Is Sudden Liquor License Spike Best for Somerville’s Bars and Restaurants?

cuisine en localeJJ Gonson stands behind the bar at ONCE. Photo by Jess Benjamin.

A dramatic increase in the number of available liquor licenses seems, on the surface, like a boon for Somerville’s bars and restaurants. But not everyone is convinced that the influx serves the best interests of restaurant owners—or the city as a whole.

Earlier this year, the Massachusetts legislature awarded Somerville 65 new liquor licenses—an increase of more than 60 percent from the city’s previous stock. It’s an unprecedented number of new licenses, and it means more bars and restaurants will soon be able to serve beer, wine and liquor.

But the influx has caused a drastic devaluation of existing Somerville liquor licenses, which are bought and sold privately when not awarded directly by the city, sometimes for hundreds of thousands of dollars.

JJ Gonson, owner of the venue and locavore restaurant ONCE on Highland Ave., says she cashed out her life savings three years ago to purchase a liquor license privately from its previous owner. The investment felt like a “security blanket,” she says, enabling her to run her business knowing she could later sell it to cover her losses if something went wrong. Now, with so many new licenses soon to be available from the city, there’s no longer a demand for her investment.

“It’s scary to feel this way,” Gonson confesses. screen-shot-2016-11-24-at-11-01-12-pm

In Massachusetts, the state regulates a limited number of liquor licenses through a quota system. Occasionally, it releases a few new licenses to cities and towns by request, but they’re generally bought and sold between restaurant owners. Those seeking to purchase a license privately must receive approval from the municipal licensing commission and the state regulatory body, and licenses are renewed annually. Before the state approved the request for 65 new licenses in July, there were 82 all-forms (beer, wine and liquor) and 16 wine-and-beer-only licenses in Somerville.

At the outset of 2016, the city had just four all-forms licenses available. Licenses awarded by the city cost $5,500, plus an application fee, and all Somerville liquor licenses—whether purchased privately or awarded by the city—require an annual renewal fee of $3,500.

Todd Smith, president of Corbett Restaurant Group, which specializes in restaurant and hospitality real estate, says that until recently those liquor licenses could sell privately for as much as $250,000.

“If I was a license owner [in Somerville], I would be livid right now,” Smith says. The announcement of the new licenses “changed the market overnight,” he says, instantly devaluing existing ones.

Dan Newcomb of Atlantic License Brokers often serves as the middleman in private liquor license transactions in Massachusetts. He says there’s no demand for private liquor licenses in Somerville since the new ones became available, and he doesn’t see that changing anytime soon.

“I highly doubt that the value of the licenses is ever going to recover,” Newcomb says. He explains that demand will likely not exceed supply for the foreseeable future, as Somerville can only ever support so many bars and restaurants.

The sudden spike is part of a recent effort to expand licensing across Massachusetts and to allow cities and towns to distribute licenses themselves. Governor Baker’s municipal modernization bill, which was signed this summer, originally included a provision to eliminate the quota system statewide, but that legislation was ultimately dropped.

The Somerville Board of Aldermen requested this increase in February 2015. Elected officials have spoken in support of the increase and, more broadly, in favor of municipal control over licensing, for years.

“Somerville has reaped the benefits of a growing restaurant culture in our city,” Mayor Joseph Curtatone wrote in 2014. “But this growth could and should have been bigger. We have had to turn down would-be entrepreneurs seeking licenses because not enough licenses were available.”

Steve Clark of the Massachusetts Restaurant Association thinks regulators need to be cautious in approving new licenses and related policies. He explains that a devaluation on the private market doesn’t just signify a loss of security for restaurant owners like Gonson but could have more significant ramifications for the industry, which has thrived in Massachusetts in recent years.

Clark suggests the state’s growing restaurant industry could be “approaching a tipping point where the market is oversaturated,” pointing to the current statewide shortage in restaurant staff.

“A lot of that new growth is coming from individual operators opening a second location,” Clark says, as restaurant owners are able to leverage the value of their liquor licenses in applying for loans from banks to open new locations. Without the value of that asset, he says, proprietors could default on their loans in the coming years, and industry growth could slow.

For many, purchasing a liquor license privately can be a prohibitive cost. The license increase has removed that roadblock, making the city a more viable place for new bars and restaurants to open their doors. But even the process of applying for a license through the city can be a significant undertaking. Katrina Jazayeri prepared for months to file for a liquor license—including speaking with city representatives and attending licensing commission hearings—and still her Union Square restaurant, Juliet, couldn’t serve alcohol for six months after opening.

“We would have had to take a close look at our business plan and concept had Juliet failed to secure that license,” says Juliet co-owner Josh Lewin. Restaurants operate on small profit margins, and serving alcohol is key in increasing them, he explains. Thankfully, Juliet now offers wine pairings to accompany its multi-course prix-fixe dinner menu and will soon have beer and cocktails.

Jazayeri says she was aware of the existing private market for liquor licenses from previous experience in the industry. “A license like that was never going to be in our cards,” she says, because of the cost involved. And she’s not alone.

“That definitely wouldn’t be possible,” says NU Cafe owner Josh Van Dyke of purchasing a license privately. When it opens in Union Square this November, the restaurant will offer alcoholic beverages alongside its smoothies and sandwiches thanks to a liquor license granted by the city earlier this year.

According to city spokesperson Denise Taylor, a strategy for distributing the 65 new licenses has not yet been determined, though some will be targeted to specific neighborhoods like Boynton Yards or Assembly Row while others will be available citywide. The new licenses won’t be awarded until 2017; they also won’t be transferrable between owners.

“The cost of obtaining a transferrable license can be prohibitive to businesses looking to locate in the city,” Taylor said in an email. “That said, the transferable licenses still have value. Some restaurant owners prefer them.” screen-shot-2016-11-24-at-11-01-12-pm

At ONCE, Gonson acknowledges that nothing has changed on a day-to-day basis, but she still feels the city has pulled the rug from underneath her business. She says the city told her that the influx of new licenses will ultimately benefit ONCE as more bars and restaurants open nearby, but she’s less concerned with that than she is with her investment. Having a valuable asset can influence business decisions—like in early 2015, when restaurants around Massachusetts struggled as bad weather forced customers to stay home.

“Our decision of survival was made based on our knowledge that we could sell [the license] if we needed to,” Gonson recalls. “If we have a winter like that this year, we’re done.”

Gonson hopes the city might offer support—like tax breaks or lower annual maintenance fees—to support restaurant owners like her whose liquor license investments have lost value. In the meantime, she’ll keep serving drinks.

“We have no choice now but to succeed,” Gonson says.

This story originally appeared in the November/December print edition of Scout, which is available for free at more than 220 drop spots throughout Somerville (and just beyond its borders) or by subscription.