ELIZABETH HAYES

Staff Reporter

When DreamWorks SKG founder Jeffrey Katzenberg circulated an internal memo last Thursday that the studio had abandoned its plan to build a new campus at Playa Vista, employees were hardly disappointed.

Frankly, many were quietly celebrating. Because amid the long-running effort to build a studio on 47 acres of the Playa Vista campus, many dreaded the prospect of a long commute to the Marina del Rey area or even having to move their households to the Westside. There was increasing grumbling about the lack of a physical core.

That was just one of the little secrets the DreamWorks principals had been trying to push aside over the years while this snake-bitten project was in the midst of stopping and starting. It really didn’t make much sense not for the bottom line of a fledgling studio that was only producing a limited number of films each year, and not for a workforce that was scattered all over L.A. County.

Steven Spielberg was the only member of the DreamWorks trio who really pushed for a Playa Vista operation. Various reports over the months had him planning a state-of-the-art operation that would be the envy of other studio executives around town. But David Geffen long has leaned against the move, arguing that the price tag at least $250 million and probably much higher simply didn’t pencil out.

Katzenberg was in the middle. “I can see that Jeffrey would want this to happen to keep Steven happy and that Geffen would be hard-headed about it,” one source said.

In the end, even Spielberg couldn’t turn this plot around.

While the pullout is being attributed to an inability to get financing for the project’s studio portion, DreamWorks executives came to the conclusion that, Spielberg or no, the company didn’t need such a large and lavish facility. It wound up playing hardball with the Playa Vista developers before finally walking away.

“Their attitude was, ‘It’s my way or the highway,’ ” one source said. “They’re the most amazingly demanding people on the planet.”

DreamWorks initially approached the Union Labor Life Insurance Co. for a loan, sources said. (ULLICO, a pension fund, is a partner in Playa Capital LLP, the entity that is developing the overall Playa Vista project.)

But an independent appraisal that DreamWorks had done on its studio site came in too low to justify the full loan amount it was seeking. At that point, Playa Capital proposed building the studio portion, then leasing it back to DreamWorks, which would have the right to purchase it after a certain amount of time.

To many, the proposal smacked of a last-ditch effort to save the deal. DreamWorks, after all, had always wanted to own its studio rather than merely being a tenant.

“We have learned a great deal during the past four years and it is clear that this move was no longer in DreamWorks’ best interest,” Katzenberg said in a statement. “It was simply not meant to be.”

Spielberg said he looks “forward to exploring other options for our permanent home.”

As of late last week, studio officials were vague about their plans. But they are certain to involve the company’s three current locations: an animation campus in Glendale, movie and TV operations in Universal City and the music division in Beverly Hills.

“We haven’t given up on the notion of, at the right time, building and owning our own studio campus. This just wasn’t the right time,” said DreamWorks spokesman Andy Spahn. “There’s satisfaction. The mood is forward-looking. It’s full speed ahead.”

Well, maybe. But giving up on Playa Vista represents a major and embarrassing turnabout to plans for L.A.’s first major studio in 60 years. Those plans included $70 million worth of public subsidies promised by the city and the state of California for Playa Vista, if DreamWorks made the move.

The 47 acres bought by DreamWorks will now revert to developers of Playa Vista, which is to be a sprawling residential and commercial development. Peter Denniston, president of Playa Capital, said there are still plans to build a studio and sound stages, though the campus is likely to be pulled back from the original DreamWorks plan for eight sound stages.

“We’re committed to giving L.A. its first new studio,” said spokesman David Herbst. “DreamWorks was only 4 percent (of the project). It was an important 4 percent, but it’s not going to be a blow.”

Well, maybe. But the spin control that both sides were offering up as word of the deal’s collapse began filtering around Los Angeles last week is not likely to last for long. In its place will be two central questions.

The first one is: What happens with the public subsidies now that DreamWorks has bowed out?

Niki Tennant, spokeswoman for Councilwoman Ruth Galanter, whose district includes Playa Vista, said, “A majority of the incentives were for job creation by DreamWorks. It remains to be seen what happens. We’re at the preliminary stages right now of seeing how it’s going to play out.”

She added that while “we are very disappointed the two parties couldn’t agree, the two objectives we care most about will remain intact. The first is that sound stages will be located at Playa Vista, and the second is, whatever development is there will contribute to the restoration of the wetlands.”

How that sits with the rest of the City Council, not to mention Gov. Gray Davis and Mayor Richard Riordan, remains unclear. Over the past year, there has been increasing criticism about the giveaway along with skepticism about Playa Vista’s economic benefit.

The second question is: What happens to DreamWorks’ expansion plans?

Among the possible alternative sites for Spielberg’s envisioned studio are the new DreamWorks animation campus in Glendale, the Amblin’ Entertainment compound in Universal City and a site in North Hollywood where J. Allen Radford is developing a $750 million studio project.

The 14-acre Glendale campus has enough adjacent developable land to accommodate 150,000 square feet of new space, said Spahn. In addition, Walt Disney Co. has recently purchased another large parcel adjacent to the DreamWorks Glendale campus. While Disney is said to be planning a new corporate headquarters for its ABC Inc. television network for that site, it is conceivable that DreamWorks could purchase the land.

A more likely scenario would involve DreamWorks expanding on and upgrading Speilberg’s existing compound on the expansive Universal Studios property. Universal Studios Inc. has been stymied in its efforts to increase development of that property, because of staunch homeowner opposition.

Yet another possibility would be for DreamWorks to cut a deal with Radford. He has a 42-acre plot of land (just slightly smaller than the 47 acres at Playa Vista) in North Hollywood. The site, along Chandler Boulevard amid a cluster of media companies, is next to the Red Line terminal station.

The Los Angeles Community Redevelopment Agency has already selected Radford’s company, JARCO/SLG & G; LLC, to redevelop the site. In April, Radford told the Business Journal that he was confident the City Council would soon give the CRA the go-ahead to negotiate a deal with him.

A few days before DreamsWorks announced it had pulled the plug on the Playa Vista deal, Radford was evasive when asked by the Business Journal if he had been talking with DreamWorks. He ultimately declined to comment.

Spahn said DreamWorks has adequate space for the foreseeable future. Long-term, the needs are unclear. “We don’t need to do anything. We have enough space to meet our needs,” he said. “As we get into it, we’ll know more.”

Staff Reporter Daniel Taub contributed to this report.