Once touted as a landmark case study in urban regeneration, the financially troubled Victory Park mixed-use project in Dallas is in the final stages of reverting back to its German-based institutional backers.

Hillwood, a Fort Worth-based development firm run by Ross Perot Jr., is negotiating to cede control of the developed portions of the project to US Treuhand, an organizer of German closed-end funds based in Hamburg.

Located just north of downtown, in 2008 Victory Park celebrated the 10th anniversary of its formal approval by the City of Dallas. Over the next 10 years, the project was set to include 12 million sq. ft. of office, retail and residential space on a 75-acre brownfield site spanning 33 city blocks.

To date, only $1 billion of the total projected $3 billion development has been completed. That includes the 20,000-seat American Airlines Center sports arena, home to the NBA’s Dallas Mavericks and the NHL’s Dallas Stars, a 33-story W Hotel, four residential buildings and three office properties. Future phases of office, retail and residential components are now on hold.

“Hillwood Victory is in negotiation with its equity partner, UST XVI LP, regarding the future of the existing vertical development at Victory Park,” Hillwood said in a statement. “We are working together to bring a fresh infusion of capital to the District to enable Victory Park to move forward with new restaurant and retail development. Our highest priority has been and will continue to be the success of Victory Park.”

Market watchers agree that it was a case of bad timing. In its rush to create a landmark destination within the North Texas Metroplex, Hillwood’s luxury retail tenants have suffered from today’s depressed economic environment. Its high-end condominiums have also not achieved expected sales volume. But Victory Park is certainly not alone in its troubles.

“I believe you would be hard pressed to find a major development project anywhere in the country that is not under tremendous pressure due to the changes in the debt markets,” says Dan Fasulo, managing director with Real Capital Analytics, a New York-based research firm.

That is a marked change from recent years, when US Treuhand invested heavily in U.S. properties. Founded in 1995, its many funds have invested $3 billion in U.S. commercial property. Lately, though, German property funds have struggled alongside other world financial organizations, pulling back their investments in U.S. commercial real estate, notes Fasulo. In 2008, $2.1 billion of German capital was invested in U.S. properties, down from nearly $6 billion in 2007.

In fact, HSH Real Estate, a division of Germany’s HSH Nordbank, holds a 50% interest in US Treuhand. But HSH Nordbank faces severe challenges of its own. The bank received some $4 billion in German stimulus money in March 2009, but some German financial experts estimate that it may need substantially more capital to stay afloat. It also recorded a 10% delinquency rate on its commercial loan portfolio of more than $5.7 billion in the fourth quarter of 2008, according to research firm Foresight Analytics.

Victory Park is a good case in point. When Hillwood could not keep up with its mortgage payments it began negotiations with US Treuhand earlier this year. Under the terms of the proposal now in the works, Hillwood would lose an ownership stake in the buildings valued at around $100 million.

To date, Hillwood has invested $68 million in Victory Park, while US Treuhand has provided $185 million for the project since 2006. Any deal would be independent of the land holdings and Hillwood would keep control of future development sites in the project. Hillwood would also continue to manage Victory Park.

US Treuhand CEO Lothar Estein has put the workout terms before a vote of the fund’s more than 1,000 shareholders. A decision is expected within the next month. If accepted, Hillwood will have three years to turn around Victory Park’s fortunes.

There are recent glimmers of hope. In March, Hard Rock Café announced plans to open its only North Texas location this summer. The 8,900 sq. ft. restaurant will be located on the ground floor of the House, a recently completed condominium tower situated at the southern edge of the Victory site.

And despite Victory’s problems, members of one prominent trade group, the Association of Foreign Investors in Real Estate, still view commercial property investments in the U.S. as a safe haven. According to a recent survey, by far the largest group of respondents (53%) cited the U.S. as the safest and most stable market, followed by Germany at 11%.