Industrial Realty Group owns nearly 60 acres of Downey Studios, and the city owns the remaining 20 acres.

Under a memorandum of understanding with IRG, the city agreed to waive $6.9 million in rent on those 20 acres and promised to expedite the permit process if IRG enters into a lease with Tesla.

Tom Messler, senior vice president of IRG, said his company is holding final discussions with the carmaker.

"We're continuing to make progress," he said.

Tesla has been looking for a place to build its next-generation Model S sedan, its seven-seat, $57,400 alternative to the $109,000 Roadster.

Tesla initially planned to build the sedan in New Mexico but was persuaded to stay in California when Gov. Arnold Schwarzenegger offered to exempt Tesla from state sales tax on equipment it buys to build the Model S. That will save the company 7% to 9% on each part purchased.

When the Model S was unveiled to reporters in the spring, Tesla said it would bring the plant to Southern California. The company has also flirted with Long Beach, and Tesla spokesman Ricardo Reyes would not confirm if it has chosen a site.

In June, the company was awarded $465 million in low-interest loans from the U.S. Department of Energy to help build the Model S, which is designed to travel as far as 300 miles on a three- to five-hour charge.

The car is slated to go into production by late 2011, and with a federal tax credit for battery-powered cars, the cost to buyers could be less than $50,000.

If Tesla comes to Downey, it would mark the return of auto manufacturing to Southern California for the first time since General Motors closed its Van Nuys Plant in 1992.