COVER STORY : AFTER THE BLOOM : Conceived During ‘80s Building Boom, Water Garden Project Remains Half-Finished, a Symbol of Recession

When Jerome H. Snyder promised Santa Monica a water garden, it was during the mega-development boom of the 1980s, a time when a developer could begin erecting big buildings and worry about the financing and leases later. The Water Garden, three six-story office buildings and one five-story building surrounding a 1.4-acre artificial lake, was to house 4,900 employees and bring the city $1 million in taxes each year. Plans called for a 17-acre oasis where workers could stroll along tree-lined walkways and bridges, a place where “fish swim and water lilies flourish,” the developer said.

After nearly a decade of negotiations, the city in 1988 approved Snyder’s plans for the $450-million project.

It was touted as Santa Monica’s largest commercial development and an impressive addition to its new office district near Colorado and Olympic boulevards.

Snyder also made expensive concessions to the city. He promised to install equipment on the site to treat sewage and recycle water. To prevent traffic congestion, a transportation plan for employees was to be included. And he agreed to pay Santa Monica millions for low-cost housing, public parks, street improvements, programs for the homeless and public art.

The sky was the limit--and so, it turned out, were the two Water Garden office buildings that opened in 1992. Two years later, the lavish project remains only half-finished, a prime example of development projects in Los Angeles that burst on the scene in the 1980s only to be stunted by recession and a sudden end to easy credit.

“The recession killed new development of all types in this city,” said Kenyon Webster of Santa Monica’s Planning and Zoning Division. “A number of projects died that had gotten city approvals and had certain time limits because they were unable to get financing. And commercial and office development was the most affected. There have been virtually no new projects applied for in the last few years.”

Nevertheless, J.H. Snyder Co., like some other local developers, has weathered the economic climate with the kinds of adjustments that have characterized commercial development in the 1990s. It is a landscape in which banks foreclose, properties change hands, partnerships are reshuffled and visions are revised.

By the summer of 1989, Snyder had started excavating the site at Olympic Boulevard between 26th Street and Colorado Avenue. To pay for the construction of Phase One--the first two buildings and the lake--he became partners with financier Marvin Davis, whose real estate development firm, Miller-Klutznick Davis-Gray Co., secured a $230-million loan.

Snyder calls the 667,000-square-foot result his “baby.” Although Snyder has only a minor interest--the project is controlled by Davis--he walks with pride across the marble floor of one lobby, with its pillars and vaulted glass ceiling and its broad veranda overlooking the expansive lake and gardens.

“This one’s from Italy, and that one’s from Brazil,” he says, touching his toe to the varieties of inlaid marble in the floor. “We’ve had sit-down dinners for 300 people in these lobbies.”

The directories list prominent tenants, among them RAND, software giants Candle Corp. and Microsoft, and the law firm of Haight, Brown & Bonesteel. There is an upscale child-care center and a large health club. Roving teams of security guards in blue blazers ensure the privacy of tenants in the two buildings, which are 98% leased.

Beyond the turquoise-and-peach decor of the lobbies and the buildings they join lies a watery scene with splashing fountains, concrete islands filled with flowers, and gardens beneath palm trees and weeping willows. The promised public improvements, including the water recycling and sewage treatment facilities, were completed.

But the lavish development abruptly ends at a field of weeds. The vacant lot stretches from Cloverfield Boulevard along Colorado to the edge of a ravine, revealing the subterranean parking structure beneath the lake, its gazebo and fountains, and the two completed buildings.

The empty field is all there is of Phase Two. Construction of the remaining two buildings was to begin this year.

“We had no financing problems in 1989 or 1990. But by 1992, the market was awful,” Snyder said. “We had no financing commitments for Phase Two because we didn’t have the tenants.”

With no tenants signed up and payments on a $45-million loan overdue, California Federal Bank foreclosed on the undeveloped land in March, although the land was reacquired when Snyder found new partners, including a subsidiary of a Korean real estate conglomerate.

A changed economy had lowered rents, dashing the financing prospects for major commercial developers. And lenders had become much more conservative, demanding greater equity and requiring that buildings be leased in advance.

“When they started building the Water Garden, it was an ‘up’ market, and the market changed on them while they were in construction. Once you start (on a project phase), you keep going,” said Vincent Muselli, a commercial realtor in Santa Monica.

One Water Garden tenant, the upscale Opus restaurant, claims that delays in leasing Phase One and the suspension of Phase Two construction destroyed its business. The owners, L’Orfeo Partners, are suing Davis’ and Snyder’s firms, claiming they signed a 10-year lease in 1991 based on false promises.

“We had a right to get out of the lease because they fraudulently induced us to get into it,” said Bryan King Sheldon, a West Los Angeles attorney representing the restaurant. “They really didn’t tell the truth about what they were going to build. The representation made to my clients was that Marvin Davis was financially backing this.”

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In the lawsuit filed in Los Angeles Superior Court, the Opus owners claim they lost $1.4 million and also are seeking punitive damages, accusing the Water Garden’s partners of fraud, negligent misrepresentation and breach of contract. In turn, Water Garden Associates is suing L’Orfeo for $3 million in unpaid rent, attributing the restaurant’s closure last summer to poor management. “They’re just trying to blame someone else for their high prices and their failure,” Snyder said.

