The Case Against Dismantling The Liquor License Quota System

Law Offices of John P. Connell, P.C.:  In Massachusetts, pursuant to state law, the number of liquor licenses towns and cities are authorized to issue is capped at a certain number based upon that municipality’s population.  Essentially, the law provides that one all alcoholic beverages pouring license may be issued for every thousand people in that municipality.

Yet, not all cities are subject to the current quota system.  Over the years, since the repeal of Prohibition, up to twenty-five municipalities in Massachusetts have been authorized to opt-out of the current quota system and issue as many licenses as the municipality sees fit.  In addition, there remain many municipalities that are subject to the quota system, which have not issued all the licenses available to that town or city simply because of the non-interest of prospective restaurateurs.

With regard to the remaining municipalities that are subject to the quota system and which have reached their quota of available licenses, prospective new restaurants need to purchase an already issued license, which can be as much as $400,000.00 in the City of Boston, for example, for an All Alcoholic Beverages License. These already existing licenses are generally bought from a licensed restaurant that is now going out of business for whatever reason.

The Massachusetts legislature is currently considering whether to dismantle this “quota system” for liquor licenses all across Massachusetts, with the City of Boston being the one exception (for now). “An Act to Modernize Municipal Finance and Government” (H.3906)  was filed by Massachusetts Governor Baker and is currently being discussed in the Joint Committee on Municipalities and Regional Government.  The legislation (Section 90 of the Bill) will allow cities and towns to self-determine how many liquor licenses to issue.

The argument in favor of dismantling the quota system is that the high cost of a liquor license prevents smaller or less capitalized potential restaurateurs from entering the marketplace and that hampers the economic development that advocates claim usually follow the appearance of a new restaurant in a neighborhood where previously there may have been a vacant store front.

While it is true people who cannot afford to pay upwards of $400,000.00 for a liquor license to open a restaurant in Boston under the current quota system cannot enter the marketplace while other small businesses such as hardware stores or drycleaners can at will, there is scant evidence that new licensed establishments generate any attendant economic development in that area once it opens. Moreover, the current quota system has created such a predictable and stable restaurant industry in Massachusetts, and the enhanced value of a liquor license causes so many positive social and economic benefits that the benefits of our existing quota system should not be disregarded or easily overlooked in the upcoming legislative debate on this issue.

Points to consider:

  1. Liquor Licensed Establishments Have Never Caused Economic Development

The argument often advanced for dismantling the quota system often goes like this: if there were an increase in the availability of liquor licenses to would-be restaurateurs, that would result in an increase in the amount of restaurants and with these new restaurants will come the gentrification, real estate development and revitalization of areas that were not previously included in recent economic upswings.

Proponents of this argument point out that in Boston, for example, new restaurants like Del Frisco’s and those at Liberty Wharf revitalized the Seaport area. Proponents of this argument to expand the number of available liquor licenses, however, do not concede that these areas of recent development and gentrification, as exhibited by their attendant new restaurants, have simply followed the revitalization of an area, and had no hand in creating it. Indeed, the recent development of the Seaport with its attendant new restaurants occurred only after the infrastructure improvements of the “Big Dig” and the general development of a few new office buildings and hotels. Prior to the “Big Dig” and that appearance of the Seaport Hotel and two other office buildings fifteen years ago, the Seaport had popular liquor licensed establishments such as Jimmy’s and Anthony’s Pier Four that were there for decades as outposts amongst wind-swept parking lots and stagnant development. Those popular licensed outposts never did anything to attract new office buildings, residences, shopping or real estate development whatsoever.

Other such success stories in Boston such as City Square in Charlestown or Broadway Station in South Boston have seen great economic development in the past fifteen years with actually fewer overall licensed establishments located in those neighborhoods.  The difference between these previously tough but now very sought-after neighborhoods is that the old tired licensed establishments of the past have been replaced with more “high end” or “new concept” restaurants, rather than an overall increase of new licensed establishments.

