No dream deal for them:
The real-estate market is a wake-up call for DreamWorks
U.S. News and world Report Nov
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
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
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 à 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
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.