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The Real Deal Los Angeles

Doing it his way: Developer Rick Caruso looks to rehabilitate his image

The self-styled Frank Sinatra of LA real estate is overcoming a series of setbacks and controversies
By Subrina Hudson | April 21, 2017 08:30AM

Rick Caruso

From the April issue: The Grove offers the same skewed perception of reality as Disneyland. At both, you’ll find manicured landscaping and polished walkways, music playing from hidden speakers and a collection of jaunty buildings designed to block out views of the grit and congestion outside.

While it may not share the famous moniker of “Happiest Place on Earth,” the open-air shopping center is a top tourist attraction that was carefully crafted by its very image-conscious owner, the real estate developer Rick Caruso, who is attempting to reshape his public persona after a series of setbacks and controversies.

Caruso, whose current portfolio consists of 13 developments with three — Palisades Village, Miramar Beach Resort and 333 La Cienega — currently under construction, is cleaning up the fallout from his very public failed bid for a shopping center in Carlsbad. The project faced vocal community opposition and a crushing defeat in the voting booth last year. Add to that the explosive L.A. Times story, published in December 2016, revealing that Caruso and many of his associates had donated massive sums to city officials, allegedly in an effort to win approvals for his projects. Whether or not that’s true, the billionaire mogul does admit to his affinity for complex developments

“I’m only focused on projects that are complicated from an entitlement standpoint,” Caruso told The Real Deal. “I want high barriers to entry because the more complicated it is, the higher the likelihood is that there’ll be less competition.”

Lewis Horne, CBRE’s president of Southern California and Hawaii and a longtime friend of Caruso, said cutting through red tape is the hardest aspect of being a developer in L.A.

“The most complicated part is the entitlement process —your ability to get the approval from the community,” Horne said. “Generally, people don’t want a development. There’s fighting by its nature.”

Trouble in Carlsbad

Caruso, 58, is seen as a visionary for going against the traditional indoor mall-style retail development, instead creating open-air shopping centers with park-like spaces and up-and-coming retailers around paved walkways.

Before proposing one such open-air mall near the Agua Hedionda Lagoon in Carlsbad in May 2015, Caruso made attempts to win over community members.

Support from residents can allow a project to circumvent normal planning procedures, such as the costly California Environmental Quality Act (CEQA) review, due to a loophole in a 2014 California Supreme Court ruling that allows the city to approve a project without a public vote or CEQA review if a citizens’ initiative is successfully submitted.

Ballot-box planning in California is controversial. Historically, voters don’t like to feel like they are being bought, as evidenced by Beny Alagem’s failed $7 million campaign to get voters to approve a 26-story condo tower last year in Beverly Hills. Even before Caruso embarked on the campaign to convince voters that his shopping center would improve Carlsbad, newspaper op-eds throughout San Diego County begged him to just give up.

He did not. His team mailed out flyers, ran television ads and even hired multiple political consulting firms.

Caruso’s proposed San Diego County shopping center called for retail, restaurants and a movie theater across 27 acres, with the remaining 176 acres preserved for open space. However, a portion of the parkland would include a farm-to-table restaurant and an existing family-owned strawberry field.

Residents supporting the upscale mall submitted signatures to Carlsbad City Council, which unanimously approved the project instead of sending it to a public vote. The prize was nearly within Caruso’s grasp.

But the opposition group Citizens for North County squeezed in a referendum, which forced a public vote on the project. The neighborhood group did not return requests for comment.

Over the next 12 months, the battle with the group led Caruso to spend $12 million to rally support for the project, according to financial disclosure statements filed with the city.

Rival developer Westfield Corporation was keeping an eye on the fight. The mall operator owns several shopping centers in San Diego County and quickly entered the ring, donating $75,000 to Citizens for North County, which spent a total of $100,000.

Ultimately, voters shot down Caruso’s Measure A in a special election on February 23, 2016.

Caruso said afterward that he had taken the initiative route to prevent Westfield from following through on its threats to sue the firm under CEQA. The Australian company had previously blocked Caruso’s proposed $500 million project in Arcadia at the Santa Anita Park racetrack in 2011 using CEQA challenges.

Caruso had another reason to pursue the initiative route: If it had passed, he would have had more power over the project’s land-use regulations, since the city would be unable to make any changes to the proposed project for 15 years.

After the failed push in Carlsbad, Caruso explained what he felt went awry.

“What happened there is we didn’t follow our formula,” Caruso told The Real Deal. “It was an expensive and very painful reminder to stick to what works. We did a lot of things right, but we didn’t do 100 percent of things right.”

Shaking hands, kissing babies

The process of winning public support is the same nearly everywhere: A developer meets with city officials, holds meetings and coffee dates with local residents and mails out flyers before finally presenting the project for city approval. The impeccably polished and charming Caruso is adept at this.

But that song and dance didn’t work in Carlsbad, nor did it work more than 10 years ago in the small Bay Area suburb of Albany. In 2005, Caruso pitched a $200 million waterfront development there similar to the Carlsbad plan. He eventually quashed the project in 2006 because city officials would not guarantee that the firm’s development application could avoid a public vote if it cleared the initial hurdle of winning City Council approval. The site of the proposed development would have to be rezoned, and local law called for voter approval on projects requiring rezoning.

Many of the Caruso projects that have successfully moved forward were first met with dissension. Opponents point to Caruso’s numerous campaign contributions to local officials as evidence of his efforts to stack the deck against grass-roots opposition. Media reports have only reinforced that viewpoint.

Los Angeles City Ethics Commission filings revealed in the L.A. Times’ December 2016 piece showed that Caruso, his family and his employees collectively donated nearly half a million dollars to city officials in the last five years. More often than not, greasing squeaky wheels with a bit of cash seems to have paid off for Caruso.

