Los Angeles Business Journal,  Jan 19, 2004  by Danny King

EVERY developer worth his salt has at least one war story about an especially tough deal. This one is a doozy.

Nearly two decades after being conceived by the heirs of Howard Hughes as a high-rise, master-planned community at the old Hughes Aircraft Co. site southeast of Marina del Rey, Playa Vista was purchased for $120 million by a group of institutional investors who were convinced that the worst was over.

After six years and another $480 million invested in the 1,097-acre property, they are not done spending. They are, however, beyond having second thoughts. The focus now is on the beginnings of the long-awaited community--and with it, thousands of renters and homeowners looking to be near the ocean and living in what urban planners have called a development more resembling a European village than the suburban sprawl of Southern California.

The first apartment complex was completed in April 2002; the first for-sale homes and condominiums last spring. About half of the 3,246 first-phase homes are either finished or under construction, all of which have been sold.

Will Playa Vista's big-time investment group, made up of Morgan Stanley, Goldman Sachs and Oaktree Capital Management, finally make any money on this deal? Playa Vista President Steve Soboroff expects the return to be modest on what's estimated to be a $1.2 billion investment by the time construction wraps, probably no sooner than 2010.

"Would these guys get together in a room and do it again? They would say 'No,'" said Soboroff. "Will they get any sort of return on their money? De minimis, but that's because everything that could possibly go wrong went wrong."

That may be overstating the case a bit. Despite all the upfront costs, money is finally coming in and deals totaling hundreds of millions of dollars are in the works. It's difficult to assess what it all adds up to; Soboroff would not provide specific financial information and Playa's investment group isn't talking.

But with homebuilders eagerly waiting to build another 2,600 units in a hot Westside housing market, not to mention the potential to develop as much as 3.4 million square feet of office space, Playa Capital's investors could yet end up with a more than decent return.

In the end, however, there's little dispute about the various missteps--starting with buying the property outright, rather than taking an option contingent on obtaining all necessary entitlements and overcoming all the legal hurdles.

"It's really unusual for those people to buy unentitled land, but they may have gone into this thinking they had a comparative advantage in getting it entitled," said Stephen Cauley, associate director of the Richard S. Ziman Center for Real Estate at UCLA's Anderson School. "Those people are used to getting what they want."

Soboroff, who has spent much of his career working in Southern California real estate, said the greatest return from the project will come from the lessons learned.

Troubled history

Perhaps they should have known.

Summa Corp., the business run by Hughes' heirs, initially planned to develop 2,400 hotel rooms, nearly 9,000 residential units and 6 million square feet of office space on the property. Running into community opposition about the scale of the proposed project, Summa brought in JMB Realty Corp. and now-dissolved MaguireThomas Partners in 1989 as partners to take over development duties.

What the developers paid to buy into the project was not disclosed, but the Los Angeles Times reported at the time that an unimproved 70-acre inland portion of the site had been appraised at $84 million.

The team received entitlements for the first residential phase in 1993, and a commitment two years later from DreamWorks SKG to build a $250 million studio on 47 acres. (DreamWorks later dropped out.)

The developers faltered in their efforts to secure funding, and in February 1997 they sought a $200 million investment from Gary Winnick, the former chairman of Global Crossing Ltd. It wasn't enough. Within months Chase Manhattan bank moved to foreclose on its $150 million loan. Playa Capital took over seven months later when it acquired $195 million in debt on the property.

Such massive developments have long been the subject of controversy and, for their investors, headaches.

In 1992, Home Savings of America received preliminary approvals to build 3,050 homes at the 2,800-acre Ahmanson Ranch site near the Los Angeles/Ventura county border. In November, after more than a decade of community opposition and litigation, Home Savings successor Washington Mutual Inc. sold the property to the state for $150 million.

In Orange County, developers had once planned to build 5,700 homes and a 75-acre marina on about half of the 1,200-acre Bolsa Chica wetlands near Huntington Beach. But in 1997, the state bought 905 acres of the site. One developer remains and the plan has been reduced to 1,235 homes. None have been built.

At Playa Vista, many of the early costs could have been anticipated. Converting a massive former aircraft manufacturing site partially covered by protected wetlands to residential and commercial use calls for a huge outlay.

In the first phase alone, Playa Capital has built or is building a maze of 17 different roads, a school, a public library, four parks and a freshwater marsh west of Lincoln Boulevard.

But much more has been spent off site on lobbying, legal fees and the infrastructure improvements necessary to appease surrounding communities.

As part of required traffic mitigation effort, Playa Capital is forking over $100 million alone to improve 78 intersections surrounding the development, most notably the widening of Lincoln and Jefferson boulevards and the reconstruction of the interchange of Lincoln and Culver boulevards. It is also buying a handful of buses for both the Santa Monica Big Blue Bus and Culver City bus lines.

The freshwater marsh cost another $28 million, Soboroff said.

In the last five years, Playa Vista has also become L.A.'s biggest lobbyist, plunking down more than $2.6 million since 1999, according to the City Ethics Commission.

Much of the outcry about the project was appeased last September, when the state purchased 193 acres of the original development site to be restored and preserved as the Ballona Wetlands. But additional lobbying and legal fees are certainly in the future.

Last August, the city released for public comment its study of Playa Vista's as-yet unentitled second phase, slated to include 2,600 housing units, 150,000 square feet of retail, 175,000 square feet of offices and 40,000 square feet of community buildings.

The initial 60-day comment period was extended to 120 days because of the volume of public interest, adding to the layers of questions the developer has to address and further delaying the entitlement process.

In all, Playa Capital will spend another $600 million on the project, according to Soboroff. While attributing about $70 million of that to remaining off-site traffic mitigation efforts, he declined to detail how the additional $530 million would be spent, saying Playa Vista's financial backers would not want more specific information released.

He would only say that finishing the infrastructure, overhead and soft costs--taxes, permits and legal, design and consulting fees--amounted to "huge numbers." Also included in soft costs is debt service. On a project the scale of Playa Vista--with nearly a decade of carrying costs left--the amount can indeed be huge.

On the other side, money is starting to roll in. Substantial money. So far, deals have been struck that would put more than $700 million into Playa Capital's coffers, with prospects, Soboroff said, for nearly as much later on.

* The partnership received $290 million from the sale of the Water's Edge site at the northeast corner of Lincoln and Jefferson boulevards to MaguirePartners and Equity Office Properties Trust in 2001, plus deals with the homebuilders in the first phase of the project, now being delivered.

* There is a commitment of $280 million in city-backed Mello-Roos Bonds, where Playa Vista is set aside as a special district and its homeowners are taxed to repay the bonds, to fund the development of streets, parks, a school, library and fire station. So far, $160 million has been received.

* After two years of negotiations, Playa Capital last month sold 193 acres of wetlands to the state's Trust for Public Land for $139 million. It donated another 400 cares to the Trust.

The developer is not done selling off acreage either. Among the deals in the works:

* With the 2,600 residential units planned for Phase II, dubbed the Village at Playa Vista, Playa Capital could easily approach the $241 million it received from the builders of the 3,246 units in Phase I.

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