Swallow the Money Want to understand D.C.'s restaurant boom? Meet the people funding it.

Elaine Chon-Baker is sitting at the mafia table, and everyone is treating her like the boss.

“You get one of my favorite cocktails of all time—not on the menu,” says bartender Steve Oshana as he approaches the secluded corner of Arlington restaurant Water & Wall, where we’re sitting in a half-circle burgundy banquette unofficially nicknamed for its Goodfellas vibe. “It’s called a Bobby Burns. It’s basically like a Rob Roy, but instead of bitters, they use a bar spoon of Bénédictine. It’s an herbal liqueur made by Benedictine monks.”

With her petite stature and long dark hair, Chon-Baker, a 42-year-old mother of three, looks young enough that she might be carded anywhere else. But certainly not here. She’s an investor.

“She drinks her Scotch like a boss,” Oshana tells me. “I enjoy certain things,” interjects Chon-Baker, who’s also an investor in Catoctin Creek Distilling Company.

After a career in telecommunications and IT, Chon-Baker moved to London in 2002 where she focused on parenting and helped launch a friend’s e-commerce site—one of many projects she’s since dabbled in. She begins to tell me how she developed a passion for restaurants during her five years across the Atlantic when a server comes to take our order.

“Can Tim just pick?” she asks, referring to chef and owner Tim Ma.

“Sure,” says the server. “How many appetizers would you like?”

“Maybe three different flavors? Sweetbreads, definitely one of them. I do like the pork belly, but then it’s all very heavy. Arugula salad, maybe?”

On a busier night, she would never ask Ma to pick, she tells me. Since Water & Wall’s November opening, she’s learned how a restaurant works and how crazy the kitchen can get. “I didn’t know much about behind the scenes,” she says. “That’s the biggest thing for an investor, is that it’s cool. The idea is a dream for a lot of people. But to make it all happen is”—she pauses—“huge.”

If you want to know why D.C.’s dining scene has boomed, you have to look at investors like Chon-Baker. Restaurants have proliferated in large part thanks to the growing number of people willing to fork over the cash to fund them. The surge in restaurants—one of the most visible signs of the District’s growing wealth—is also an indication of the abundance of people in the area with money to invest. After all, most restaurant capital comes from relatively wealthy people. Banks tend to be wary of these notoriously risky businesses. Individual investors, on the other hand, are much more willing to take a gamble for potentially big returns and the perceived glamour. Of course, being a restaurant investor has always had its cachet. But as food and drink has become a hipper and more powerful industry here, the allure of being part of it is greater than ever. While you can probably name the chefs, restaurateurs, and even bartenders behind your favorite restaurants, chances are you don’t know the people who paid for it all.

Chon-Baker moved from London to Vienna, Va., in 2007 and desperately missed having good restaurants nearby. Then one day a couple years later, she noticed a modern-looking brown sign go up in her neighborhood for Maple Ave Restaurant, the first business from Water & Wall owners and husband-wife team Tim Ma and Joey Hernandez. The first time she ventured in was not to eat, but to see if the owners might donate a gift certificate for an auction at her kids’ preschool. Which they did. She later returned for dinner with her husband (from whom she’s since separated, but who remains a co-investor). They returned again. And again. And again. “We fell in love with Maple Ave and in turn fell in love with Tim and Joey,” Chon-Baker says. “After many dinners there, we started to say, ‘Hey when are you guys going to open up another restaurant? You guys are so good. We should do this with you. We’re happy to help you.’ And then one day they said, ‘Sure, let’s talk about it.’”

Ma initially didn’t want investors. He and Hernandez had self-funded Maple Ave, which opened in 2009, with a scrappy $100,000 budget and lots of build-out help from friends and family. “We wanted a restaurant that would be our restaurant without us executing somebody else’s vision because they have the money,” Ma says. He’d heard horror stories about investors who come from other industries and don’t understand how restaurants really work. “I don’t want an investor who’s sitting on the line cooking with me every day, telling me what to cook because they think that’s what everybody wants, or why I have to charge a certain amount for a certain dish without knowing anything about where the food comes from or the food costs,” Ma says.

Most restaurant investors aren’t involved at all in day-to-day operations, and many have contracts that explicitly restrict their involvement in decisions. But some do lend their expertise and opinions—welcome or not—in different ways. “Typically, you want investors that are completely silent, that are investing in you because you are the professional that knows best how to run the business,” says Streetsense Director of Eat & Drink Adam Williamowsky, who consults on restaurant investment and development for the architectural and real estate brokerage firm and also invests in a number of places himself.

