By JOYZELLE DAVIS

Staff Reporter

Holding the key to millions of dollars in building subsidies, DreamWorks SKG is pressuring Playa Vista’s developers to give them a 50-acre studio site for free or they will take their project elsewhere, according to sources close to the negotiations.

Moreover, the dispute may have played a role in the L.A. City Council’s Feb. 13 refusal to support the developers’ application for state low-income housing bonds.

Councilwoman Ruth Galanter, whose district includes Playa Vista, has allied herself with DreamWorks and was instrumental in the council’s decision, the sources said.

Galanter did not return calls for comment, but an aide confirmed that she is pressuring the Playa Vista developers to accommodate DreamWorks.

“Any time a developer is asking for government incentives, Galanter has to ask herself what the community receives in return,” said Adi Liberman, the councilwoman’s deputy chief of staff. “The new owners haven’t come up with an affordable housing mix, and haven’t struck a deal with DreamWorks, so she couldn’t in good conscience give away the people’s resources for free.”

“The community and the city want DreamWorks,” said another Galanter aide, who spoke on condition of anonymity. “It is the lifeblood of the project, whether the new owners like that or not.”

Eager to see development of the first major new film studio in decades, the city and state have offered Playa Vista tax credits and development subsidies with an estimated value of up to $75 million.

Those subsidies $40 million and $35 million in city credits (including discounted sewer hook-up fees and business license taxes) are tied specifically to DreamWorks’ involvement in the project, Liberman said.

DreamWorks is considered the anchor of a media district that would create more than 8,900 permanent jobs and generate $2 billion in direct and indirect benefits to the city.

Officials from DreamWorks and Playa Capital Co. LLC the project’s ownership group have been in intense negotiations in recent weeks in an attempt to hammer out a deal for the entertainment company to build its studio at the seaside site.

While both refused comment, sources close to the talks say that the parties are at an impasse, and one of the stumbling blocks is the sale of the land itself.

DreamWorks wants the developers to essentially give it 50 acres to build its proposed $275 million studio for free, while Playa Capital counters that it is willing to sell that land at below market rate, according to sources.

“They are asking us to violate our fiduciary responsibility to our investors by giving away the store for free,” said one member of the ownership group, who spoke on condition of anonymity.

The owners, whose assets include several pension funds, believe that the DreamWorks proposal is “abhorrent to the widows and orphans whose money is invested in this pension fund money.”

Peter Denniston, president of Playa Capital, refused to comment on any aspect of the negotiations, including speculation that the developers might seek an anchor tenant to replace DreamWorks.

But a source close to the talks said the developers could potentially make more money by selling the 50 acres at market price, and forgoing the subsidies they would get with DreamWorks as a tenant.

Originally scheduled for groundbreaking in 1996, the Playa Vista development was stalled throughout last year over financing problems. Then last fall, the project was purchased from a partnership led by Maguire Partners by a new group consisting of Morgan Stanley & Co., Goldman Sachs & Co., Union Labor Life Insurance Co., Oak Tree Capital Management and Pacific Capital Group Inc.

Negotiations between DreamWorks and the Playa Vista developers had been on hold for much of last year while the new financing agreement was being hammered out, but talks resumed as soon as the new owners took control.

Sources close to the deal say that DreamWorks came to the table with a radically different proposal than what they had negotiated with Maguire’s development company.

Originally, DreamWorks was planning to buy about 22 acres to build its studio, land that it would acquire at below market rate.

Then last fall, DreamWorks said it wanted 60 acres which would carve away the bulk of the project’s proposed 90-acre Entertainment, Media and Technology District.

The two parties eventually agreed that DreamWorks could have 50 acres 20 acres of land with entitled development rights, and another 30 acres of unentitled land.

However, both parties remain at odds over the price, the sources said and each side believes it has leverage.

DreamWorks officials have powerful allies in Galanter and Mayor Richard Riordan, who have pushed to get the fledgling studio to locate at the site since the Playa Vista development was first announced in 1995.

Galanter already spearheaded the council’s refusal to endorse the developer’s bond financing application. But she has more weapons at her disposal.

The project still needs City Council approval for its Mello-Ross bonds, which are a means of financing infrastructure in subdivisions. Playa Vista also needs entitlements for the second phase of the project, which includes more residential and commercial office construction.

DreamWorks could also have the real estate community on its side, since some tenant brokers say the project’s credibility hinges on the studio setting up shop there.

Playa Capital, meanwhile, might have the tight real estate market on its side. Sources close to the talks say there are several major studios and entertainment companies interested in building on the site, regardless of DreamWorks’ involvement. The developer could build sound stages and lease them out on a short-term basis or build facilities for another studio.

In addition, Denniston said the council’s refusal to endorse the housing bonds will not faze the developers, or “delay the project’s planned grand opening of Phase I in Spring 2000.”

“This simply delays the amount of affordable housing we can provide in the first phase of the project,” Denniston said.

Instead of dedicating 20 percent of the 3,200 housing units to low- and moderate-income housing, he said, just 15 percent will be set aside the minimum required by the city. Setting aside 20 percent of the units would have entitled the developer to tax-free financing.

The developers ultimately plan to build 13,000 units of housing.

The developers can apply again in April to the City Council for the California Debt Limit Allocation Committee for multi-family housing bonds, but chances are that the state will have already marked that money for other projects. The state awarded more than half of the $890 million in available funds at the first meeting of the committee, according to Joe Yew, executive director of CDLAC.

The endorsement of a local government agency isn’t technically required to receive the funding, but it is politically prudent.

“The more community support (a developer) can show for the project, the more confident the committee is in funding it,” Yew said.