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A Second Course at Seven

Angry partners. Broke investors. A flawed business plan. But the former R. Norman and 7 Sushi survived. Now David Koch is taking the restaurant in a new direction.

A Second Course at Seven

David Koch leans back against a soft suede cushion and sips from a bottle of Voss water. He’s in the second-story sushi bar at the restaurant Seven, at the corner of Seventh and Hennepin in Minneapolis. It’s in the same building that houses the historic Pantages Theater.

For the restaurant’s opening at the end of 2007, Koch (pronounced “Cook”) and his wife, Alexus, transformed this room into some new-age version of the Hindenburg’s top deck: foil walls, luminous pillars covered in sheer draping, lush hues—burgundy, cocoa, amber—and seating for 195 in various configurations. Music thrums through speakers the size of baby grand pianos. The carpet here is sound. The vibe is sex.

Seven is the sixth drinking-and-dining business Koch has opened in his career, all designed to woo the beautiful, the affluent, and the trendsetting. But he and his wife didn’t open this place alone. And though the room speaks volumes about what they want it to be, Seven might be most remarkable for what it isn’t.

For one thing, it isn’t closed. In April 2009, barely more than a year after it opened, the restaurant filed for Chapter 11 bankruptcy protection. Then last September, what had been the R. Norman steak house and the 7 Sushi Lounge—a pair of coliseum-size operations that cost $6 million to build out and open—emerged reorganized, with a trimmed-down name, a smaller ownership group, and a more grounded business model.

Gone are partners Randy Norman, who was general manager, and Denny Hecker, a major investor whose financial scheming not only contributed to the restaurant’s decline, but now is playing out in court. Koch, the only original principal remaining, and his minority investors are re-growing the business.

The bankruptcy made clear other things that Seven isn’t. It isn’t the kind of intimate, chef-driven operation that’s been in vogue lately. And despite being situated near Hennepin Avenue’s theaters and nightclubs, Seven isn’t in an easy location. Traffic flow on the streets outside and a floundering Block E across the way were barriers to its high-flown, hot-nightspot ambitions.

But Koch isn’t trying to make Seven into that kind of place anymore. Against the odds, his business got a second chance. He’s repositioning it with an eye to the changed realities of the restaurant industry. Seven used to get less than 15 percent of its revenues from private events. Koch is trying to grow that to 30 percent, with some success.

“We have the standard company parties and sales meetings,” Koch says. He and his CFO, Scott Kotaska, project revenues of $5.6 million in 2010, and they’re on track to reach it with a little more than $900,000 in sales for the first two months of the year.

His specialty has been venues (Bellanotte, Escape) where only those who rise above the fashion bar can get in. But now Koch says, “We’ve created a place where everyone can be comfortable and feel at home.”

That begins to bring Seven in line with what National Restaurant Consultants, a Denver-based market research group, says there’ll be more of in the restaurant business. This is an era in which casual, low-margin, and so-called green eateries will continue to grow, according to NRC. Mobile carts, trucks, or cafés that use social media to draw a crowd—meaning where they are is less important than whether patrons can find them—will also do soaring business.

Further, the consultants predict the “death” of the generic menu, and hard times ahead for any restaurant that fails to serve the needs of families with young kids.

The model that Seven’s first incarnation was built on, that of opulence and the $15 martini, is vanishing. At least for now.

 

Making the Club Scene

From the beginning, the restaurant was riding coattails, conceived and financed by some of the same partners as its wildly successful predecessor across the street, Bellanotte.

Koch is one thread that ties Seven to Bellanotte and to earlier ventures downtown. Tall and fit, with a neatly trimmed goatee, he looks younger than his 49 years, despite a career of late nights and now months of financial worry. He’s attracted to the club life, the hours and the fray.

He grew up in St. Paul’s Como Park neighborhood and took over his family’s business, a promotion company called A-Plus Demonstrating. It’s no longer operating, but it did in-store marketing in retail stores, handing out product samples and the like. Koch ran it for a dozen years, traveling a great deal and frequenting nightclubs and restaurants around the country. In the mid-’80s, he invested in a place called Club Caesar in New York, but it folded quickly.

