Donald Salk ventured beyond his dental practice to invest in Chef Roy Yamaguchi’s first solo effort, a Euro-Asian restaurant called 385 North.
Salk, who had done well a few years earlier by investing in Wolfgang Puck’s Spago, said he knew both chefs and figured that restaurants were an “interesting” investment.
But in the case of 385 North, ultimately unsuccessful. “There was a fair amount of money lost,” Salk said of the restaurant, which closed in 1985.
Stories like Salk’s have been played out over the intervening years as wealthy professionals got done in by restaurant investments. It even became a running gag on Larry David’s HBO comedy series “Curb Your Enthusiasm.”
In the latest variation, two sets of investors are in court over the financial failure of the Hollywood & Vine Diner.
An investment group consisting of doctors and lawyers sued the developer of the restaurant, Richard Heyman, and his attorneys in 2003 seeking to recover what they claim is $2 million in losses.
The investors claim that Heyman promised to “capture the vision” and “create the institutions of Hollywood’s tomorrow” at Tinseltown’s famed corner. They say his lawyers assured them that the diner and an accompanying nightclub, The Ultra Lounge, would open in 2002 and make $1.3 million in its second year.
The lounge never opened, and the diner suffered from costly delays. “Heyman was essentially broke and desperately hungry for new sources of cash,” the investors claim.
The battle is playing out in L.A. Superior Court, even as the diner re-opened last year under the ownership of a different investor group. This one includes the lawyers representing Heyman in the suit but not Heyman. That group has filed its own suit against the original investors related to the restaurant’s initial closure.
All told, the individual investors of Hollywood & Vine have spent two years of legal fees to recover $2 million and it’s not over yet. An appellate ruling earlier this month reversed the opinion of a lower court judge on an arbitration matter and sent the case back to Los Angeles Superior Court, delaying the case further.
The messy fight over Hollywood & Vine is unlikely to deter others from getting into the restaurant business.
“It’s romantic, it’s got a lot of sex appeal and it’s exciting,” said Chris Bonbright, chief executive of Ramsey-Shilling Commercial Real Estate Services Inc., which brokers restaurant and nightclub leases. “It’s highly appealing from the outside, but the industry is fraught with pitfalls and perils.”
Competition, changing tastes and unpredictable economic factors all make restaurants ripe for failure. They are also dependent on large amounts of initial capital and doctors and lawyers willing to sign a few checks in exchange for a stake in the glitz have proven to be a ready source.
Those investors, many of them savvy at stocks and bonds, often forgo scrutiny and profits for the prestige of owning a restaurant.
“It’s what I would call a ‘lifestyle investment,'” Salk said. “It’s more about being able to go to the restaurant and say, ‘I’m one of the owners. Give me a good table.'”
A typical investment can involve anywhere from $15,000 to $50,000 and is often based more on referrals from a friend or colleague than careful due diligence, such as examining any prior lawsuits.
“I think they get snowed,” said Mike Garrett, managing partner of Falcon, on Sunset Boulevard. “They get romanticized into the ego part of it and think, ‘Wow, I’m going to be the owner of this great place.’ Anything looks good on paper.”
Garrett, who started in the business with his first nightclub 11 years ago, said he convinced the shrewdest investors by asking for smaller investments, about $6,000 each.
“Our strategy was to make it a dollar amount where they would be interested but it was not going to be something that would make or break them,” he said.
Even if a restaurant does well, investors do not always make a lot of money. Many individual investors, unaware of the industry or local market, bail out at the first sign of trouble.
Things may be worse in 2005 for the crop of restaurants in their freshman and sophomore years. In the last year, landlords have upped prices so much that a flood of restaurants may be on the market sooner than expected.
Despite the risks, lawsuits like the one surrounding Hollywood & Vine are rare.
“The majority of them end up losing a lot of money,” said Darlene Heskamp, restaurant specialist for Beitler Commercial Realty Services and president of the Restaurant Brokers Association. “But they take it out on their taxes as a bad business risk, or as bad debt. I don’t know that they’re terribly hurt.”