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As with Ma, the last thing any operator wants is an investor who’s going to nitpick. “I have seen opening nights of restaurants where an investor who is a lawyer, doctor, accountant, stockbroker is going around the restaurant trying to tell servers how to wait tables,” Williamowsky says.

That fear is one of the reasons why restaurateur Jeff Black, who owns Pearl Dive Oyster Palace, BlackSalt, Black’s Bar & Kitchen, and others, has largely avoided investors—a rarity among D.C.’s restaurants. “A loan doesn’t show up at 7:30 on a Saturday night and want a table. They’re not trying to get little Billy’s bar mitzvah comped,” Black says. “It’s a different animal when you have investors. There’s a lot more hand-holding. With a bank or debt, it’s pretty simple: Either you pay me, or I take your business away. I appreciate the cut and dry nature of that.”

Black opened his first restaurant, Addie’s, in Rockville in 1995 with family money and a loan from the Small Business Administration. Black had two small investors at Black’s, whom he bought out. Today, he only has two investors in BlackSalt—one who works in the air conditioning business and consulted on his HVAC system, and another who’s a CPA and helped him learn the financial aspects of real estate. “If I’m going to give you a part of my business and you’re going to be silent and you’re going to sit on the sidelines and take money from me, I need to know that you bring some other expertise,” Black says. Still, he says he’ll probably buy those two out in the next year or so. The fact that he owns much of his five restaurants’ real estate, unlike most restaurateurs, has helped him secure loans from EagleBank.

At first, Ma also chased several bank loans. But the banks said no. “In the end, restaurants are the riskiest business, so they don’t give out loans to people like me,” Ma says. On his own, Ma estimates it would have taken at least another two or three years of living lean to fund Water & Wall, which ultimately cost nearly $300,000 to open. (And that’s still much cheaper than a lot of restaurants, which can cost in the millions.)

But Chon-Baker and her husband were willing to take a chance. They now own a third of the business and are the restaurant’s only investors. (Some restaurants, however, have as many as 100 investors, although the average is around 25 to 50, says consultant Williamowsky.) “Elaine has a real passion for this,” Ma says of what sold him on bringing her on. “You could always tell this was her passion project.”

Many investors are wooed, at least initially, by the perceived razzle-dazzle of the restaurant world. “Obviously, it’s a lot sexier to tell your friends, ‘I invested in X,Y, Z restaurants,’ versus, ‘Oh, I bought 100 shares of X, Y, Z stock that makes widgets,’” says Williamowsky.

Perks can run the gamut, from guaranteed reservations to free cocktails or extra dishes. David Dochter, a senior director of retail services at Cushman & Wakefield, says he gets a card with a few hundred dollars to spend on food and drink from Sixth Engine, where he’s an investor. He also gets to skip the velvet rope at The Huxley nightclub, thanks to his funding there. Other establishments give their investors a set discount every time they visit, and some places host special parties for investors only. Benefits like these are often outlined in contracts.

Despite the freebies, most of the investors I spoke to aren’t necessarily that interested in them. “Really, they’re business investments,” says Dochter, who sees his investments as one avenue for diversification. “I mean, I don’t have to wait in line so that’s great, but besides that, we’re looking at it from a business side and for a return on our money.”

Chon-Baker agrees: “Yeah, it would be nice to have a free meal every time and invite all my friends and treat everyone well, but at the same time, it’s a business,” she says. If she’s taking away from the restaurant’s profits, she’s ultimately taking money from herself. As for a guaranteed reservation? “I would feel a little bit embarrassed that I was taking a table from a customer,” she says.

Another part of the appeal is tangibility. Many investors want to put their money into something local—and something they can actually see and check in on—that gives them at least some semblance of power over the success of their financial plays.

“I got super disillusioned, like a lot of people, with the stock market and the financial world when I just saw the amount of money that people were making,” says Jeff Jetton, a 38-year-old investor in Toki Underground, Mockingbird Hill, and CreamCycle, a fleet of ice cream sandwich–slinging bikes. “I want to be investing in my local community and have control over what I’m doing.”