“I learned you can’t be a good absentee owner when you’re just breaking into the business,” Koch says.

In 1996, he made good on that education, becoming the hands-on proprietor of a club called South Beach in the Minneapolis Warehouse District. His partners were Kam and Keyvan Talebi, the Gen-X brothers now behind the popular Crave restaurants. South Beach thrived, despite an incident early on in which someone shot up the place on a crowded Vikings game day and killed a patron.

But Koch and the Talebis decided to sell South Beach in 2003. The city had unveiled plans for the new Block E. The partners would open a larger, more luxurious club there called Escape.

“Block E was supposed to be a very hot venue,” Kam Talebi says. “Clearly, in the end, it did not meet the vision and expectations of what it was supposed to be.”

Escape’s owners were deep into a $3 million initial outlay when they began to uncover Block E’s now-legendary defects. The elevators were unreliable. Skyways closed at 1 a.m., forcing clubgoers out onto the cold streets to retrieve their cars. Stairwells were dank and urine scented. Sound insulation was poor. Neighboring tenants, including a multiplex movie theater, eventually demanded that Escape either turn down the music or install soundproofing, which it did.

Then the smoking ban of 2007 took effect.

“That was the nail in our coffin,” Koch says. “We were a second-story club. People didn’t want to go down and outside to smoke.”

Everyone involved lost money on Escape, according to Koch and Talebi. But that wasn’t so painful. By then they had launched a neighboring enterprise, the now-defunct Bellanotte. And this mammoth restaurant with its fashion-runway mystique was the blockbuster they had wanted all along.

 

Bella Days

Conceived as a Miami Beach–style magnet for the rich and beautiful, Bellanotte opened in the winter of 2004. Koch knew it was a winning concept, but he also believed the place needed some polish. So he brought in Randy Norman. Norman had moved to Minneapolis in 1997 to open the Capital Grille on Hennepin Avenue. He was a smooth, front-of-house operator who knew his customers: their likes and dislikes, their business dealings, where they preferred to sit.

“Randy was distinguished, but he was streetwise, too,” says Pat Lindquist, a PR consultant who worked on Bellanotte and R. Norman–7 Sushi. “He’s also the kind of GM who will put on a chef’s jacket and help on the line when the restaurant gets slammed.”

Bellanotte had arguably the splashiest, most successful opening that year. “We were giving Minneapolis something it had never seen before,” Koch says, excited even six years later. “It was about energy and sensory stimulation. Great food, total sophistication, different genres of music.”

By many accounts, Koch overestimates the quality of the Italian cuisine at Bellanotte. “A lobster ravioli came fishy and grainy, with the sauce separated,” Mpls.St.Paul’s Andrew Zimmern wrote in 2005. “Fettuccine Bellanotte with shrimp, cream, Parmesan, and dried porcini came congealed, dense, and metallic.” Jeremy Iggers summed up in the Star Tribune a few months after the opening, “If you come for the glamour and aren’t all that picky about what you eat or how much you spend, you can have a fine time at Bellanotte.”

Plenty of patrons seemed willing to adopt that attitude. Limousines pulled up outside the restaurant-cum-nightclub. Vikings, Timberwolves, and Twins adopted the place as their own. Carl Pohlad and Ralph Burnet were seen doing deals at corner tables. Sportscaster Charles Barkley came to town for the NBA’s Western Conference finals and liked Bellanotte so much he gave a thank-you on the air.

One of Bellanotte’s original investors was Tom Petters, the now convicted Ponzi schemer. A few years after Bellanotte opened, Denny Hecker also began looking for a way in. A wealthy operator of auto dealerships and other businesses at the time, Hecker ultimately bought Petters’ shares.

 

End of an Era

Despite success, tensions simmered among Bellanotte’s partners. Hecker’s entry brought them to a boil. And Koch was restless.

So he was receptive in 2006 when developers from the Stimson Building, home of the Pantages, approached him about a cavernous 26,000-square-foot space they were trying to fill. Koch saw it as a chance to take everything he loved about Bellanotte and make it even bigger and better.

