Acquiring a liquor license: What you need to know

NATIONAL REPORT—Having the appropriate paperwork in order will help hoteliers seeking liquor licenses streamline the lengthy process, even if there are bumps along the way. Being aware of roadblocks ahead of time can prevent headaches down the road. As they say, time is money, and the more time spent with paperwork, the less money the property ends up making. Once a license is acquired, staying ahead of evolving alcohol offerings can help properties stay compliant. 

“The acquisition of a hotel, restaurant or catering establishment involves a number of complex layers of legal inquiry,” said Kevin M. Hirson, partner at Warshaw Burstein LLP, a full-service law firm with offices in New York City. “These transactions involve real estate, tax, corporate, banking, administrative and employment law.” 

For the lawyer, what it ultimately comes down to is the client’s economic desires, however. The real estate purchase agreement, asset purchase agreement or lease must fit the client’s expectations. What must also fit the client’s needs and desires: price, rent, term, assets intended to be acquired and other economic details in the documents.

“After these facts are confirmed, we, as lawyers, must focus our attention on liens and encumbrances; landlord consents and estoppels; real estate, transfer, sales and income taxes; choosing the proper corporate entity for acquisition or leasing; liquor license transferability, eligibility and compliance; zoning, building department and other agency violations; employment concerns; notices to and non-disturbance agreements from existing lenders; and franchise agreement issues,” he said.

One hurdle overlooked more often than not is the individual. The individual principals must be able to qualify for a liquor license. For example, felons, police officers, minors, and alcohol manufacturers, producers and wholesalers don’t qualify for state liquor licenses.

“Furthermore, in urban areas, the local community boards and neighborhood associations have significant review and input into the determination by the authority to grant the license,” Hirson said. “Generally, the standard is whether the issuance of the liquor license will be in the ‘public interest.’ This is determined by many factors: experience of the owners and operators; concentration of licensed establishments in the neighborhood; traffic, crowd and noise control; and the source of the funds to acquire or lease the property and open the business.”

Even if a business is able to woo its surrounding communities, there are still additional challenges to consider—including time. Grace Yang, shareholder at GrayRobinson, a full-service corporate law firm, said, “Going through a liquor license application process may require many weeks or months of lead time, especially if hearings and mandatory meetings are required in the process.”

Liquor laws vary by state, which means it can be fairly difficult to obtain a liquor license in some states. For instance, 17 states across the country impose liquor license quotas: Alaska, Arizona, California, Florida, Idaho, Kentucky, Massachusetts, Michigan, Minnesota, Montana, New Jersey, New Mexico, Ohio, Pennsylvania, South Dakota, Utah and Washington. Take New Jersey, for example: The cap is one license per 3,000 municipal residents; however, in Massachusetts, it is one license per 2,000 residents. Currently, the strictest state in the country is Utah, at one license per 4,925 residents. 

“Each licensing jurisdiction (local or state) has different liquor license requirements and application procedures,” Yang said. “Generally speaking, however, there are layers of disclosures in liquor license applications. Disclosures include information about the applicant’s entity structure, direct and indirect ownership interests, financial information, and personal information about certain individuals, such as individual owners or officers. We find that many of our business clients are sensitive about disclosure requirements, the level of detail required and whether data may potentially become a public record.”

Some states are tough in other ways. “For example, the highest court in New York state, the New York Court of Appeals, upheld the denial of a liquor license to a hotel because the purchasing entity had, through an affiliated entity, less than 1% interest in a company that owned a foreign beer manufacturer,” Hirson said. “The ‘de minimis’ argument was rejected based on a strict reading of the New York State Alcoholic Beverage Control Law.” New York state also restricts an individual from owning more than one retail liquor store; in other words, retail liquor store chains are prohibited. 

It’s important to remember: There are differences between on-premises and off-premises liquor licenses. For example, hotels fall under on-premises liquor licenses, meaning, obviously, any “alcohol sold at on-premises establishments must be consumed on the licensed premise,” he said. There are exceptions with regard to beer in certain states. 

“The similarities are that both on-premises and off-premises licensees need to comply with a variety of laws and rules, such as tied-house laws and ensuring that they do not sell or furnish alcohol to minors,” Yang said. “In some states, on-premises and off-premises licensees need to train their employees in the responsible sale of alcohol. In other states, the training is voluntary. In some states, only on-premises operators need to have their employees trained for responsible alcohol service.” 

For lenders and private investment funds, what’s most important is doing their homework. “A lender’s concern with respect to liquor license compliance is limited to confirming that the borrower and food and beverage operators are properly reported to the alcoholic beverage control authorities or included on the license depending on the control and economic relationship with respect to the service of alcoholic beverages,” Hirson said. “An investment fund acquiring a license holder will likely be required to qualify as an alcoholic beverage control license. The investment fund principals and management team must submit personal disclosure material and fingerprints to the liquor authority for approval.” Depending on jurisdiction, investment fund principals may not qualify for a retail alcoholic beverage license (there may be a conflict of interest). 

As alcohol offerings in hospitality advance, additional issues to consider arise. For example, some have acknowledged the minibar’s demise, while others have claimed its resurgence. Whatever the case may be, properties have been advancing concierge floor offerings, which is where the shift to higher quality wines and craft beer is at play. While these offerings are appealing to hotel guests, there are liability concerns for properties. 

“Because of the nature of alcoholic beverage laws, offering high-quality wine and beer on the individual floors generally requires increased labor costs to ensure that minors and intoxicated persons are not improperly accessing alcoholic beverages,” Hirson said. “With the advent of technology, we are beginning to see now, and will see even more in the future, very sophisticated wine dispensary machines with high-tech verification technology and miniature cameras designed to allow self-service of high-quality wine with minimal risk of violations of law.” HB