No dream deal for them:
The real-estate market is a wake-up call for DreamWorks

U.S. News and world Report Nov 4, 1996
BY JASON VEST

Roman Polanski's Chinatown showed that movies about hot Los Angeles real-estate deals can be successful. But in fact, L.A. real-estate deals are often brutal, which is something that another legendary director, Steven Spielberg, is fast discovering.

Before we get to the plot (of land, that is), a quick background montage: To be a founder of DreamWorks SKG is to be the object of a faith most people reserve for a deity. Cut to scene of rapturous faces at a press conference two years ago, when Spielberg, Jeffrey Katzenberg and David Geffen announced they were creating their new studio. How else can one explain the lack of concern about the rate at which they have burned through cash? Since 1994, they've spent about a third of their nearly $3 billion in start-up capital. SKG's first TV offering, Champs, didn't last past a few episodes. While Spin City looks very promising, Ink had one of the rockiest starts in recent TV history, and High Incident, after barely being renewed, is in the ratings basement. The studio's first animated feature will be out soon, but its first live-action movie isn't due for a year. By the company's own estimates, profits are at least five years away.

Beach view. If DreamWorks were any other start-up company, few would care. But this is the triumvirate, some believe, that will set the future standard for the entertainment business. DreamWorks has also captured the public's imagination with its lofty plans to build not just a new studio complex but the company town of the future. It has entered the real-estate business with mega-developer Maguire Thomas Partners--and has received generous tax breaks from the city of Los Angeles, which views the project as a potential economic boon. But the project is already months behind schedule and could be delayed for years.

The plan entails spending $7 billion to develop a 1,087-acre tract known as Playa Vista, or "Beach View" for the Spanish challenged--one of the last sizable tracts of undeveloped coastal land in the Los Angeles area. Home to the Ballona Wetlands (which have been more or less dry since 1941, when the Army Corps of Engineers sluiced Ballona Creek into a concrete trench), the land brought little joy to its previous owner, Howard Hughes, another movie producer. The billionaire built an aircraft plant on a corner of the property but was never able to develop the rest of it because of inadequate financing or angry protests (often followed by lawsuits) from nearby residents, who were concerned about the environmental impact of the project.

After Hughes's death, the Hughes Corp. eventually gave up on the land. But in the late '80s, Maguire Thomas Partners, builders of downtown L.A.'s tallest skyscrapers, turned its gaze on the swaths of grass and reeds. Between 1989 and 1990, MTP took out $158 million in loans from Chase Manhattan Bank and became the lead developer; the Hughes Corp. remained a limited partner.

Confronted once again with the possibility of high-rises and traffic jams, area residents soon rallied around Ruth Galanter, who was elected to the City Council on the basis of her vows to derail the project. Environmentalists also filed suits to stop the development.

As the hue and cry grew, says Doug Gardner, project manager for Playa Vista, MTP revised its plans. A compromise was later reached among the developer, the city and the environmentalists: In exchange for letting construction proceed on one parcel of wetlands, the developer would commit $12.5 million toward restoring 280 acres of wetlands.

In development. The proposed development is nothing if not ambitious. "Originally, under the Hughes group, this was going to be tall buildings, strip malls, the usual L.A. development," says Gardner. "What we've tried to do here is create an entirely new development that takes the ecosystem into consideration. We plan on using electric buses and have tried to design this with an emphasis on pedestrian traffic, not vehicles."

While the compromise was not popular with everyone (a smaller group of environmentalists continues to protest), MTP had cleared a major hurdle. Alas, the L.A. real-estate market bottomed out in the early '90s, and Playa Vista's future looked bleak again. But then came a ray of hope from Hollywood: The three entertainment moguls announced their plans. Ah, thought MTP, which for two years had been unable to attract an anchor tenant for Playa Vista, perhaps there's a deal to be made. A familiar face to SKG, Jeffrey Berg of the ICM talent group, was brought in to broker it.

And so it came to pass that DreamWorks, in exchange for a $66 million stake in the project, is not only supposed to have its high-tech complex constructed by MTP but also stands to receive one third of the development's profits. Not a bad deal on paper for DreamWorks (which estimated it would have to spend $200 million to build its own facility), nor for Maguire Thomas. After MTP dangled the possibility of Los Angeles's getting its first new studio in 60 years, the City Council, led by Galanter, granted the developer $70 million in tax breaks, while the state kicked in a $40 million grant to defray the cost of building Playa Vista's roads.

Though L.A. Mayor Richard Riordan and California Gov. Pete Wilson quickly characterized the arrangement as a boon to Southern California's economy, others beg to differ. "Talk about corporate welfare--tens of millions in tax breaks to DreamWorks," says Bruce Robertson, a private investigator who is also director of the Ballona Valley Preservation League. "I don't think anyone thought they were going to go to Boise. This wasn't necessary to `keep' them in Los Angeles."

But construction won't begin anytime soon and not just because the environmentalists, whose previous legal challenge failed, have filed an appeal. The problem is that before MTP can start building the company town of the future, it must put in the infrastructure. And to build the essential roads and utilities, the developer needs more money. But between the bank debt (secured by the land) and the reportedly high mortgage costs of other MTP properties, Playa Vista is having a tough time attracting additional investors--despite the presence of DreamWorks, which most expected would be a major investment draw.

City officials are anxious for the project to succeed. Plans to float $49 million worth of bonds are in the works. But that may not be a panacea for MTP, says a real-estate attorney who has kept a close eye on Playa Vista. "The DreamWorks campus," he says, "is dead in the water until this gets resolved." Among the rank and file in SKG-land, this reality has begun to sink in. "I probably won't be working for the company by the time it gets its own studio," says a DreamWorks writer.

Even if immediate financing is secured, the problems aren't likely to end. The bonds may help, but should the development be completed, they could necessitate higher rents. And while the first phase of the project--which includes 3,200 housing units and the DreamWorks facility--has been approved by the L.A. City Council, the second and third phases still haven't had their hearings, and environmental challenges are expected. "The [complex] will happen," insists a DreamWorks executive, but "it's going to be painful."

Of course, none of this necessarily spells doom for DreamWorks, which doesn't need a high-tech complex to make money (a few hits la Jurassic Park would do). Indeed, it has already begun signing leases for other properties in the area. While some work is being done in old Hughes Aircraft hangars, more will be done on the Universal back lot. Animation operations are being set up in Glendale, and recording space is being secured in Beverly Hills.

In the meantime, a new CD-ROM by DreamWorks called Steven Spielberg's Director's Chair will be hitting the stores by Christmas. It is billed as "a fully operational Hollywood movie studio at your command." Were it only so easy.