“You have to understand that at the time there were all sorts of wonderful things planned for Hennepin Avenue,” he says. “I was told there were people getting the Schubert Theater together and bringing additional restaurants in. There were also some luxury condos that were supposed to be going in off 11th and Hennepin. This seemed like a great deal.”

Some of his partners disagreed. “I felt Seven would cannibalize our core business at Bellanotte,” Kam Talebi says. “Both my brother and I refused to get involved.”

Koch went ahead anyway, taking Norman with him. Hecker straddled the two concerns, investing with Seven yet staying on with Bellanotte.

It took time to assemble the deal. Stimson Partners, the developers, provided a loan of $3.5 million in build-out capital as an incentive. Another $2 million was from Hecker, Koch, and minority investors who contributed a couple hundred thousand dollars each. A final $1 million was a bank loan made jointly to Hecker and Koch.

On December 31, 2007, the Koch Group opened R. Norman, a richly umber street-level steak house, with the more opalescent 7 Sushi up above, and a rooftop bar over that. It was at the end of an auspicious period for restaurants. Pricey menu items and fine wine were still selling easily. Rumors of a downturn in the economy were just that.

“Our clientele crossed all genres,” Koch says: young urban professionals, downtown residents, the corporate community. “We had the older generation of businesspeople who were steak eaters, plus the younger generation of sushi eaters. We felt we were really diversified that way.”

Numbers for the first few quarters looked strong. The Republication National Convention gave an inflated sense of how robust business would be. But after the delegates left town, customers dwindled, particularly at R. Norman. Then, as the housing crisis became more evident and consumer spending began to fade, the steak house went nearly dormant.

 

Way Too Big and On the Wrong Side

I thought at the time that Randy’s name was immediately recognizable and would be a good brand, but I was wrong,” Koch says, shrugging. “7 rocked from the night it opened. R. Norman never found a footing.”

Randy Norman lasted only six months at the eponymous restaurant, leaving in July 2008. But his view of why the venture failed couldn’t be more different. He describes constant meddling from Hecker. The auto giant wanted to steer the restaurant’s menu and décor. And according to Norman, Hecker was always dividing the other partners, trying to turn one against another. Norman says he never bought it, but Koch did.

Koch was too reliant on Hecker for money, Norman says: “David actually called Denny ‘Mr. Hecker,’ like he was beholden. And he was.”

Koch says only that he and Norman had “differing philosophies.” But he does admit that Hecker was a big part of the problem, promising a second round of capital that never materialized and defaulting on the million-dollar loan that reverted to Koch alone.

Phil Roberts owns the Minneapolis restaurant consulting firm Idein, as well as restaurants that include Manny’s, Salut, Chino Latino, and Il Gatto. He says Seven’s problems had less to do with its backers or the steak house’s marquee name than with Koch’s “bonehead” decision to locate where he did.

“Hennepin Avenue is a risky place, and [the restaurant] was way too big and on the wrong edge of Block E,” Roberts says. The location “was gritty with a perception of being unsafe. Plus, the steak concept was never anything you could identify. It wasn’t Manny’s or Capital Grille or even Murray’s,” he says. “Koch didn’t know what audience he was trying to reach. I guarantee you, no one ever said, ‘I’m an R. Norman kind of steak guy.’”

Lindquist, the PR rep, says she loved the restaurant, but she agrees with Roberts’ assessment of the location. “We were on a terrible corner,” she says. “Suburbanites didn’t like it. And the city of Min-neapolis didn’t help at all. We were on a throughway, so we couldn’t use valet [parking] until after 6 p.m.

“We tried to run a happy hour from three to six to get profits up a little,” she adds. “But we couldn’t offer curbside pull-up, so no one came.”

Even 7 Sushi, which had launched with Koch’s signature see-and-be-seen allure, suffered as the economy tanked and lukewarm reviews appeared. City Pages critic Rachel Hutton called the food “good enough to make people happy but not so good as to be distracting.” The Star Tribune’s Rick Nelson wrote that Seven offered “perfectly competent fare at slightly higher-than-competitive prices.”

Then, in a supremely bad stroke of luck for Koch and his group, Ralph Burnet opened the W Hotel at the more desirable Eighth and Marquette, with the light-spangled Living Room lounge and, at the top of the former Foshay Tower, the Prohibition bar. It was September, just nine months into Seven’s existence, and the glitterati defected, en masse.