Salud Carbajal, now a congressman, was one of four Santa Barbara County supervisors to approve Caruso’s Miramar Beach Resort project in Montecito in 2015. Caruso and his wife, Tina, donated $15,000 in 2011 for Carbajal’s reelection campaign for supervisor and $10,800 to his 2016 congressional campaign, according to the Santa Barbara Independent. 

In L.A., the board of the Westbury Terrace condominium, located across the street from 333 La Cienega, Caruso’s 16-story luxury residential tower, petitioned the neighborhood council over the building’s initial proposed height of 20 stories, saying it would increase traffic and block views. Once Caruso promised to make $500,000 worth of improvements to Westbury’s building, many petitioners reversed their complaint.

It’s a move that might be viewed as deceptive, but many in the industry say that this brand of backscratching is just part of doing business.

Eric Sussman, professor at the UCLA Ziman Center for Real Estate, said any developer would stress the importance of having a relationship with local council members.

“I think anyone who has half a cerebrum understands money is important to politics,” Sussman said. “[Caruso] is very political. He’s savvy [but] that landscape is changing as well.”

Sussman says that Los Angeles Mayor Eric Garcetti’s recent ban on planning commissioners meeting privately or communicating directly with developers regarding their plans could be in direct response to tactics employed by developers such as Caruso and Westfield. He added that it could impact the sustainability of Caruso’s strategy.

But not every project is met with community pushback and tension.

Take, for example, Caruso’s Pacific Palisades project, Palisades Village: The 116,000-square-foot project has been met with support from the city and neighborhood groups. It’s expected to open in 2018 and will include a movie theater, a grocery store, retail and restaurants.

David Kaplan, chair of the Village Project Land Use Committee, said Caruso and his team met with community leaders and residents several times to answer questions and present information on the project.

“He’s capable of having conversations with people and not becoming defensive, as many developers will, when they’re presented with people who are saying, ‘Well, not in my backyard,’” Kaplan said.

Origin story

Caruso is an L.A. native who grew up in Beverly Hills. His father, Hank, got his start selling used cars and became a leading auto dealer by 35. But the elder Caruso and  some associates were indicted for fraud, forgery and conspiracy in 1957. He initially pleaded not guilty but changed his plea at the behest of his attorney, who said he could avoid prison time if he copped to the charges, according to Los Angeles Magazine. He was ultimately sentenced to one year in L.A. County Jail and 10 years of probation. Eventually he was allowed to change his plea back to not guilty after fulfilling his probation, and the charges were dismissed. 

By that time, Hank Caruso had already sloughed off the damage from the scandal, launching a highly profitable business in 1966 renting out cars for a dollar a day plus mileage costs. The company, Dollar Rent a Car, became one of the largest auto rental companies, competing with firms such as Hertz and Avis.

Rick Caruso has said in previous interviews that his father’s jail time was not something the family discussed, especially since Caruso was only a toddler when the case made headlines.

The younger Caruso attended Harvard Prep and graduated from University of Southern California with honors in 1980.

Real estate was always the career Caruso wanted for himself, but he put it aside, graduating from Pepperdine Law in 1983  and joining law firm Finley Kumble. The mogul admits that while his father initially pushed him to study law, it ultimately helped him become a better developer.

“There was a certain discipline and a decorum,” he said of Finley Kumble. “They didn’t care about my social life. They didn’t care about anything other than working.”

Caruso added that if he had gone the traditional route of working for a development firm fresh out of college, he wouldn’t have taken the risks he takes now.

“I would’ve never been able to build the Grove,” he said. “Because nobody was building outdoor properties. Everything had to be an indoor mall anchored by a JC Penney’s or Sears. So a great gift for me was my dad saying, ‘You’re going to law school.’”

The elder Caruso did help get his son’s development career off the ground. When Rick Caruso launched Caruso Affiliated in 1987, he purchased land and leased it back to his father’s company to expand his own company’s business.

But the fortunate son would ultimately forge his own path. One of his first projects as a developer was a mall called Burton Place.

Of all the projects he has done over the years, Caruso said, this was the one that taught him the most about being a developer in Los Angeles.

“It was sort of a bag of everything,” he said. “I had to get a street vacated. I had to get a zone change. I had to move trees. I had to do everything, and I knew nothing.”

The company only had two employees at the time: Caruso and his assistant.

Thirty years on, the company enjoys  consistent growth at a time when many mall operators are scrambling to fill large vacancies left by those once all-important retailers that are now closing thousands of shops across the country.

Caruso told TRD that his company compared its sales growth to its publicly traded competitors’ this year, and while most grew at 2.5 percent, Caruso’s firm grew more than 7 percent last year. The developer said the company had 100 percent occupancy at its properties. TRD could not independently confirm Caruso’s assertions about the company’s performance.

“Our sales growth is up, every metric of us was up over the year,” he said. “We’re the only company that did that, but we’re providing a different product.”

And while Caruso has been pushing his firm to expand with additional properties, he has also attempted to pay his success forward in other ways.

The chief executive has been actively involved in his charitable foundation, which he launched in 1991. His work in that sector even caught the eye of Pope Francis. Caruso was awarded the papal honor known as Knight Commander in the Order of the Knights of St. Gregory the Great in January.

Caruso said it was an unexpected award and one that was humbling.

And he added that, as with his business, he is very careful about how the foundation spends its money.

“We want the money to make an impact,” he said. “What I learned a long time ago is it’s better to pick a small handful of things and support it forcefully than to spread it out and not make as much of an impact.” 

Editor’s note: A previous version of this story incorrectly stated the opening date of Caruso’s Pacific Palisades project.