Corruption Case Makes Clear: Prince George’s County Must Do Away With Competitive Liquor Licensing Process

I just finished reading the plea agreement regarding a liquor licensing attorney in Prince George’s County who pleaded guilty to bribery on Friday. The underlying facts were that this attorney made payments to a public official to secure his assistance in influencing liquor licensing decisions. The statement of facts contains verbatim quotes, demonstrating that either someone was cooperating or that phones were tapped. In any case, this statement from the lawyer jumped off the page at me:

            “Two Gs is nothing man … for what they got.”

What the lawyer was referring to was the $2000.00 payment made to the public official to help this business get a liquor license.

As noted by the statement of facts, “[l]iquor licenses in Prince George’s County are extremely valuable.” The statement notes that they can sell for “$5000.00 or more.” Try five or six times that and you have a more accurate statement.  This might explain why this attorney and his client were happy to pay $2000.00 to obtain a liquor license.

Which all brings up a fundamental issue as it relates to the liquor licensing process in Prince George’s County: namely, that licenses are awarded on a competitive basis. That is to say, the Board will announce that it is awarding a certain type of license (e.g. a beer, wine, and liquor license) on a certain date, and that it will accept applications for that license up to a certain deadline. Then, at the hearing, each applicant will present its best case to the Board and the Board will choose which applicant gets the license. How they make that decision is left almost entirely to the discretion of the Board.

There could be 3, 4, or 5 applicants – but only one goes home with the license.  Only one business gets not only the right to make much more money at its restaurant by selling alcohol, but also is awarded an asset valued at tens of thousands of dollars. Is it any wonder that a business (or unscrupulous advocate) might be tempted to try to find a way to influence the decision of the Board – either directly or indirectly?  And here its worth noting that other businesses (via this same attorney it appears) allegedly paid bribes directly to a member of the Board himself, who also has been indicted and is facing trial next year.

That is why the statement of this attorney was so jarring, but also so unsurprising, because it was undeniably true: “two Gs is nothing man … for what they got.”

It certainly will not fix everything, but it should be clear from this case (if it was not already self-evident) that the competitive liquor licensing process invites corruption. And even where there is no corruption or improper influence (which is the vast majority of cases), the possibility of the process being fixed in some way puts the County Liquor Board in the unenviable position of having its own motives — almost certainly unfairly — questioned.

And making matters worse, this suspicion of unfairness or corruption is invited for no compelling public policy reason. There is not a glut of restaurants in Prince George’s County such that they must be artificially limited. In fact, it is quite the opposite – business and governmental leaders are trying to attract development and investment, and the County’s affluent population is clamoring for more dining choices. One need look no further than the success of National Harbor (which is exempt from the competitive process) to see this is the truth. The competitive liquor licensing process that exists elsewhere throughout the County, and the expense and uncertainty it imposes, only drives would-be restaurant owners to other jurisdictions, most often Montgomery County, where there is no such limitation on liquor licenses and which enjoys a much more varied and vibrant restaurant scene.  So the policy is self-defeating on every level.

There is a new legislative session starting in a few months. Prince George’s County’s leaders and representatives should strongly consider doing away with the competitive liquor licensing system. Such a move would allow the Board do its important job without the specter of suspicion and unfairness that hangs over the current process, and would make Prince George’s County a much more welcoming place for restaurants to do business.

You Should Hire a Restaurant Real Estate Broker

We work with lots of clients who are thinking about opening their first restaurant, or who are in expansion mode. When I get one of these calls, among my first questions is “are you working with a broker?” If not, I always try to encourage them to call one of the many experienced restaurant real estate brokers that I work with. Why? It’s simple:

They Don’t Cost Anything. If you work with a restaurant real estate broker as a tenant, you don’t pay a dime. Your broker can pound the pavement and work the phones looking for available space and, if you find a good space, negotiate the business terms of the lease and shepherd the process through to signing. And, if it all works out, the landlord pays his commission. So you – quite literally – have nothing to lose.