 

Bankruptcy

By the spring of 2009, the Koch Group was in debt to dozens of vendors and unable to come up with $325,000 in past-due sales tax. The state was threatening action.

“Things were really starting to crumble,” Koch says. “I remember sitting at a meeting, going through all this, and Denny just sat back and looked at us and said, ‘You think you got problems?’ Then he threw out this staggering number of what he owed, and we all thought he was kidding.”

The partners had tried cost-cutting measures. They stopped lunch service just two or three months in. Downtown workers weren’t crossing the Hennepin Avenue divide at midday, Koch says; there was a perception that service would be too slow or the meals too expensive. The owners also had cut back the restaurant’s late-night hours to weekends only and worked on reducing their cost of goods sold.

On April 13, just one day before the state was set to prohibit liquor sales to Seven, the Koch Group filed for Chapter 11 and submitted a reorganization plan to the court. The partners had more than 100 creditors (wine purveyors, a pest control company, the IRS) to whom they owed debts listed as “between $1 million and $10 million.” Their offer: to pay general unsecured debt at a rate of 15 cents on the dollar, with a payment schedule of up to eight years.

All but one of Seven’s creditors agreed to the plan. Attorney Lynn Wartchow of the Morris Law Group in Edina, who represented Seven in its reorganization, calls that an “encouraging show of support.”

But Joe Lawver, counsel for Carlton Financial Corporation, a secured creditor that was owed roughly $836,000, says the agreement was strictly business. Carlton leases restaurant equipment, such as ovens, vents, and walk-in coolers, to Seven.

“If we’d taken all our equipment out and liquidated it, we would have gotten less,” says Lawver of the nearly $400,000 that Koch Group has promised to pay in full (with the remaining debt to be paid at 15 percent). “It was how to get the best chance of recovery on our collateral. I do hope they succeed, very much so. But that’s not my main concern.”

 

Keeping It Real

It is Koch’s main concern. But he and his sales and marketing director, Nick Rancone, are less worried now about having limousines outside. They’ve traded in flash for a more temperate approach.

“We pay cash on delivery for everything,” Koch says. “And that’s not because we have to. I’ve had vendors offer me terms, but I say no, let’s just keep the money real.”

They’re keeping the business anchored in reality in other ways, too. Their push for private events is suited to the restaurant’s vast square footage. They’ve become “universal” in their menu offerings, Koch says, letting people order steak, sushi, or whatever they want from the menu regardless of where in the restaurant they’re seated. And Seven is still closed over the lunch hour, focusing instead on developing a daytime catering business.

But the high-margin rooftop Skybar stayed open even during the winter months, adding a large canopy and outdoor heaters to keep patrons warm. It was popular and Koch says he’s considering doing the same next winter.

He believes that these tactics, combined with business from the new Twins stadium and a slightly brighter outlook for the restaurant industry as a whole in 2010, will mean Seven’s continued survival.

The restaurant isn’t out from under the clouds yet. Among other things, there’s unresolved business with Randy Norman.

Norman has taken a chance on another splashy concept, Om, an upscale Indian restaurant located on First Avenue that features star chef Raghavan Iyer. Meanwhile, Norman intends to keep pressing for the interest he claims he was promised in R. Norman–7 Sushi (between 8 and 11.5 percent, depending on who you ask) in return for his sweat equity and his name.

“I have not gotten my position out yet,” says Norman, against the backdrop of Om’s 24-foot chandelier. “But my attorneys are still working, and now that Seven has gone through Chapter 11, I’m sure we can come back to the table.”

Koch demurs on that topic, saying whatever interest Norman held was eliminated the day Seven’s reorganization plan was approved by the court. Besides, that’s old business. He has only the future in mind, specifically, the new catering operation that he predicts will grow very quickly.

“It’s called Seven in the City,” Koch says, taking another sip of his Voss. “We’re a strong brand in a changing economy, and all we need to do is bring our product to the people. The corporations are supporting us. Our vendor programs are very strong. The Vikings, the Twins, the University of Minnesota—they all love us. Given this, we cannot fail.”

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