Jetton, who worked for Marriott for 15 years and most recently did business development for the architectural and real estate brokerage firm Streetsense, says he decided to get involved with Toki mostly because he wanted to improve the H Street NE neighborhood, where he was hanging out a lot at the time. He knew owner Erik Bruner-Yang through mutual friends and the music scene (the chef was in indie-pop band Pash). But it was a meal of ramen and dumplings that Bruner-Yang cooked for him and fellow investor Brian Weitz (of the band Animal Collective) that ultimately sold him. Jetton was also attracted by the informal education that being an investor has given him: He has an MBA in finance and real estate from George Washington University, but likes to say he’s learned much more about contracts, lease structures, and tax law by buying into restaurants than he did in grad school.

Jetton says at first there was some prestige to being behind one of the city’s hottest tables. But he says he’s matured beyond that. “Press is great. PR is awesome, right?” he says. “But accolades are one thing, and the bottom line is another thing. What’s going to keep the longevity of a restaurant is its bottom line, so that’s probably what I care more about.”

Dennis Hoffman just wanted a better restaurant in his neighborhood. And in late 2007, his good friend Hilda Staples, now a managing partner in the restaurants of chefs Bryan Voltaggio and Mike Isabella, approached him about investing in her first place, Volt. Hoffman, who works in private equity, had been friends with Staples’ husband, Jonathan Staples, since college, and he was the best man at their wedding. Like the Staples, he lives in Frederick, Md., and liked the idea of bringing a higher-caliber restaurant to town. At the time, Hoffman didn’t actually think he would make any money. “I looked at it more as I was joining the country club,” Hoffman says. “I was putting money into Volt so it would happen and I could go and eat there, but I was very pleasantly surprised when I realized it was an investment that would pay reasonable returns.”

Volt opened in July 2008—just before the stock market crashed. Despite the economic downturn, Volt made a profit its first year and continued building with an extra boost from Voltaggio’s appearance on Bravo’s Top Chef. “In those years, that was the best investment I made,” Hoffman says.

Hoffman has since invested in all of Staples’ restaurants, including Family Meal, Range, Graffiato, Aggio, and Rogue 24. He’s also involved in DGS Delicatessen, Bruner-Yang’s forthcoming food and fashion market Maketto, and other ventures that are still in the works. It’s in large part thanks to money from the Staples, Hoffman, and other investors that chefs like Isabella and Voltaggio have been able to go from being on Top Chef to working in someone else’s kitchen to big-name restaurateurs with about half a dozen places each—all within just a few years.

All told, Hoffman says he’s invested “in the millions”—with anywhere from $15,000 to $400,000 per restaurant. (He declined to say which restaurants he gave how much.) “When I average my returns from restaurants, they’re definitely beating the market,” Hoffman says. On average across all of his eateries, he says he’s seeing returns of about 20 percent per year. Some investments have been busts, but his most profitable ones bring in more than 50 percent.

“People are always asking me, ‘Hey, will you bring me in on the next deal?’” Hoffman says. “And the big problem is an individual restaurant may work or may not work, just like the stock market, but if you have a portfolio of restaurants, then you invest in the market.”

That’s what inspired Hoffman and his business partner at Wellrock Capital Partners, Paul Tinney, to create a “restaurant fund”—essentially a private mutual fund that will allow investors to buy into an entire portfolio of mid-Atlantic restaurants at once. Hoffman hopes to launch the fund this summer with eight to 10 new and existing restaurants, including new eateries from the owners of Rappahannock River Oysters, and add more as time goes on. Hoffman’s goal is to bring on 25 investors to start at a minimum buy-in of $25,000 and then add more. The fund will likely close down after about seven years.

But investing in restaurants isn’t just about money, as Hoffman knows. One big draw for him is the special attention. For example, when he attended a pop-up for Maketto, chef Erik Bruner-Yang brought him a pig’s head and carved him the prized cheeks: “It was interesting and delicious and fun, and to me, I like those perks much more than the discount.” Just being part of the club is also a bonus. “If I’m going to Salt Lake City, I can call Bryan [Voltaggio] or Mike [Isabella] and say, ‘Where should I eat?’ and they’ll call ahead for me,” Hoffman says.

So Hoffman plans to set up a “concierge service” that lets his fund’s investors get reservations in the places where they’re putting their money. The service will likely include other perks, like free dishes, off-the-menu items, or a personalized table visit from the chef.