They Know the Market. Unlike buying a house – where sale prices, along with detailed photos and precise locations, are readily available – renting commercial restaurant space can be an opaque, mysterious process. Price per square foot can vary dramatically from place to place, and landlords are often willing to give concessions (such as tenant improvement money or months of free rent) depending on the circumstances.  If you don’t know the market, you won’t know what to ask for. And you can leave a lot on the table.

They Know the Landlords. As we’ve written here before, who your landlord is can make all the difference in the world. There is no single greater relationship that will determine your success. And landlords, like people, run the gamut. Some are accommodating and forgiving. Some are tough but fair. And some are unrelenting and unforgiving. When you are signing a ten-year restaurant lease, you want to know which one you are dealing with, don’t you?

They Know the Restaurant Business. A caveat here: a good broker should know the business. And this is where you need to do a bit of due diligence. You wouldn’t hire a podiatrist to fill one of your cavities, right? You wouldn’t hire an electrician to fix your toilet.  By the same token, don’t hire someone who is used to filling office space for lawyers or accountants or dentists to find your next restaurant space. If you hire someone who knows the restaurant business, they can tell you the dead spots in a shopping center, and if the space you are looking at is one of them. They can tell you if the kitchen is suitable to your needs. They can tell you whether the demographics of where you are looking work for your concept, or if there is a lot of competition in the immediate vicinity. And if they are not sure of any legal issues (like can I get a liquor license for this location), they know enough to call a restaurant lawyer like us to make sure all questions are answered.  In short, only a broker who knows your business can make sure the terms of your deal are consistent with the needs of your business.

We work with experienced restaurant real estate brokers every day. When we get a restaurant lease from them, we know that the business basics will be covered – just as they know when they get the lease back from us, the legal terms will be airtight. We act as a team to make sure you get the best restaurant lease possible, and thereby have the best chance to succeed in your business.  If you need a referral to a good restaurant real estate broker, just give us a call. It’s one of the biggest decisions you can make to get your restaurant business off on the right foot, and we’d love to help make sure that the decision you make is a good one.

Limiting the Personal Guaranty in Your Restaurant Lease

If you are getting ready to sign a restaurant lease, you are almost certainly being asked to provide the name of someone who will provide a personal guaranty of payment on the lease.  This person, whether it be you yourself, or someone with whom you are associated, will be personally on the hook if the tenant (usually an LLC or some other corporate entity) itself does not pay.  The reason the landlord requires this is because, unless the tenant is a big corporation with a lot of assets separate and apart from this restaurant (and, regardless, we usually advise our clients to set up new entities for every location they open), a personal guaranty is the only way the landlord can have some assurance that you won’t simply walk away from your restaurant (and the lease) if business gets bad.  The landlord wants someone on the hook.

Many restaurant tenants do not realize that they do not have to agree to a full guaranty – i.e., one that will make them liable for all payments due under the lease, for the full term, if there is a default.  On the contrary, landlords will often agree to limit the personal guaranty on on the lease, and thereby limit the personal liability that can result if your restaurant does not succeed.  The two most common forms these limits take are a cap on liability, and a “burn off” provision.  Most common is some combination of the two.

A liability cap means that the guarantor’s liability is capped at some dollar amount or, more commonly, some number of months’ rent due under the lease.  For example, the guaranty could provide that, in the event of default, the landlord’s maximum recovery against the guarantor be (let’s say) 24 months of rent.  This would be true even if it takes the landlord much longer to find a new tenant or incurs significant expenses in securing such a tenant (such as in brokerage fees, rehabbing the space, or in concessions to the new tenant).  One can imagine such a cap being particularly valuable if a restaurant fails early in a long-term (e.g. 10-year) lease.

burn off provision means just that, that the lease guaranty will “burn off” at some point, provided the tenant has met all other requirements under the lease.  For example, a restaurant lease guaranty could provide that, after five years of on time payments by the tenant, the guarantor would have no further liability and the guaranty itself would terminated.

Again, most common is a combination between these two liability limitations.  In one formulation we negotiate for our clients quite often, the liability will be at some amount during the initial years of the lease, then burn off, or “burn down,” as time goes on: perhaps from a full guaranty to 24 months after some number years of on time payments; then from 24 down to 12; and then maybe eliminated altogether.  In this way, a tenant is incentivized to keep paying rent on time (especially early in the lease, when the liability is the greatest), and rewarded for being a good tenant later in the lease.

