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Restaurateur Gets Taste of Hotel Development

September 10, 1989|WILLIAM FULTON | Fulton is editor of California Planning & Development Report, a Ventura-based monthly newsletter covering local growth issues around the state. and

Michael McCarty's career as a real estate developer began one morning in 1981 while he was driving down Pacific Coast Highway to his fashionable restaurant in Santa Monica.

As he passed the Sand & Sea Club, he remembered reading that the state and the city of Santa Monica had decided to redevelop the property, the former Marion Davies estate now used as a private beach club.

"It just clicked in my head," he recalled, "that what needed to go on that site was, in effect, a little Bel-Air (Hotel) at the beach."

After confirming his impressions during a bidders' tour of the property, McCarty submitted a proposal to the city. It contained no fancy graphics, no list of heavy-duty financial partners--just McCarty's half-thought-out idea for a small luxury hotel.

It was characteristic of the brash McCarty to think he could win a major development competition simply on the basis of a good idea, even though he'd never done a development before. After all, he'd never run a restaurant before opening Michael's at age 26.

Also characteristically, he didn't give up when his admittedly "amateurish" proposal lost. Today, after a second competition, McCarty has been selected to develop the Sand & Sea Club property and he's negotiating with the city about the terms of the deal.

Restaurateurs don't usually devote eight years of their life to building a beachfront hotel, but anybody who knows McCarty wouldn't be too surprised that he undertook the task.

McCarty has a lot of chutzpah. He's a nonstop talker. He has absolute confidence in his own ideas and never lets go of them. He likes working on his own and prefers debt to partners. So far, he's sunk $1.5 million of his own money into the Sand & Sea Club project.

In other words, he's a born real estate developer.

McCarty's proposal for the site includes the hotel, where rooms would run about $300 a night, and a variety of public uses, such as parking, lockers and showers, and a home for the Westside Arts Center.

But the idea still could collapse. The project must be approved by the California Coastal Commission, which is sure to give careful scrutiny to the criticism--from losing bidders, among others--that it is still too exclusive to fulfill the state's mandate of public access to the beach.

And it could get shot down by a proposed Santa Monica ballot initiative that would prohibit the construction of future beachfront hotels.

But McCarty is confident that he'll succeed. Proposed revenue from the high-cost hotel (along with a high-cost hotel restaurant he'll operate), permitted McCarty to guarantee the city and the state $1 million a year in revenue, which will be used to replenish the depleted Santa Monica State Beach Fund.

And, he says, the small, exclusive hotel will also cut down on the project's side-effects on Santa Monica neighborhoods. "It's the Michael's restaurant concept," he said. "Few people, lots of revenue."

As a self-described "businessman-restaurateur," McCarty has always recognized that restauranting and real estate are intertwined, simply because they share the same key to success: location, location and location.

"The people who make a lot of money in the restaurant business, in the long run, make it in the real estate business," McCarty said. "The classic examples are the New York restaurateurs who have made a nice living their whole lives and, when they decide to retire, they turn around and sell their restaurant for $98 million because it's next door to where the IBM building's going."

This relationship between restaurants and real estate became clear to McCarty early in his career, when he decided to open Michael's on 3rd Street near Wilshire Boulevard in Santa Monica.

Third Street was not exactly Restaurant Row, but the property had certain advantages. It cut down on his commute to Malibu. It had the physical layout McCarty wanted--restaurant in front, courtyard in the back--so he didn't have to build a new building. And it was cheap. (McCarty does not own the property. He signed a 25-year lease in 1979.)

Thus, he was--and is--able to run Michael's without much overhead. "A great deal of my financial success here has not just been the restaurant but, clearly, the fact that the real estate deal here was unlike anything else I could have gotten," he said.

Expanded Slowly

Over the last few years McCarty has deliberately chosen to expand slowly. Rather than go into obvious markets such as San Francisco and Boston, he selected secondary cities--Denver, Detroit and Washington--where he had connections and the chance to cut good deals. All three restaurants (called Adirondack) are part of major retail renovations, rather than stand-alone projects.

"The key thing is the real estate deal," McCarty said. "The landlords built the restaurant for us."

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