Olives in City Square, Charlestown, for example, was largely associated with the revitalization of that neighborhood in the early 1990’s, but there was a time in the 1940’s and 1950’s that Charlestown was known to have the most licensed establishments per square mile anywhere in the world, with no attendant economic development.

All of the success stories in Boston and other Massachusetts communities where economic development has taken root, attribute their success to a variety of other factors that have garnered positive change in a particular area, including private investment in housing and shopping developments; governmental improvement of infrastructure or accessibility to public transportation; and accessibility to a job market that improves upon the job market that stood before.  New restaurants of any quality that arise in a previously blighted area have not yet proven to be a generator for larger economic growth alone, but seem to always closely follow development.

  1. New Available Licenses Do Not Attract Restaurants To Open In Areas That Are Currently in Need Of Economical Revival

In 2014, the Massachusetts Legislature granted the City of Boston 75 new liquor licenses to be issued over 3 years, and 60 of those new liquor licenses (or 20 per year) were to be issued only to certain neighborhoods in Boston that were thought of as needing economic development, such as Roxbury, Mission Hill and Mattapan among others. The hope was that these new essentially free liquor licenses would cause restaurateurs to seek an advantage on their competition and establish new restaurants in these neighborhoods for a fraction of the cost it would take to open in such areas as South Boston or Charlestown. As reported by the Boston Globe 8 months after these new so-called “restricted” licenses became available, however, only one new applicant for these licenses came from Roxbury and Mattapan, and no new applicants came from Mission Hill.

While the availability of an essentially new “free” liquor license is and should be an economic incentive for a restaurant to open in a particular zoned area, the other costs of opening a new restaurant such as equipment, construction, leasing and staffing remain very formable expenses for any new business and those costs often times do not justify the opening of a restaurant in area that is otherwise potentially not going to financially support that new business.

  1. The Economic Benefits Of The Quota System

There is only one sure consequence of eliminating the current quota system in Massachusetts, and that is that liquor licenses that now have a relatively certain value will be worth a lot less, if anything, without some careful planning and legislating to protect these values.

For most restaurants that have already entered the market place and purchased a liquor license, that license has a generally known value and is therefore currently considered as an economic “asset,” which in some cases may be more enduring and valuable than the good will, furnishings, equipment and leasehold improvements made to a particular premises. This singular asset with a discernable and transferable value has therefore not only acted as a hedge against over competition in a particular market for the potential buyer of a restaurant, but also as an asset that banks have grown comfortable with using as collateral for loans to potential restaurant buyers.  Existing restaurants that purchased their licenses years ago value the potential re-sale of their businesses based upon this fixed asset.

The consequences of a sudden devaluation in liquor licenses should the quota system would certainly require banks and other lenders who took a “Liquor License Pledge” as collateral for a loan or line of credit to seek alternative collateral or potentially even call in that loan as below their asset to debt ratio requirements.

Moreover, people who have invested money into restaurant businesses over the years did so with an understanding that the existing liquor license was highly valued due to the quota system that has gone unchanged for more than eighty years. Someone’s investment in a restaurant made just last year or five years ago would be instantly devalued with the dismantling of the quota system.

In short, the economics of the restaurant industry subject to the quota system – and a lot of people’s financial investments in that industry – are premised on a valuation of a common asset that everyone has come to know and be comfortable with.

  1. The Social Benefits Of The Quota System

Many of the reasons for the current regulatory framework of alcoholic beverage laws, including the quota system, which have been in place and largely unchanged since the end of Prohibition, were “social ills and benefits” recognized by the state legislatures that enacted these laws through their experience with the Pre-Prohibition period, where there were many social ills associated with the loose regulation of alcohol, primarily excessive over-intoxication and alcoholism in society, and the Prohibition period itself, where there were many social ills associated with over regulation of alcoholic beverages, primarily violent crime and the disregard or increasing disrespect for the rule of law even by otherwise law abiding citizens.