Hoffman isn’t aware of anything similar, though he’s still working out the legal details. Not only would his fund let investors bet on the regional restaurant scene rather than individual establishments, it could also have a big impact on which restaurants get funded. After all, opening a restaurant isn’t just a matter of good food and a cool concept; you’ve got to find friends with deep pockets, too. Hoffman says restaurants that can’t or don’t want to find funding on their own will be able to approach him about becoming part of the fund.

Hoffman is just one of many people betting big on the D.C. area’s restaurant boom. “Without a doubt, food investment, whether or not for the public markets or the private markets, has definitely gone to a new level,” says Williamowsky. “They’re seeing the potential return on their money.” On one extreme, AOL co-founder Steve Case’s Revolution Growth fund made headlines late last year for announcing it would invest $22 million in Sweetgreen to fuel the local salad chain’s national expansion.

There’s more local money going to restaurants these days because there’s more local money. You need only look at the crane-dotted skyline or expected arrivals of Dior and Hermès in downtown D.C. to confirm the fact that the Washington region is among the wealthiest places in America. Census data unveiled late last year show that four of the five counties with the country’s highest median household incomes are nearby suburbs; Maryland has more millionaire households per capita than any other other state, according to a report released in January from marketing and research firm Phoenix Marketing International. Virginia ranked seventh and D.C. tenth.

And while you don’t have to be Steve Case to invest in restaurants, you do have to be pretty rich. Almost all restaurants require backers to meet the Securities and Exchange Commission’s definition of “accredited investors.” That means they need a net worth of at least $1 million (which can include assets owned jointly with a spouse, but excludes the value of their primary home), or an income of at least $200,000 for the past two years (or $300,000 with a spouse). The idea is to protect people from getting in over their heads if they can’t afford to lose whatever they’re putting up.

Restaurants can technically bring on unaccredited investors, but the paperwork, extra disclosures, and additional costs required make it far more burdensome, says attorney Scott Museles of Shulman Rogers, who worked at the SEC and now helps a number of local restaurants on investment structures: “I steer a lot of my restaurant clients toward only accredited investors if at all possible.” At the same time, a lot of restaurants don’t comply with these laws because “they don’t even know,” Museles says. “Those that do not take the time to understand these technical laws could face costly investigations and penalties.”

Crowdfunding sites like Kickstarter and Indiegogo have begun to democratize the world of restaurant funding by allowing anyone to give money to new businesses. These sites also allow entrepreneurs who don’t have a lot of wealthy connections to tap into a huge pool of potential supporters. The difference: A restaurant that’s launching a Kickstarter campaign can’t offer profits, only perks like a free dinner or a name engraved on a bar stool. Crowdfunding rules are changing, though: The Jumpstart Our Business Startups (JOBS) Act, signed into law in April 2012, includes a new “crowdfunding exemption” that will open things up for anyone to be an equity investor under certain limits. But it hasn’t gone into effect yet; the SEC is still writing regulations to implement it.

In the meantime, some states are loosening their own rules. In March, the Maryland General Assembly passed legislation that allows unaccredited investors—the not-rich folks—to invest up to $100 in small businesses and earn interest (but not a share of the profit). Maryland small businesses can raise up to $100,000 a year that way, though they have to follow the SEC’s rules, too.

Thanks to the JOBS Act, businesses can now also solicit the general public for funds more easily. Unless they went through the onerous process of registering with the SEC, it used to be illegal for restaurants to send out an email blast seeking investors to, say, their 2,000-person mailing list or put an ad looking for cash in the newspaper or on their websites. So restaurateurs had to be somewhat well-connected to find backers. But that’s no longer the case. The catch is that all investors solicited from a mass public appeal must be accredited investors.

Whether people are putting in a lot of money or a little, there’s a decent chance they may never see it again. “It’s not a conservative investment. It’s high risk,” says Museles. If you invest in, say, real estate, you usually don’t get a “zero,” he points out. There’s always value in land, even if it decreases. “Whereas a restaurant, you put in money, if it closes, you don’t get anything back.”

Depending on the type of restaurant, it typically takes three or four years from opening day to pay back investors, says Williamowsky. Plenty of places don’t make it that long.

“Oh yeah, I’m prepared to lose every dime. But I’m a gambler by nature,” says Jeff Greenberg, who’s invested in Clarendon’s Bracket Room, Good Stuff Eatery, &pizza, and Cava Mezze Grill. Greenberg says he occasionally bets on football, but even his day job as owner of ticket broker ASC Ticket involves gambling of sorts. “I work with Stubhub, and I pick different teams to invest in, and I buy different areas of stadiums, and depending on how the team does, I can win or lose tens or hundreds of thousands of dollars on a team in a given year.”

