The City of Boston and Devaluing The Pouring License

Law Offices of John P. Connell, P.C.: On June 22, 2017, a Committee within the Boston City Council held a hearing seeking public comment on the City of Boston’s proposed request to the State Legislature to issue 152 new pouring licenses. The hearing generated arguments by and between those restaurants that already have purchased liquor licenses, particularly those located downtown, and those which seek to enter the Boston marketplace but don’t want to incur the cost of a new liquor license purchased on the private market. The City of Boston’s proposal to the Legislature, which controls how many liquor licenses can be issued by most municipalities within Massachusetts, as it now stands, seeks permission to issue the following no-value/non-transferable liquor licenses:

– 7 city-wide all alcohol licenses per year and 3 city-wide wine and malt licenses per year (30 total licenses);

– Provided the neighborhoods of Back Bay, Beacon Hill and the North End shall not be granted more than 3 of the city-wide licenses per year;

– 3 all alcohol licenses per year and 2 wine and malt licenses per year for each of the following neighborhood zoning districts: Dorchester, East Boston, Hyde Park, Jamaica Plain, Mattapan, Mission Hill and Roxbury (105 total licenses);

– 3 all alcohol licenses per year and 2 malt and wine licenses per year for areas designated as Main Streets Districts by the Boston Redevelopment Authority (15 total licenses);

– 1 all alcohol license for the Lawn on D (which already has such a license); and

– 1 all alcohol license for the Boston Center for the Arts.

A second section of the proposal would create a so called non-transferable “umbrella license” allowing the City to grant an umbrella license to a real estate development project with total combined gross floor area of at least 500,000 square feet. Large developments such as One Seaport Square in the Seaport or the New Balance development in Brighton would be in theory allowed such an “umbrella license” to cover multiple restaurants within those large developments.

If approved by the Legislature this July, the City of Boston’s proposal would make the first round of these new liquor licenses available in September 2017. One may recall, the City of Boston issued thirty (30) new liquor licenses last year, ten (10) of which were full value licenses as the last distribution of seventy-five (75) new licenses approved by the Legislature back in 2014.

Those arguing in favor of these new licenses (including City Councilors and Mayor Walsh) claim with the high cost of acquiring an existing full-value license, which in the case of All Alcoholic Beverages Licenses have sold for more than $400,000.00 in recent years, many would-be restaurateurs are shut out of the Boston market as that cost alone is prohibitive. Perhaps with more vigor, supporters of additional liquor licenses also claim that because existing licenses are so expensive, they tend to wind-up in more expensive neighborhoods such as the Back Bay and North End, and do not wind up being located in lesser expensive neighborhoods, most notably Mattapan which does not currently have a restaurant with a pouring license.

Both of these arguments essentially incorporate the theory that more available licenses will mean more restaurants which will mean “more economic development,” especially in neighborhoods such as Mattapan, which could use restaurants and their positive social attributes and foot traffic to stabilize other neighborhood businesses in need of a sense of “community” or “neighborhood.” Ergo, “economic development” (i.e. more businesses, more jobs, more build-outs, more permitting fees, more meals taxes collected, higher real estate values and therefore more real estate taxes collected for more occupied commercial space and more money generally invested in neighborhoods) drives the argument for more liquor licenses (although it would be hard to argue some neighborhoods within the City of Boston need any more “economic development” than they are currently undergoing).

On the other side of the argument, are the existing restaurants that purchased their liquor licenses and have relied on those “assets” to collateralize loans, entice investors and which remain on the books as at an “asset” to be sold when the restaurant’s lease ends, its business is sold or it otherwise cannot be sustained. Existing licensees argue additional available licenses depreciate the value of their licenses and provide new restaurateurs with a financial advantage over them, and who were only required to buy their licenses at market rate because of the State’s imposed liquor license quota system through no fault of their own. Indeed, substituted collateral may be required for these restaurants that have collateralized commercial loans with a pledge of their once valuable liquor licenses should significant devaluation occur.

