Appalled officials survey damage, city role in artificially inflating liquor license values

Nicole Murati Ferrer presides over a License Commission hearing in January. (Photo: Marc Levy)

City councillors grappled Monday with the city’s role in duping hundreds of restaurateurs into spending hundreds of thousands of dollars on alcohol licenses that are now worthless, as well as how to compensate the buyers for their empty investments. Some of the ideas for compensation ran into the millions of dollars.

The problem has been becoming increasingly obvious at the License Commission for months as more businesspeople have been called to surrender their licenses after prolonged but fruitless attempts to sell for anywhere close to their original value. Most councillors were spared the growing crisis until recently, when they were approached by suddenly struggling holders of licenses that once served patrons at T.T. the Bear’s Place, River Gods and Emma’s Pizza.

“We need to be looking at the number of these issues and cases that will be coming out of the woodwork, and the amount that each case represents. I can’t overemphasize the enormity of what we’re looking at,” councillor Nadeem Mazen said.

Costly problem

By some estimates there are some 250 city restaurateurs holding such licenses – the apparent result of the city’s License Commission refusal to issue so-called “no-value” versions for 35 years, instead insisting businesses that wanted to serve beer, wine or cocktails had to bid on the ones being sold as others shut down their eateries and moved on.

The owners of Finale, the Harvard Square dessert restaurant that closed three years ago, said its license cost $450,000 in 2002, which is more than $619,000 in today’s dollars. Bonnie Bouley, who ran the former T.T.’s, paid $60,000 in 1973, which means she paid the equivalent of $343,382 in today’s dollars.

Though Bouley said she’d expected to retire on the proceeds of a license sale after being forced to shut down the nightclub in July 2015, now she can’t even get a broker to attempt to sell it for a tenth of its value.

Commission: Cause and cure

Mazen was present at a License Commission hearing last month where he heard Bouley and former River Gods owner Jackie Linnane plead their case. An aide for councillor Jan Devereux was also present. Yet it was councillor Tim Toomey who brought forward an order Monday calling on the city manager and License Commission to come up with a plan to “provide relief and fair compensation” to license holders whose purchases had been devalued.

They are “individuals who played by the rules over the years and did what they were told to do and invested substantial, substantial” amounts, Toomey said. “These are very unusual circumstances … these regulations were promulgated by the city.”

Several councillors, including Toomey, said they wanted to know “how we got into this situation,” though it was clear what in a way both caused and ended it: Current commission chairwoman Nicole Murati Ferrer, who has been aggressively reforming local rules and regulations since her arrival last year to bring them back into line with state law. By ensuring Cambridge was no longer acting illegally, including with a revamp of liquor licensing rules that took effect a little less than a year ago, she burst a sort of bubble of artificial value that may date back to 1981.

Vice mayor Marc McGovern said that, despite the pain license holders were feeling, Murati Ferrer shouldn’t be blamed. “She could take a lot of of the heat for this situation,” McGovern said, “but she’s trying to fix something. I want to thank her for getting us on the right track.”

Freeze sought

That left the question of what might be done to compensate license holders, including a potential waiver of annual fees that might begin to pay back a fraction of license value over time, or a one-time aid package made up by repurposing a year’s restaurant taxes revenue – estimated by Toomey at just short of $5 million. Though councillors wanted to hear what the city manager and Murati Ferrer could figure out, they agreed on a freeze in the taking of unused licenses until they did.

Murati Ferrer, emailed for comment late Monday, said she had no comment at this time.

Meanwhile, nine local license owners have a meeting planned Tuesday with the city manager, which will likely help shape a city response.

“They were duped”

At the start of the conversation, Mazen said he wasn’t sure what government could do about the bursting of market bubbles. But it became clear quickly that councillors saw this as something else.

“That’s different to me. When you invest in the stock market and a bubble bursts and you lose money, that’s sort of a game you play. If what the folks are telling us is true,” McGovern said, “and the city unintentionally or whatever gave them the wrong information and it cost them hundreds of thousands of dollars, that’s not a bubble burst where they invested in something and it’s just that the bottom fell out.”

“They were duped,” McGovern said, “and that is a huge problem if that is indeed true. And it does put the responsibility squarely on us.”


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6 Responses to "Appalled officials survey damage, city role in artificially inflating liquor license values"

  1. Jerry Vandesic   Tuesday, June 13, 2017 at 4:08 pm

    I disagree with McGovern’s “duped” comment. Were taxi drivers duped into buying medallions in the years before Uber? Should the city be writing checks to medallion holders? I don’t think so. The world changes, and what you have today is not guaranteed to be valuable tomorrow, whether it be gold or a license.

  2. Kim Courtney   Tuesday, June 13, 2017 at 10:05 pm

    Unfortunately, the reason why they were “duped” and this isn’t just a situation of regular market fluctuations, is because there was fraud involved.

    Yes, Jerry, the taxi industry was “duped” as well. The City also lifted the quota for taxi medallions in 1988, yet failed to inform anyone and allowed them to spend $500k on taxi medallions, pledge them to banks, leverage their homes and even have personal liability. Not to mention the fact that Uber was flat out illegal in Cambridge yet the City refused to enforce the law. So yes, the taxi industry does have the same legal claims here.

  3. John S.   Thursday, June 15, 2017 at 2:26 pm

    The high value of the license is derived from the fixed supply. Has the City actually increased the number of liquor licenses? If not, the City could gradually release new licenses over time (maybe one per year?) to gradually lower prices. Or, the City could offer a reverse auction to buy back outstanding licenses. I’m sure there are existing ways to deal with this.

  4. Jerry Vandesic   Thursday, June 15, 2017 at 10:11 pm

    Kim, so far the MA courts have disagreed with your ideas about Uber, and the outlook for the liquor licensees is likely to be the same. The licenses & medallions will be ground into dust by the forces of an evolving economy.

  5. Xavier Dietrich   Friday, June 16, 2017 at 12:48 am

    McGovern is 100% correct here. The city duped these individuals into buying licenses when it was not necessary. This is not the case of a natural market fluctuation, or even the case when the market falls due to a change in policy or regulation. The cause here is that the City defrauded the business owners by telling them they needed to buy a license when that was not necessary. The actual market devaluation occurred in 1981 with the lifting of the quota. The City then proceeded to deceive the public through various schemes in an attempt to protect the value of existing licenses. Obviously this is not sustainable and the loss of asset value is a direct result of fraud committed by the City.

  6. walter   Tuesday, June 20, 2017 at 9:15 pm

    The value of an alcohol license is not in its resale price but in the enormous profits earned from the alcohol sales it enabled. I wish I was “duped” into decades of nice profits. It’s unclear to me why the city feels obligated to funnel even more money to successful business owners. I’ll be watching this issue carefully.

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