Greenberg knew he wanted to bet on Good Stuff Eatery, his first restaurant investment, from the moment he first stepped into chef Spike Mendelsohn’s Capitol Hill burger joint in October 2010. “I just couldn’t believe the lines…It’s like 45 minutes to get through the line, and I’m like calling my brother and saying, ‘We gotta find this guy and partner with him and open up 20 of these with him.’” So far, Greenberg has helped fund the locations in Crystal City and Georgetown, with another coming to Philadelphia this summer.

Greenberg later got interested in investing in &pizza because of online reviews: “Really how I found [&pizza owner Steve Salis] was I was just looking on Yelp…I would just read and see who’s getting lots of four-and-a-half- or five-star reviews. If you read his reviews, they almost seem like they could be fake, because every single person says, ‘This is the best pizza I’ve ever had. It’s like crack.’” (Greenberg later ran into Salis at the H Street NE pizza shop, which officially kicked off their relationship.)

The appeal, Greenberg says, goes far beyond money—although he’s in it for that, too. “Let’s say I had an opportunity three years ago to invest in 12 Jiffy Lubes, and on paper it looked like it could be more profitable than working with Good Stuff. I wouldn’t be interested in that,” Greenberg says. “It’s boring. It’s not fun.”

Back at the mafia table, after dinner has concluded at Water & Wall, Tim Ma stops by to chat.

“Hello, chef,” Chon-Baker says. She often calls him “chef” rather than Tim as a sign of respect. “Have a seat. Do you have a drink?”

Ma tells us he’s actually sneaking out early to check out Barmini. “How was dinner?” he asks.

“It was great. Sorry we ate so slowly at the beginning,” Chon-Baker says. We’d been doing a lot more chatting than eating.

“I was like, ‘Derek [the server], how far along are they?’ ‘They haven’t even touched it.’ ‘Tell them to start fucking eating it, because I’m getting antsy over here,’” Ma says. Chon-Baker bursts out laughing. “But it’s fine, you guys ordered an easy second course,” Ma says of Chon-Baker’s rockfish and my Burmese-style bouillabaisse, which is usually one of Chon-Baker’s go-to orders. “We actually thought that was yours, so we hit it with a lot of spicy,” Ma tells Chon-Baker.

The conversation eventually morphs into Ma talking about the wine glasses he has to bring to Maple Ave the next day, when Chon-Baker interrupts. “I must say,” she says, “I love this man. I am the luckiest girl alive to be working with such a great team…From the time I met Tim and Joey, even now, I still have such great respect for them.”

“Because we made her work the floor one time,” Ma cracks. That’s another thing most investors have probably never done: Chon-Baker was curious what it was like to actually work in the dining room, so Ma and Hernandez asked if she wanted to act as floor manager and check on tables one Saturday night when they were planning to be out (under the supervision of their general manager, of course). “They made things look easy, and I’m just struggling to be like, ‘Smile, smile,’” Chon-Baker had told me earlier in the evening. “It was a great experience, but I just did it once. I like being in the back better.”

In general, Chon-Baker’s involvement in Water & Wall is atypical. Before she and her husband split up, she planned to be a silent, uninvolved partner. But she says the restaurant became a welcome distraction. After learning that Ma was doing the bookkeeping at both restaurants, she volunteered to take over the task so he could focus what he actually loves: cooking. “I said, ‘I used to be the school PTA treasurer, I know how to use Quickbooks! I can help you!’ I don’t think he ever wanted me to feel I had to do something, but I said, ‘Please, let me do something.’” Ma happily obliged.

Chon-Baker has proven useful in other ways, too. Ma and Hernandez hadn’t purchased anything to decorate the walls of Water & Wall, so “one day, I brought my whole portfolio of all the different prints I had and said, ‘Pick some.’”

Two of her prints now hang not far from our perch at the mafia table. Eventually, Ma heads out, and Chon-Baker and I finish up an apple tart with cinnamon semifreddo. It’s getting late, and the restaurant is almost empty. But before the staff kicks us out, Chon-Baker has one final thought on what it’s like to be a restaurant investor:

“It’s kind of like being the entourage of a rock star, you know?” she says. “Your rock star is there, and you’re behind the rock star… Nowadays, maybe it’s the era of me, me, me, me, me, but people like being associated with something.”

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