Whichever side of the argument one finds itself on, the introduction of 30 new liquor licenses available city wide in addition to the 120 licenses designated for certain neighborhoods and the potentially unknown number of restaurants that could open under an “umbrella license” for large developments, seems sure to devalue – or at least destabilize – the existing liquor license market over at least the next three years, as most new proposed restaurants will undoubtedly seek those “free” licenses for the remainder of 2017 rather than buy one on the private market. Why wouldn’t they? If not successful this year, it would seem those same would-be applicants who can wait will wait until 2018 or perhaps until 2019 rather than buy an existing license, especially if the “hand-writing is on the wall” that such licenses may be permanently devalued by the City of Boston as a “development tool” and may never have a re-sale value in the years to come.

Indeed, Cambridge recently devalued its pouring licenses entirely by refusing any further to enforce its own partial quota system unique to Cambridge, which left some long-term licensees totally shocked and in disbelief as they were unaware of such a devaluation before trying to sell their licenses. Similarly, Somerville recently acquired 65 new liquor licenses effectively devaluing its pre-existing licenses that had been purchased by restaurants. City governments, it seems, have concluded that “economic development” is benefitted more from having additional licenses made available than maintaining the quota system. In the 2016 legislative session, some in the Boston City Government lobbied the Legislature to do away the quota system in Boston all together and permanently devalue licenses henceforth. Is permanent devaluation in the cards for Boston as well?

The experiment undertaken by Cambridge and Somerville to move away from the quota system are rather new and untested especially in light of the fact that the restaurant business in Massachusetts for the most part has existed as it has for more than seventy years. Moreover, these experiments in moving away from the quota system are being undertaken in a good economic climate of general growth in cities that have experienced booming property value increases. Even in these favorable economic conditions and even with the existing quota system in Boston still controlling, however, there is seemingly a Boston licensed restaurant going out of business, losing its lease or selling-out to new owners every week.

What appears to be unknown is whether and to what effect temporary and/or the prospect of potentially permanent devaluation of liquor licenses will have on the existing licensed restaurants in Boston that possess full value licenses over the next few years. For example, a restaurant in Boston seeking to sell its liquor license over the course of the next three years, it would seem, may find it very difficult to sell such an asset when the same asset is being provided by the City essentially for free, and which is now becoming free in other cities. (All liquor licenses for both full-value and no-value have an annual renewal fee of approximately $3,000 for most restaurants but depending upon occupancy size.)

Is the loss of a valuable asset for one restaurant, its owners and its creditors outweighed by a new restaurant appearing on the scene with a lower start-up cost? Having created the artificial market for liquor licenses by limiting their supply, should the government in equity manipulate that market downward for the benefit of more participants? If that were the case, would it make sense for the government to devalue real estate prices at the expense of current property owners so more people could buy property?

Aside from theoretical economic questions, there are real consequences for the current City of Boston proposal. Under the current liquor license quota system, as one restaurant goes out of business in Boston and another seeks to take its place, the liquor license asset has been used by the departing business to pay-off creditors (the Department of Revenue most often) and/or provide a return for its owners. No such “fall back” asset may be available to the approximately 1,000 current full-value licensed restaurants that collectively possess approximately $300,000,000.00 in value for their acquired liquor licenses for the next few years as new applicants take their “shot” at a new free license. There indeed may be little or no market at all for these assets due to the uncertainty thus far shown by the government, both at the State and City levels, as to whether Boston intends on preserving a limited number of liquor licenses or not.

Whether at the end of the day, the temporary or permanent devaluation of liquor licenses brings “economic development” to the City of Boston while existing restaurants also remain financially healthy remains to be seen. Other factors, including the scarcity of employees to service even current restaurants, the health of the economy in general and how many “new” sustained or sustainable restaurants can actually be added to the net number of existing restaurants without achieving oversaturation in Boston, will of course have a hand in the health of existing restaurants but we shall see. It seems that while some neighborhoods and potential large developments may need stimulus through additional liquor licenses, other neighborhoods do not especially if the price for additional restaurants is to devalue the current assets of restaurants already located in those bustling neighborhoods.

(c) Law Offices of John P. Connell, P.C., 2017

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