DEALS: THE UNRAVELING OF DREAMWORKS AND WHAT IT SAYS ABOUT PUBLIC-PRIVATE ECONOMIC DEVELOPMENT DEALS Economic development and motion picture development are not alike. Economic development is a slow, often bureaucratic, process involving the collaboration of many people, including government, real estate interests, and big employers. Motion picture development, on the other hand, is dominated by a handful of powerful personalities, predominately studio heads, who can simply axe a project if they have second thoughts about it. End of story. On to the next project. The above observation is hardly original. Everybody knows that movie moguls are impulsive, willful and mercurial. The phrase, "as cooperative and public-minded as a studio executive" has never become a folk saying. Why, then, are we entrusting such people with an important part of our economic future? No doubt, this question was being repeated over and over in the minds of many Los Angeles residents in July, after DreamWorks co-founder and chief hatchetman Jeffrey Katzenberg wielded his axe. In a brief statement, Katzenberg said that DreamWorks was pulling out of its commitment to build the studio's long-anticipated headquarters in the Playa Vista development in the City of Los Angeles. Playa Vista, he said in the statement, was "no longer in the interests of DreamWorks." No apologies. No explanation. In other words, Katzenberg washed his hands of Playa Vista much as he would have rid himself of an unsatisfactory motion-picture development project. The problem is, building the studio was not a project that could be dropped without affecting many other people. Beyond the loss of potential jobs, the DreamWorks deal squandered a great deal of political capital and goodwill in Los Angeles. Katzenberg hung a lot of people out to dry, including Los Angeles Mayor Richard Riordan, who campaigned vigorously for the project and even changed the business tax code, in part, to accommodate DreamWorks. Riordan also helped round up $35 million in economic incentives for the film studio. Similarly hung out was City Councilwoman Ruth Galanter, who first came to office campaigning against an earlier version of Playa Vista. Galanter had spent most of her political resources backing this controversial project on the promise of hundreds of high-paying jobs to be delivered by the film studio, as well as the many entertainment and technology companies expected to cluster around it. It's not as if Katzenberg and his partners, director Steven Spielberg and entertainment mogul David Geffen, did not have some ambivalence about Playa Vista. They had threatened to pull out before. Still, DreamWorks fought — and I mean fought — for the project for nearly five years. Katzenberg's tactics showed just how much tougher the entertainment industry is than commercial real estate, or nearly any other business that operates lawfully. Katzenberg publicly feuded with (and humiliated) developer Rob Maguire in the pages of The Wall Street Journal, just as he would later use the same newspaper to pillory his former boss at Disney, Michael Eisner. DreamWorks seemed to get everything that it asked for, including very favorable terms for 47 acres of ocean-front real estate from Maguire, who complained that Riordan strong-armed him into accepting the deal. After persevering and winning all that, it seems strange that DreamWorks would bow out after being rejected by a single lender. According to the Los Angeles Times, the lender turned down the deal because DreamWorks needed more "mezzanine financing," which is usually a way of providing more equity to a project. In other words, the lender asked for a bigger downpayment. (Customarily, real estate developers need to borrow some equity to receive a construction loan.) Here is where the mystery starts. Why did DreamWorks take no for an answer? One thing is clear: The loan refusal was used as a fig leaf for the DreamWorks partners. Does anyone really believe the shuck-and-jive routine of "oh, we couldn't get financing, so I guess we can't build a studio, after all. Darn." As the Times observed, each of the partners is a billionaire, or nearly so, and each could afford to finance the entire $200 million construction project out of his pocket without giving up his ski vacation in Gstaad. More than one person has observed that Katzenberg could have paid cash for nearly the entire project out of his recent settlement with The Walt Disney Company over contested royalty payments. So why didn't they build? This is my theory: It is well known that DreamWorks has fallen far short of its financial goals. Although several of the firms' movies have been well-received critically, only a few have been box office winners. It is perfectly believable that spending $200 million for a film studio may not appeal to DreamWorks as much as it did five years ago. After all, if these guys really wanted to build it, they would find a way. But they have decided that they can rent studio space and defer the grandiose prize of a monogrammed water-tower on their own studio lot. If there are any lessons to be learned from the Playa Vista fallout, however, they are not being learned quickly by local government. Almost desperate not to lose DreamWorks, the mayor's office and the City Council are trying to dangle a different development project elsewhere in the city in front of Katzenberg, this time in North Hollywood. Meanwhile, in accordance with California's dog-eat-dog style of regional cooperation, surrounding cities — including Burbank, Glendale, Santa Clarita, Palmdale and Lancaster — immediately made offers to el Tres Caballeros. (Lancaster, a high desert suburb as far away in the mind of Hollywood as Juneau, Alaska, reportedly offered 47 acres for free.) But DreamWorks will probably not build a campus anywhere. Yet there's something else more important that all the other Hollywood wannabes do not seem to understand. Companies like DreamWorks — entertainment and other fast-growing entrepreneurial firms — are bad bets for public-private partnerships. Perhaps cities would be better off with more lumbering, more conservative, more — dare we say it? — corporate partners than with hot-shot outfits. Unfortunately, the fastest growing sector of California's economy is in entrepreneurial entertainment, bio-tech, and software businesses, and this cachet of companies looks very sexy to economic development types. But if you lie down with DreamWorks, you will likely wake up alone.