Davis was committed only to the Water Garden’s initial phase. A spokesman for Davis’ development firm would say only that the financier could have provided loans for Phase Two but decided not to exercise his option to participate.

Snyder, faced with the difficulty of finding financing for office buildings, adapted by negotiating to make Phase Two a 600,000-square-foot wholesale clothing outlet rather than office buildings. About 200 tenants of the California Mart in Downtown Los Angeles had chosen to move to the Water Garden to escape high rents and urban blight. But Snyder was unable to secure loans for the project, and the plan was abandoned last fall.

If the 1980s were the heyday of large-scale projects, they also evoked the anti-development sentiments of residents who battled increased traffic and pollution and the additional burden on public facilities. But the recession spoke louder than all the angry voices at public hearings.

“Homeowners and politicians who objected to those projects are having their way because of the economy,” Muselli said. “A lot of people think the status quo in Santa Monica is just fine. There are a lot of homeowners who would prefer not to see Water Garden Phase Two built.”

The millions Snyder spent on public improvements to appease the anti-development faction was the price he paid, as a major developer, for doing business in the boom era.

“That’s an impediment, from the standpoint that it drives up the costs,” Muselli said. “You can’t keep piling on these costs--development fees, in-lieu fees, traffic mitigation fees--and expect things to happen. It’s not going to work anymore.”

For some developers elsewhere on the Westside, community opposition was either insurmountable or caused costly delays. The massive Playa Vista project, for example, endured 4 1/2 years of environmental reviews required by government regulations and fueled by community opposition, while the economy, and the chance to obtain financing, changed.

The developer, Maguire Thomas Partners, has had to reconsider the original plans for 3,247 housing units, 1.5 million square feet of office space, 35,000 square feet of retail space and a 300-room hotel, a project that would stretch from Playa del Rey west to the San Diego Freeway.

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The project’s emphasis now is on the more easily financed housing units. The developers say the delay might have saved the project.

“The Water Garden was being built during the tough times,” said Doug Gardner, vice president of Maguire Thomas. “We haven’t even started yet. But if we had started three years ago, it might have been a different story.”

It might have resembled the story of the Arboretum, a plan for more than 1 million square feet of offices and a hotel across Cloverfield from the undeveloped half of the Water Garden. Now the property contains only some temporary units used by small businesses and is circled by a chain-link fence.

“Most developers got hurt by the office buildings,” Muselli said. “They would be into them for $150 a square foot, and now they’re selling for $70 to $80 a square foot. Very successful, major companies with a lot of cash and ability to get financing will be the ones to make it happen. The small guys who are trying to become big guys will have trouble doing that.”

After two sales and a foreclosure, the new Arboretum owner, the Berkeley-based TransAction Financial Corp., has drastically changed the plans. The new configuration, if approved by the city, will consist of a supermarket and retail space instead of the hotel, and either condominiums and apartments or offices, depending on what the market will support. The project is scheduled to go before the Santa Monica City Council in November.

In the meantime, developers and financiers are looking to single-tenant projects such as supermarkets and built-to-order offices.

“We are working on Alpha Beta food markets,” said Milton Swimmer, a partner in J.H. Snyder Co. “We didn’t specifically decide to go into the market business, but we can make them happen and get them financed. They have a single tenant who signs the lease in advance.”

J.H. Snyder Co. recently substituted a supermarket for a 315,000-square-foot office building at Marina Point, on Lincoln Boulevard south of Washington Boulevard in Marina del Rey. And it is building another supermarket at Fountain and LaBrea avenues in West Hollywood.

Although lending terms have changed the development landscape, builders and investors are encouraged by the first hints of an improved economy.

“Major banking investment houses in real estate advise us on a regular basis that capital is returning to the office building business,” said Bob Bisno, chief executive officer of TransAction Financial. “Vacancies in the Santa Monica market are single digit, and vacancies on the Westside are shrinking to 10 digits. In the next three to four years you will actually see shortages of office space.”

So optimistic are Bisno and Snyder that they have become partners in Phase Two of the Water Garden. In September, their two companies joined K. Young Cos., a subsidiary of Korean real estate giant Kunyoung, in buying the foreclosed land for $5 million in cash.

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Although they still hope to add two more buildings to the Water Garden project, the financing terms are challenging. Gone is the era of speculative building, or loans based on commitments by only 30% of the future tenants. Instead, they must sign up 70% of the tenants in advance, or build to suit a company with vast space requirements.

“We have a request for proposal from one of the country’s largest media companies for 500,000 square feet built to suit,” said Bisno, who declined to say which company has made the inquiry. “If you would look for a 200,000-square-foot block of space on the Westside, I don’t think you could find one, and there are fewer than four 100,000-square-foot properties west of the 405.”

Snyder said he and his partners have been negotiating with three major entertainment and news media companies, including a newspaper, for Phase Two of the Water Garden.

“The reason we bought (Phase Two of) the Water Garden was we noted the significant improvement in both the retail and office markets,” Bisno said. “Had we not seen so much positive activity on the Arboretum, we would not have bought the Water Garden.”

It will be two or three years before their vision is realized, the partners said. But their development agreement with the city does not expire until 2000. And Snyder remains undaunted.

“It will work out,” he said. “We own it. We’re stuck with it.”