Playa Vista delays could hurt project's bond sales.

The long delays in breaking ground for the massive Playa Vista project has put the brakes on a $280 million bond measure to pay for public improvements to the site - delays that could adversely affect the bond ratings, analysts say.

The bonds would be issued by the city of Los Angeles, which agreed in 1995 to finance roads, sewers, street lights and other improvements for Playa Vista on the condition that DreamWorks SKG builds a film studio on the site.

The bond issue would be the largest ever under the Mello-Roos Community Facilities Act, a 1982 law that gives municipalities the ability to form special tax districts to finance land improvements, said Stephen Shea, an analyst with the California Debt and Investment Advisory Commission. Once a district is formed, the city can issue tax-exempt bonds secured by taxes placed on local property owners.

Officials with bond rating agencies say Mello-Roos Act bonds are already somewhat risky because they are secured by undeveloped land. But in the case of Playa Vista, the large amount of money being bonded and the uncertainities associated with the project would make the deal even riskier, said Ken Kurtz, an analyst with Moody's Investors Service.

"Mello-Roos issues are always risky investments, and Playa Vista appears to be having its own problems," Kurtz said.

Playa Vista developer Maguire Partners was supposed to break ground on the project last year, but has been unable to put together an $8 billion financing package to build the complex.

Lenders holding the mortgage on the property have threatened to foreclose on Maguire and take the property. Early this month, Maguire did reach a tentative agreement with affiliates of Morgan Stanley Real Estate Fund and Goldman Sachs & Co.'s Whitehall Real Estate Fund, which hold the $150 million in debt on the project.

The agreement delays foreclosure until July 25. Sources close to the negotiations say the tentative deal would create a new development partnership for Playa Vista, with a diminished role for Maguire.

City officials originally thought they would have issued the bonds by now, said Gerry Miller, the city's chief of debt administration.

Now, Miller said the city will continue to hold the bond issuance until Maguire can come up with a financing plan to build the Playa Vista project. He thinks it might happen sometime in the fourth quarter.

"Basically, all of the things that we needed to do on our end for the Mello-Roos portion have been completed," said Miller. "We are waiting now for them to finalize the rest of the financing."

The city plans to issue $280 million in several phases - as needed - during the next decade. The first $60 million would pay for infrastructure in Playa Vista's Phase I.

The developer could receive even more government help. Los Angeles County has the option to issue another $140 million in Mello-Roos debt for the project.

"Approximately $400 million of net bond proceeds over the life of the project qualifies for funding under the Mello-Roos act," said Randy Johnson, senior vice president of Maguire Partners. "That is over 10 to 15 years. Whether that will be used or not is unclear. However, the city will be the issuer of about $280 million and the balance will come from the county."

Once the city has issued its entire amount, Maguire - or the new development partnership - would pay about $6 million a year in debt service payments. Legally, the developer - not the city - is responsible for the payments.

But Wall Street analysts warn that Mello-Roos securities can be among the riskiest of municipal bonds.

"What happens is that you end up with a lot of debt on undeveloped land," said Kurtz, who said Mello-Roos deals typically get low ratings. "The payments are made by a developer. who can simply walk away if the deal turns bad. Municipalities (which are usually responsible for debt payments) can never really walk away."

A low rating means the city would be forced to issue the bonds with higher interests rates, Securities with high ratings - or that carry bond insurance - will pay much less. Kurtz said.

Peter Bianchini, a director with Standard & Poor's Corp., warned that "anybody that buys a land-backed deal without a rating should have concerns, because they are definitely risks involved with land-backed transactions."

In 1990, Mello-Roos issuance in California hit an all-time high - peaking at $977 million for the year, according to the California Debt and Investment Advisory Commission.

But in the years that followed. the real estate market bottomed out in California. Realizing that property values were worth less than the debt on the land, many developers walked away and allowed the property to go into default.

By 1993, there was only $249 million in Mello-Roos issuance. The numbers have since climbed (it was at $592 million last year) but analysts say the risks are still real.

Though the Los Angeles real estate market has taken a hit in the past few years. Miller said the market is currently strong and on an upward trend.

And analysts say one thing helping the Playa Vista project is that those involved are well financed.

"They have some very deep pockets," said Bianchini. "When you have names like Goldman and Morgan Stanley involved, that's always a good sign. But, there are still concerns, including any environmental problems the project might have."

Playa Vista, a development located on nearly 1,100 acres adjacent to Marina del Rey, is slated to include 13,000 residential units, approximately 5 million feet of office and studio space, roughly 600,000 feet of retail space and 750 hotel rooms.

Of the 5 million feet of commercial space, DreamWorks - the brainchild of movie moguls Steven Spielberg, David Geffen and Jeffrey Katzenberg - is scheduled to occupy about 725,000 feet of office space.