Of course the specifics of what a landlord will agree to will depend on the financial viability and business history of the tenant, but this all where an experienced restaurant leasing attorney (or restaurant real estate broker) can be immensely helpful.  The limits your lawyer or broker can negotiate for you can make the difference between bankruptcy, and being able to pick your self up and give it another try some time the future.

Prince George’s County Liquor Board Seeks 5 New Members, Cancels Upcoming Hearings

The Prince George’s County Liquor Board, which is already down to three members due to the resignation of its chairman (following a guilty plea in a DUI matter) and another member (following a bribery arrest) will get an entire new membership later this year.  Pursuant to legislation passed in the recent 2017 Maryland General Assembly, the Board last week published a notice seeking applications for these members.

On that same date, the current members of the Board voted to cancel the upcoming hearings scheduled for June 27, July 12, and July 25, inviting the question of whether there will be any liquor board hearings at all until the new members are seated.  As the Board is required to approve all new and transfer liquor license applications, that will mean no new liquor licenses can be issued in Prince George’s County until at least August, and quite possibly later than that.  Not being able to issue any new licenses during the summer months is, of course, not a good look for the County, which is touting its development boom and holding itself out as an alternative to high-priced Montgomery County and areas of Northern Virginia.  This delay and overhaul will not help those efforts, at least in the short term.

It has been a difficult few years for the liquor board in Prince George’s County.  In addition to the well-publicized arrests noted above, in 2015, the former chairman of the Board  to the new chairman appointed by (at the time) incoming Governor Hogan.  This led to chaos at at least one hearing (of which I was in attendance), and the cancellation of multiple scheduled hearings before the the controversy was finally resolved.

The current members of the Board (as well as its fantastic staff) are conscientious public servants who probably deserve better, but so do the people of Prince George’s County.  Here’s hoping that this overhaul (and increase in oversight) can get the Board back on track.  Prince George’s County is becoming more attractive to national and local restaurant chains (we’ve finalized several leases there just in the last couple of weeks), so a functional liquor board is vital to demonstrating that the County is someplace businesses should want to invest.

New Restaurant Location? Strongly Consider a New LLC.

I often say that opening a restaurant is like becoming a parent.  It keeps you up late at night, it occupies most of your time and attention, it makes you worry whenever you leave it with someone else…. But like parenthood, restaurant ownership can also get easier over time. And, when it does, you may actually start thinking, “hey, I’m beginning to get the hang of this.” If you are lucky enough for that to happen to you, you may also think like the parents of a moderately behaved toddler – “maybe it’s time to think about number 2.”

That decision (as related to restaurants, at least for these purposes) is fraught with many more issues than I could ever cover in one blog post.   So I will allow this post to cover only one such issue – whether you need to create a new entity for the new location. My answer, in almost all instances, is a resounding “Yes.”

The main reason is this: you will need to sign a new lease for your new location. And, with that new lease, comes another set of significant obligations and financial liabilities. If you don’t create a new entity, not only will your new restaurant be responsible for those liabilities, so will your first one. That is to say, if the new restaurant flops and goes out of business, but the first one is continuing to do well, failure to form a new entity can allow the Landlord for location Number 2 can go after the bank accounts and assets of location number 1. In short, Number 2’s debts can bring down Number 1 along with it.

If you create a new entity, however – call it McSwiggen’s Ale House Number 2, LLC – only the assets of that entity will be available to satisfy any liability under that Lease. The assets of McSwiggen’s Number 1 LLC will be protected by laws of limited liability (that’s what the two L’s in LLC stand for, after all). Yes, of course, you personally may be on the hook for any personal guaranty on Number 2’s lease, but the first restaurant – the one that was doing so well that it caused you to think about Number 2 in the first place – will still have the chance to live to fight another day.

