investment. As a result, Mills said it will likely not recoup any of its invested capital until the project has been completed and stabilized.

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