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A de facto cap on new liquor licenses in Pacific Beach has made the ones that exist extremely valuable. They’re selling for as $1 million and are having a dramatic effect on property values and tenant-landlord relationships.
This is Part One in a two-part series. Read Part Two here.
In Pacific Beach, businesses are struggling to get new liquor licenses – and that has turned preexisting liquor licenses into pure gold.
If a business has a preexisting liquor license, the value of the property increases, creating contention between tenants that hold the licenses and landlords looking to cash in on the rising value. And the supply squeeze has led many Pacific Beach businesses to convert from family restaurants to bars as they try to satisfy the demand of San Diegans and tourists that come to the area to drink.
A preexisting liquor license in Pacific Beach can sell for between $100,000 to $300,000, said Sara Berns, the executive director of Discover PB, the local business improvement district.
Tony Franco, a ubiquitous commercial broker whose face is found on bus stop benches and whose real estate footprint is etched into the major commercial hub of Garnet Avenue, told me he has seen a liquor license sell for as much as $1 million.
There is no single reason that explains why it became so difficult to obtain a new liquor license in Pacific Beach. The California Department of Alcoholic Beverage Control regulates the application process, and among the many things regulators look at is crime.
Pacific Beach ranks second among San Diego neighborhoods for violent crime, according to recent records from the San Diego Police Department. It has been this way for a while. Since 2003, Pacific Beach has either led the city or has come in second in the category.
During the application process, high violent crime figures are just one of the many reasons most Pacific Beach applications are protested and often denied. John Carr, spokesman for Alcoholic Beverage Control, said that each case is different and each is looked at differently.
A protested application may take more than a year to process, Carr said. Protests can come from the police department, a local official or even a local resident. Given the high crime in Pacific Beach, SDPD often protests applications to the area. Along with their own investigation, state regulators take all of the local voices into account before making a decision.
Another reason applications are often protested is the heavy concentration of preexisting liquor licenses in Pacific Beach. According to state law, one new on-sale license, such a license for a restaurant or bar, can be granted for every 2,000 people, and one new off-sale license, like a liquor store, for every 2,500 people.
Based on Alcoholic Beverage Control records, census tract 79.05 in Pacific Beach, which includes parts of Mission Boulevard and Garnet Avenue, has 23 active on-sale liquor licenses and a population of 2,584, well above the state’s recommended ratios.
Carr said that in the 1990s, however, California passed a stipulation that allows for a new license to enter a heavily concentrated area, as long as it serves a public convenience or necessity, such as “enhancing a business district, giving a boost to the local community … or providing a new and unique service to an area of the community that may not have that particular service.”
Two of the 23 active licenses in the Pacific Beach census tract were granted within the past five years.
Since Pacific Beach lacks real delineation between residential and commercial districts, the public convenience and necessity exception has drawn concern from some locals.
“Pacific Beach is very unique due to the proximity of businesses to residential neighborhoods,” said City Councilwoman Lorie Zapf, who represents the area.
When driving along Garnet Avenue, this multi-use landscape becomes evident.
For instance, at the intersection of Garnet Avenue and Dawes Street, a small, light blue apartment complex rubs shoulders with Bub’s at the Beach, a sports bar where displaced Pittsburgh Steelers fans often congregate on game day. Between Bayard Street and Garnet Avenue, a cluster of upscale condos sits behind Johnny V, a multi-room nightclub. A few blocks from Pacific Beach Middle School is PB Cantina, a happy hour margarita destination, and PB Pub, the local tavern. Between the middle school and the two bars is a series of apartments.
“My office has received calls from concerned citizens regarding aggressive transients, lawless behaviors and over-intoxication on our beaches, in the business district and unfortunately in some neighborhoods,” Zapf said.
The heavy concentration of licenses and high crime numbers have also become a rallying cry for local groups, such as Save PB, which argues that alcohol and poor regulation is to blame. These types of groups have existed in Pacific Beach since the early 2000s. Brian Curry, chair of the Pacific Beach planning group who advises the city on land use issues, said that it was in the early 2000s when new liquor licenses began to grow scarce in Pacific Beach.
Even with the scrutiny and regulation, many Pacific Beach businesses are converting from family restaurants into bars.
Franco told me the trend is great for landlords, since a liquor license can increase the value of a property. If a business converts to a bar, a landlord can raise the rent as the value goes up, Franco said.
The booming value of alcohol-serving properties is where the contention begins for some tenant-landlord relationships, which are at times characterized by high rent hikes, lawsuits and abnormal lease modifications.
Michael Reidy, owner of Bar West, a defunct nightclub on Garnet Avenue, is currently engaged in a lawsuit with their former landlord, Thomas Plotts. Plotts sued Bar West in August 2015 for breach of contract. Bar West responded with a cross complaint, alleging that Plotts took an “adversarial stance” against the tenants after they rejected Plotts offer to buy the property. The court documents show that after Reidy’s second refusal, Plotts offered an ultimatum: “either purchase the premises at a far above market price, or enter into new lease terms that were also well above market [price].”
Plotts offered the place for $3.4 million. The high price was based on the value of Reidy’s own liquor license, as court documents allege. A court hearing is still not set.
After multiple attempts, Plotts was unavailable for comment.
Since liquor licenses are private property, belonging to whomever they are issued to, businesses often buy and sell the preexisting liquor licenses between one another, as commodities. Some landlords have also joined the exchange, taking measures to mine the golden licenses from businesses.
I was able to obtain a lease modification between a Pacific Beach landlord, Michael Katz, and one of his tenants. Signed on Dec. 12, 2012, the modification extended the tenant’s lease until 2020 and added a “Demolition Clause with the right to Purchase Liquor License.”
Based on a typical reading of demolition clauses, the modification gave Katz the right to terminate the lease, demolish the building and afterward, buy the liquor license from the tenant, perhaps to develop a new business. The only thing Katz is required to do is give the tenant a heads up beforehand.
Franco called these practices where a landlord deals for a tenant’s license, “preserving their assets.” He said that although it’s a case-by-case scenario, generally, it’s wise for landlords to purchase preexisting liquor licenses. “It’s just the free market,” Franco said.
Berns said landlords aren’t as embedded in the community as small businesses are, so she feels compelled to prepare new businesses coming to Pacific Beach for that reality, hoping to offer workshops on what to look for and what questions to ask when negotiating a lease or rent.
“These are small businesses owners, these are people’s dreams,” Berns said. “But they don’t necessarily have the legal background to negotiate a lease.”
Yet for Berns, there is no systemic issue in Pacific Beach. She said, in general, most landlords operate their businesses just like a small business owner does and is mostly out to make an honest profit. But she said the rising value of liquor licenses is causing some landlords to take advantage of their tenants.
“The more you make a liquor license worth money, the more there’s now predatory behaviors toward those with them,” Berns said.