Liquor License Impact on Existing Restaurants

liquor license impact on restaurantsLast week, we took an overview of the proposal to eliminate the state Legislature from the liquor license process and the quota system. (See “Lifting Liquor License Caps in Massachusetts.”)

While it may seem well intentioned on the surface and that sending control back to the local level is a good thing (who knows the neighborhoods better than the local government?), eliminating the liquor license quota system can severely impact existing restaurants.

A Liquor License as an Asset

First and foremost, an establishment’s liquor license is a huge asset. A Boston all-alcohol license can average $285,000 to $300,000 with a beer and wine permit costing between $80,000 and $90,000 dollars. Although licenses are less of investment in the suburbs, it’s really all relative.

For every restaurant or pub in Massachusetts that currently holds a liquor license, that license represents a huge investment and is a substantial portion of a restaurateur’s overhead.

Banks see it the same way. The liquor license is an asset that’s often used as the main collateral for a loan – either a loan to launch the restaurant or one to generate a line of credit to cover ongoing operating expenses.

If the quota system were to be removed with local licensing authorities issuing them more or less at will, the value of an existing license drops dramatically. The restaurateur who paid $275,000 for a liquor license could be left holding what may amount to a piece of paper.

At the same time, the bank that issued a loan based with the original value of the license as collateral suddenly has nothing backing up the loan. The bank in all likelihood would ask current licensees to increase collateral with other assets that may… or may not… exist.

It’s not unthinkable that a number of restaurants and pubs that now hold liquor licenses, purchased prior to lifting or altering the quota system, could close up shop. And what does that do for economic development?

President of the Massachusetts Restaurant Association, Bob Lutz, clearly sees both sides of the issue. On one hand, it’s exciting to think about bolstering the food and beverage industry and its role in economic development, but at the same time, there needs to be protection in place for existing establishments. He’s quoted in Boston Magazine’sCommittee to Discuss Governor’s Economic Development Bill”: “There has to be thoughtful deliberation and consideration given to protect those existing owners who have paid a significant premium for a license and sometimes have even used that as a pledge-able asset with their lender to help build the business.”

Clearly changes to the liquor license system will impact existing restaurants. It’s critical to tread carefully and lightly regarding quotas. There’s no point in plunging ahead to issue liquor licenses for new restaurants to open if the old ones end up closing because their liquor license has been devalued. There is a balance that must be maintained.