The quota system was one mechanism amongst many other laws enacted in the Post-Prohibition period that currently make up the complicated patchwork of regulatory laws that seek to make alcoholic beverages available to the public but in a safe and controlled manner, so as to prevent the excesses that can be associated with intoxication. Eighty years after the quota system was first enacted more or less in Massachusetts, society has evolved (sort of) but the express limit on the number of licensed establishments a city or town can impose on its main streets undeniably has caused those who currently possess “valuable” liquor licenses to act responsibly in the service of alcoholic beverages.

A current licensee will naturally resist the temptation to sell to minors or over-serve its patrons for the sake of income if the risk associated with doing so is the loss of a valuable financial assets: one’s liquor license. The availability of an unlimited number of liquor licenses – or valueless liquor licenses – undercuts the potential financial penalty that operates as a check against potentially irresponsible behavior when serving intoxicating liquors for a price.

  1. The Restaurant Industry As A Whole Is Currently Competitive And Therefore Healthy

Although there is an argument to be made that smaller restaurant businesses should be allowed to get into the marketplace with cheaper liquor licenses, the truth is that notwithstanding the current demand for new liquor licenses by these small businesses, even existing restaurants with liquor licenses routinely go out of business for a myriad of different reasons. Failure of tired-old concepts or poorly operated establishments is healthy for any market, and that routinely occurs in the Massachusetts restaurant industry making way for new concepts and potentially more efficiently run establishments.

When existing restaurants fail, their liquor licenses become available to new ventures and with the high price of a liquor license required, that new venture will assuredly protect that investment with enough capitalization and concept design to provide for a new establishment that will be designed to beat its competition. Such capitalization and concept designs only possessed by those with the funds to acquire a relatively expensive liquor license causes Massachusetts consumers to experience an always reproducing new generation of great new venues with expensive renovations and menus that replace venues that seem pale in comparison.

The opposite would also be true with a low financial threshold required in order to enter the restaurant industry. With relatively cheap liquor licenses, lower end so-called “dives” with dim lighting and cheap drinks that have largely disappeared in Boston and other municipalities may now be allowed to make a comeback. Selling alcoholic beverages is a very profitable business for anyone with a liquor license. If one need not invest much in an establishment to sell those drinks, one can only imagine the types of establishments that will be allowed to open in what is now a very healthy and competitive restaurant industry.

Providing food to the public, adhering to the health and building codes, and properly abiding by the high standards required of those providing intoxicating beverages, are all serious obligations not to be undertaken by those who are un-capitalized or not financed well enough to spend money on compliance related issues.

While the current shortage of liquor licenses in some cities and towns has caused many local, smaller neighborhood bars to be essentially a thing of the past, so too in these same cities and towns have bars that once catered to drug dealing, gambling and other elicit crimes become a thing of the past.  These “gin-mills” or “buckets of blood” were once very common in the metropolitan Boston area and they appear in most local notable crime dramas, both real and fictional, but they are mostly gone or almost entirely on their way out.

Liquor licenses have simply become too valuable an asset for them to be left to a dark and dingy “gin-mill” with no significant business other than serving those who used the establishment as a cover to sell drugs or engage in another criminality.  Liquor licenses have certainly become too valuable an asset to existing establishments to run the risk of losing its license to regulators if criminal conduct is allowed to exist on its premises.  In short, it can be argued that a shortage of liquor licenses has simply driven the criminal element out of bars and caused the quality of service to increase.

Making the number of new liquor licenses available to anyone who wants to apply for such a license, it seems, will have consequences that may not be fully comprehended, and like with most proposed legislation designed solely to stimulate economic growth – rather than remedy an actual public need – its consequences may have effects that the state, cities and towns have not fully appreciated.  These are just some of this issues Governor Baker and the State Legislature should consider when dismantling the “status quo” of the last eighty years in one of Massachusetts’ most vibrant industries.

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