To use a different analogy from the one I started with, you can build your restaurant business like an apartment building or a suburban subdivision. And if you think of your restaurants like that, think of financial difficulty like a fire. If you use the same LLC entity for each new location, financial difficulty in one will threaten to bring down them all, just like a fire in that apartment building. But LLC laws allow you to treat your restaurants like suburban homes on a cul de sac. They may all look the same, and be constructed the same, but they all stand on their own. And, while a fire in one will not be welcome to the neighbors, they’ll all still have some place to sleep that night.

Getting good advice and doing things right the first time will help you sleep at night too.  Before you open your second location, consult with an experienced restaurant lawyer to make sure you do all you can to protect the first.


Tough Market Makes a Good Restaurant Lease More Important than Ever

2017 has not been the easiest year for restaurants, particularly for sit down casual dining restaurants. Reports of store closures, missed earnings, and abandoned concepts have been a common occurrence this spring, as restaurants have tried to recover from its worst year since the recession. Even fast casual chains, which had been thought to be insulated from many of the challenges of the larger restaurant sector, have felt the pinch.

In recognition of this broad trend, we have been advising our clients that it has never been more important to focus like a laser on your lease, and not sign one you don’t fully understand and feel comfortable with.  First of all, restaurant owners need to make sure that the rent is affordable. As concepts proliferate (many of which are backed with investment dollars), rents have escalated in many markets. While a location may be attractive, if you cannot collect revenues of approximately 10 times your monthly rent, you are probably paying too much. When you are scouting space, be sure to keep this closely in mind. Second, as it relates to your lease terms themselves, you should be sure to focus (and push back hard) on key provisions such as:

  • Assignment rights. If you ever want to sell your restaurant, or just get out of a concept that is not working, you will need to be able to assign your lease to someone else. Make sure your lease provides for the ability to do that.
  • Guaranty limitation. You will almost certainly be personally liable for any damages to your landlord if you breach your lease. There are ways to cap that liability, however, and limit any damage to yourself personally if you have to close or walk away.
  • Default provisions and remedies. Can your landlord kick you out if you are a few days late with your rent? Do you have any opportunity to cure the default if you are late? Many leases have very strict default provisions. You can soften those to allow you to recover if you hit a rough patch.
  • Exclusivity provisions.  Competition is tough in the restaurant business, but if you can, you should keep any direct competition out of your backyard.

Certainly rents are going up and there is a lot of competition for restaurant space, but the spate of restaurant closures, as well as softness in the broader retail market (as Amazon and other online retailers force closures in that sector), can present opportunities to negotiate. And, you can negotiate.  Too many restaurant owners simply sign the lease they are provided, thinking they have no choice.  You do — especially now.

If you know what questions to ask, and what pitfalls to avoid, at the time you are looking as space and signing a lease, there is no reason your restaurant can’t be among the success stories.

Big News: Private Liquor Stores May Be Coming to Montgomery County

As we continue our review of the 2017 Maryland legislative session, which ended last week, it is clear that, for those of us in Montgomery County, one of the most consequential – and overlooked – new laws relates to how hard liquor is sold in the County. For the first time since anyone can remember, private retailers will be able to obtain the right to sell spirits such as vodka, rum, whiskey, and gin in their stores.

Now, as with all good things, there are some restrictions on who can apply for these privileges – for example, convenience stores that sell items other than beer and wine (e.g. snacks or groceries) will not be eligible. And eligible stores will still need to contract with the County for the authority to make these sales (with that process still to be worked out via regulations to be formulated by the County DLC).  But still, don’t let anyone tell you any different – this is a very big deal.

Until now, anyone who wanted to buy a bottle of liquor to take home had to buy it at a County-owned retail store. This was a cause of great frustration to many, not only because residents were captive to the selection that the County Department of Liquor Control decided to stock in their retail stores, but also that there were only 26 such stores – for a population of over a million people.

With this change, there are now – immediately – approximately 150 stores that meet the requirements and are eligible to seek full beer, wine & liquor retail sale privileges. If even a fraction of those stores actually sought and obtained the right to sell liquor, the number of available outlets to buy spirits could double, or even triple. Presumably, many would attempt to differentiate themselves from the DLC-owned stores by offering more hard-to-find or craft spirit brands. This increased availability, variety, and overall competition will be great news for consumers.

