Regular readers of this newsletter may notice recurring announcements of upcoming auctions held by the Pennsylvania Liquor Control Board (“LCB”). For those seeking a liquor license the LCB license auction is often a good way to acquire a liquor license for a very reasonable price. In 2016 the General Assembly amended the Liquor Code to order that the LCB hold periodic auctions to release restaurant liquor licenses that have been reclaimed by the LCB for non-renewals due to unpaid tax liability or citations against the license. Such licenses were commonly referred to as “zombie licenses”.
Since the change to the Liquor Code in 2016, there have been eight auctions. The procedure for each auction has been virtually the same. A date is set by which sealed bids are to be received by the LCB Purchasing and Contract Administration Division. The minimum bid for each license is $25,000, and each bid must be accompanied by a $5,000 bid surety or 5% of the total bid amount, whichever is higher. The surety is intended to serve as a deterrent to submitting frivolous and underfunded bids and is to be treated as liquidated damages of bidders who cannot complete the transaction. The surety must be made by a bank check or certified check. Bids must be in whole dollar amounts. Failure by the bidder to follow the LCB’s strict instructions immediately disqualifies the bidder and the surety is in such cases returned to the bidder. Bids are unsealed usually within a week of the deadline at which time auction winners are determined and announced. The winning bidder for each license has the right to submit an application for the license to the LCB within six months of the auction award. The full bid amount must be paid to the LCB within fourteen days after the announcement of the bid winners and that payment must be by bank check or certified check. The surety cannot be applied as part of the full bid amount. If the bid payment is not received within two weeks of auction award, the second highest bid winner wins the bid for the license and the highest bidder will lose its surety. Bids are held in escrow by the LCB, pending approval of the license application. The surety is held by the LCB until the transfer is complete or until 240 days passes, whichever is sooner. The winning bidder must apply for the license transfer within six months of the announcement. The application can be for prior approval, allowing the winning bidder time to build out a space if necessary.
Licenses offered at auction do not have any licensing restrictions and all licenses will be free of liens from the Departments of Revenue and Labor and Industry. Auctioned licenses must remain in the county in which they were originally located. Such licenses are permitted to go back into the municipality in which they originated, provided that the municipality is not above the LCB quota limit. If the license is not going back to its originating municipality or if the originating municipality is over its quota, the bidder will have to go through the standard intermunicipal transfer process.
When the Liquor Code was amended in 2016 it was estimated that there were about 2,100 zombie licenses available for auction. In the eight auctions that have been held, a little over 300 have been offered and of those offered at auction only 257 have had winning bids. Approximately 14% of the licenses offered thus far have had no bidder. Auction winners have generally fared better than those buying on the open market and in some cases remarkably better. For instance, in July 2017 two Chester County licenses sold for less than $27,000 each; at that time licenses being sold on the open market were selling for $500,000 plus. While not every bidder has managed to get such extraordinary results through the bid process, most winning bidders have fared better than those vying for a license on the open market. In the most recent auction held in March, winning bids range from $28,888 for a license in Elk County to $276,100 for a license in Bucks County. The average winning bid in the eighth auction was $95,255. The number of bids received for each of the 22 licenses receiving bids ranged from one to eight. The ninth auction has not been announced, but using the last two years as an indicator, we expect to see an auction date by the end of the summer.
It is important to note that the Liquor Code bars a person or entity from possessing more than one class of license; thus, for example, the holder of a distributor license may not also hold a restaurant license. Likewise, the holder of a manufacturing license generally may not hold a restaurant license unless the manufacturing licensee operates as a “couplet,” which is an entity that has both a manufacturer’s license and a restaurant license for use at the same location. The LCB will not issue a license to a person, entity or owner of an entity of ill-repute. Applicants precluded from acquiring an R-License due to the LCB’s prohibitions may not obtain an R-license through the auction process. The ultimate decision is made by the Board at its sole discretion.
Our office has helped multiple clients procure liquor licenses through the auction process. If you have further questions or would like more information about the LCB auction process contact our office.
— J. Ken Butera