When financing a start-up or business acquisition, lenders typically require a lien on the business assets of the borrower as collateral. If the borrower operates a restaurant serving alcohol or a retail store selling alcoholic beverages, then the lender should determine, as part of its “prudent lending standards,” whether it should place a lien on the borrower’s liquor license.
There are four considerations for the lender to weigh when deciding if it should lien a liquor license:
- Is the liquor license lienable?
- How valuable is the liquor license?
- What is the correct process to place the lien on the liquor license?
- How much does the liquor license lien process cost?
A liquor license is usually lienable if a state regards the license as personal property, not merely as a “privilege” to do business. Accordingly, because states could view liquor licenses as both, the laws regarding liquor licenses vary greatly from state to state. Generally, however, they are divided into two categories: quota and non-quota states.
- A quota state places population-based caps on the number of liquor licenses available in a municipality, which effectively forces a business to look for a license on the secondary market and drives up the value. Not all quota states permit a lien to be placed on the liquor license, but those that do include Florida, Massachusetts, Michigan, Minnesota, Montana, New Mexico, Pennsylvania, South Dakota, and Washington.
- In a non-quota state, liquor licenses hold almost no value at all as they are plentiful and tend to expire unless renewed frequently, and there would be nothing gained by the lender in placing the lien even if it is permissible to do so.
Due to great variations in the liquor license lien process, it is extremely important the lender confirms with local counsel that the correct lien process is followed in order to protect the collateral and the SBA guarantee in the event of a borrower default and liquidation of the collateral. Here are examples from Florida and Pennsylvania which demonstrate differences in process.
- In Florida, in order to perfect a lien or security interest in an alcoholic beverage license, the lender should record the lien with the Division of Alcoholic Beverages and Tobacco (using a specific form provided by the Department of Business and Professional Regulation) within 90 days of the date of creation of the lien or security interest (i.e. execution of the security agreement). Currently, the fee to run a pre-closing or post-closing closing lien search is $20 and the fee to place the lien is $10. All liens and security interests filed on a liquor license in Florida must be renewed every five years for an additional $10 fee. **Note: Simply filing a UCC-1 financing statement is not sufficient to perfect a lien or security interest in a Florida liquor license.**
- In Pennsylvania, a liquor license is considered property as between a lender and the licensee, and the lender may perfect a security interest in the liquor license just as it would if it were any other type of tangible property by filing a UCC-1 financing statement specifically referencing the liquor license number and having the borrower sign a security agreement. The UCC-1 financing statement filing fee is relatively negligible for collateral that can be quite valuable.
As a best practice for SBA lenders, any lender placing a lien on a liquor license should specifically list the liquor license by number as a secured business asset in the security agreement and add the liquor license information to Section H – Collateral of the SBA Loan Authorization. If the liquor license number is not known prior to closing, then the lender should require the borrower to execute an amended and restated security agreement once the borrower has obtained it post-closing.
Lenders considering whether or how to lien a liquor license as collateral for an SBA loan should consult with local counsel to determine applicable state and local requirements. For more information regarding liquor license liens, please contact Kristen at (407) 618-0698 or at firstname.lastname@example.org.