Restaurateur Gets Taste of Hotel Development

By WILLIAM FULTON

Sept. 10, 1989 12 AM PT

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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.”

Manhattan, however, was another story. McCarty wanted to open a Manhattan restaurant in 1980, but the owner of the site he wanted at Fifth Avenue and 55th Street became reluctant and negotiations have dragged on ever since. Finally, in June, McCarty closed the deal for a 49-year ground lease and he plans to open the restaurant in November.

Even though he has leased five properties, McCarty has never developed a project from scratch.

The Sand & Sea Club property is owned by the state but managed by the city, which uses revenue from it to operate and maintain Santa Monica State Beach.

The city and the state began to think about redeveloping the 5-acre site when a 25-year lease with the club ran out in 1981. Both agencies were interested in generating more revenue from the property.

At the time, the Sand & Sea Club was paying about $100,000 a year, and the city couldn’t afford to make needed beach improvements. The state was concerned about the questionable legal status of operating a private club on state beach property. So the city issued a request for proposals (RFP).

McCarty responded with his hastily conceived proposal for a hotel and lost out to Doug Badt, the longtime operator of the Sand & Sea Club, who proposed maintaining the club as it was, but opening it up for certain types of public use.

Many New Restrictions

The state, however, rejected Badt’s proposal, and a second, much more specific, RFP was issued in 1987. The result of lengthy negotiations between Santa Monica and the state Department of Parks and Recreation, it contained many restrictions on the height and bulk of any new buildings on the site and required that the distinctive North House of the Davies estate be retained. It also required maximum feasible public access and public usage and required bidders to offer at least $500,000 a year in revenue.

This time McCarty was ready with a strong team. As developer, he lined up Joel Landau of Dominion Properties, who built the Sea Colony project farther south on the Santa Monica beach. To run the hotel, he turned to his friend Gerry J. Inzerillo, who had recently bailed out of a promising career with the Four Seasons chain to run a small, chic hotel in New York. Richard Keating of Skidmore, Owings & Merill was picked as architect and Jones Lang Wootten arranged the financing.

To run political and legal interference, McCarty hired John Alschuler, who had been city manager during the heyday of the “People’s Republic of Santa Monica,” and Christopher Harding, a lawyer who is active in the All Santa Monica Coalition, the city’s more moderate political groups.

A Public Cafe

McCarty proposed a 148-room hotel with nine bungalows and a hotel restaurant he would run. About 100 extra underground parking spaces would be built for public use. The North House would be revamped to include day-use beach facilities, a public cafe and a home for the Westside Arts Center. He also offered a guaranteed $1 million a year in revenue.

McCarty had 10 competitors, eight of whom also proposed hotels. They included Badt, who had teamed up with Kimpton Hotels; developer David Greenwood and Doubletree Hotels; InterContinental Hotels, and Raleigh Development Co.’s George Rosenthal. The two non-hotel proposals came from the Sand & Sea Club members, who suggested retaining the club, and Bob Morris of Gladstone’s 4 Fish, who proposed a similar restaurant on the site.

But none could match either McCarty’s revenue or the sheer size of his public access/public use offer. “His proposal was the strongest in the public access area,” says Assistant City Manager Lynne C. Barrette. “Revenue wasn’t the only consideration.”

The Santa Monica City Council approved the McCarty proposal last November on a 6-1 vote.

Since then, McCarty has been negotiating the terms of the lease with the city, which will then pass it on to the state for approval.

Meanwhile, slow-growth activists in Santa Monica have circulated an initiative petition (with Badt’s support) to ban any further beach-area hotels, including McCarty’s.

One Win, No Losses

McCarty tosses the initiative off lightly, insisting that if the state backs the project it will get built. “The biggest hurdle was winning,” he said. “Once we won, the city and the state were our partners.”

And he insists that if he can get the Sand & Sea Club project built, he’ll retire from real estate development with a record of one win, no losses.

“I will never do this again,” he claimed. “It’s just not worth it.”