But it is also wonderful news for so many of our County’s small beer & wine store owners, who are generally prohibited by law from owning more than one store and can often struggle to finds ways to maintain profitability. As lawyers who work with small business owners every day, and who do all we can to ease that struggle, it is gratifying to know so many of our clients will have the opportunity to expand their product offerings in such a dramatic manner.

New Maryland Law to Cure Liquor Licensing Glitch

Credit: CHRIS URSO, Tampa Bay Times

We wrote here last year about a glitch in Montgomery County liquor licensing laws that limited individuals to holding one beer & wine license in the county, whereas an individual could hold up to ten beer, wine & liquor licenses.  This, of course, made little sense and caused any restaurant with more than one location in the county to incur the additional cost and bear the additional regulatory burdens of a full liquor license, even if the restaurant just wanted to serve beer and wine.

The glitch in the law has been particularly frustrating to fast casual operators, who are likely to have several locations — and increasingly are moving to serve beer and wine
— but also do not generally need a full liquor license.

I am happy to report, however, that today Governor Hogan will sign into law a bill that will raise the number of beer & wine licenses an individual can hold to ten as well.  This new law, which will go into effect on July 1, will not only save many restaurants already operating in the county thousands of dollars a year, it will also make the county more attractive as a place for restaurant chains to grow and prosper.  (Note:  Anne Arundel County law is set to change as well, increasing the number of beer & wine licenses allowable for one individual from 2 to 5).

And how did this all come about?  As it happened, around the same time I wrote the post referenced above, I had the occasion to discuss this matter with senior licensing staff at the Montgomery County Department of Liquor Control, and explained that this was a frustration to many of my restaurant clients with multiple locations, and that it was likely a deterrent to smaller restaurants, particularly fast casuals, opening new locations in Montgomery County.  It was not any formal advocating for a change to the law; it was just an expression of frustration about the state of the law and the burdens it placed on my clients.

To the DLC leadership’s credit, however, within weeks I was told that the matter would be brought up with the county’s delegation to the Maryland General Assembly, and later last fall, was advised a bill was being prepared for presentation in the Assembly during the 2017 session.  The bill passed both houses unanimously and, as mentioned, is set to be signed today.  So, while I would like to take some credit for raising this issue in the first place, I commend DLC staff — notably the amazing Kathie Durbin — for being so responsive to the needs of our small restaurant owners here in Montgomery County.  This was good government at work, and we will all — businesses and consumers alike — benefit from it.

Can My Landlord Lease to One of My Competitors?

GARY T. MILLS/The Times-Union -- Jan. 2012 -- Quiznos Sub recently closed at 7159 Philips Highway.

(GARY T. MILLS/The Times-Union — Jan. 2012)

My family and I had dinner this past weekend at the newest location of a locally-based fast casual restaurant chain.  It had a line nearly out the door and every table was full.  After dinner we noticed that, in the same shopping center, was an existing restaurant serving the exact same type of food.  It was nearly empty.  And I have to figure it will not long survive.

Competition can be brutal in the restaurant business, of course.  And no one can — or should — expect to be protected from competition entirely.  Competition is, after all, necessary.  And it is even desirable in many ways.  It drives innovation and fosters outstanding customer service.  If you can’t stand competition, go find another business to get involved in.

But should restaurant owners be able to expect their landlords to give them some protection?  Or at least not undermine them directly by bringing a competitor into their same shopping center?  The answer is: not necessarily.

I wrote a while back about the need to seek exclusivity provisions when negotiating restaurant leases, and for those provisions to have teeth.  Your landlord is not your partner, and not your protector.  The only way your landlord will keep your competitors out of your shopping center is if it is financially harmful for them to do so.  And those provisions have to be included and negotiated at the time the lease is being signed.

I don’t know what this smaller, older restaurant’s lease said about exclusivity – or if it said anything at all.  But I do know that if it did say anything, it was not strong enough for this landlord to hesitate in bringing in a shiny, new, well-financed competitor.  And because of that, the smaller competitor is probably going to go out of business.

How Long Does it Take to Get a Liquor License in Montgomery County?

cross1Just about every day, we get a call from a restaurant owner (or aspiring one) who is interested in opening a restaurant here in Montgomery County, Maryland. One of the questions that we are almost always asked is “how long will it take to get a liquor license?” It is understandable that this is a primary concern. Many restaurant leases require a tenant to open on or before a certain date, or incur penalties. If you cannot get your liquor license before that date, you are faced with the choice of opening without a license – and tell your customers, “next time you can get a beer, we promise!” – or incurring penalties from your landlord. Even where the lease does not require it, many restaurants understandably do not want to open until they can offer their guests the full experience, drinks included.

So we get it, and we do all we can do to expedite the process. But there are many steps involved, and when it comes to dealing with the government, some things just cannot be rushed. To help give restaurants a better sense of the overall process, and how long it takes, we thought it would be helpful to provide this overview so you can plan accordingly.

Step One: The Application

At this stage we work with you to complete the written application to the County Liquor Board as well as compile all the required affidavits, corporate documents, and other information the Board needs to review your application. If a resident agent needs to be named, or if any documents needs to be created as related to your company or restaurant, that will happen at this stage too. Finally, we coordinate with your landlord, as they will have to sign off and approve your license application as well.

Depending on how diligently we work at this stage to gather the information and prepare the materials, the time from when you contact our office to when the application is submitted can take 7 to 14 days. In certain circumstances, we have gotten applications submitted in as short as 48 hours, but that is not the norm – or our preference.  We find that rushing leads to mistakes, and can ultimately lead to unnecessary delay.

Step Two: Review and Supplementation

After we submit the application, it will be reviewed by licensure personnel at the County Liquor Board. These reviews occur once per week, so it is important to get the applications in before the review day, or you can end up losing a week. After review, Board personnel will contact my office and let us know if they have any questions or if anything is missing. While there are usually follow up questions or requests for further information, it is always our goal that nothing of significance is missing so that the application can be set for hearing. This process of review and supplementation usually takes about one week, but can drag on if there is anything important wrong with the application.  (See, that’s why we don’t want to submit it unless it is done properly).

Step Three: Publication and Posting

After review of the application, you will be provided with a hearing date for your application and a poster to put in the window of your restaurant. This poster will note the date and time of the hearing so any interested member of the public can attend the hearing and, for whatever reason, express support or disapproval of the license application. The hearing will also be publicized on the Board’s website as well as in certain other publications.

The poster must be in your window for a minimum of 30 days, but depending on the dates the hearings fall – they are only held twice per month – and whether the Board’s docket is full, the period between application and approval can be as much as 45 days or longer.  During this period, we try to stay in regular contact with liquor control personnel to make sure there are no last minute issues that we need to deal with.  We want there to be no surprises at the hearing.

Step Four: The Hearing

After the notice period is over, and after all this hard work is done, you will have the hearing on your application before the County’s five-member Liquor Board. Each of the Commissioners will have the opportunity to ask you questions about your business and your experience in the restaurant business and with serving alcohol. The Commissioners will also ask you about your policies and procedures as it relates to the service of alcohol and explore your familiarity with state and local liquor laws.

We usually meet with our clients during the week leading up to the hearing to go over these questions in detail and, at the hearing itself, are usually given the opportunity to ask our clients many of these questions ourselves. We pride ourselves on having our clients exceptionally well-prepared for their hearings.  The hearings can be nerve wracking and intimidating, and solid preparation helps them go more smoothly.

At the conclusion of the hearing, the Board members will vote on whether to grant the license.

Step Five: Final Inspection

Once the Board has voted to approve the application, the hardest work is done. The last step is to schedule your final inspection with the Department of Liquor Control. Someone from the DLC will come to your establishment and inspect the premises and ensure that your restaurant is compliant as it relates to, among other things, where your alcohol will be stored and how it will be served. After you pass your inspection, which will usually take place about a week after your hearing, you can pick up your license.

So, as you can see, this whole process can take anywhere from 8 to 10 weeks from the time you pick up the phone and call our office. We can do our best to try to shorten that time in certain circumstances, but it is rare for the process to take much less than two months from start to finish. And if the application is incomplete or not prepared properly in the first place, that time period can drag on longer.

So the sooner you get the process started, the better.