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Securitizing Pennsylvania Liquor Licenses in Loan Transactions

Securitizing Pennsylvania Liquor Licenses in Loan Transactions. Presented by: Theodore J. Zeller III, Esquire. Acknowledgement. We would like to thank Ted for his time and providing Information regarding his experience in this field. All

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Securitizing Pennsylvania Liquor Licenses in Loan Transactions

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  1. Securitizing PennsylvaniaLiquor Licenses in Loan Transactions Presented by: Theodore J. Zeller III, Esquire

  2. Acknowledgement We would like to thank Ted for his time and providing Information regarding his experience in this field. All Opinions, conclusions and/or recommendations expressed Herein are those the presenters and do not necessarily Reflect the views of SBA.

  3. Liquor Licenses are a Saleable Commodity in Pennsylvania • In order to sell alcohol, you must buy a license in the open market from another licensee who wants to sell. • The values of these licenses differ from County to County. • Some Counties have values over $300,000. • Pa.L.C.B. is also conducting auctions of old, forfeited, “Zombie” licenses.

  4. July 2017 Restaurant License Auction Top Bidders

  5. Take a Lien Interest in a Liquor License • In Pennsylvania, a restaurant, hotel, club, eating place, distributor or importing distributor license can have a lien placed on them by filing a UCC-1, and other relevant documents discussed below. Please note most Hotel licenses have no value because you get them free from the state. Old “grandfathered” Hotel licenses have value to the site they are located. • Lenders can issue a loan to purchase a liquor license, and the lender can take a senior interest in that license. • Lenders can loan money for other business expenses, and use a liquor license owned by the party as collateral.

  6. Required Documents for Taking a Lien Interest in a Liquor License • Limited Irrevocable Power of Attorney • Corporate Resolution • Note and Security Agreement • UCC-1 • All documents, except the UCC-1, should be dated on the same date for conformity.

  7. Power of Attorney: Generally • Gives the Lender the authority to act on the company or individual’s behalf with regard to the license. • Granted by an individual principal of the company, authorized by the Corporate Resolution. • Pa.L.C.B. will only accept a POA to allow a third-party to act upon a license. • Must have Agent Acknowledgments attached thereto for understanding and exercising the powers granted in the POA. • Must be notarized.

  8. Power of Attorney: What Authority is Granted • POA gives authority to: • Sell, assign, convey or transfer the liquor license. • Validate and renew the liquor license, and appeal any order or decision affecting the liquor license. • Negotiation of a Conditional Licensing Agreement affecting the liquor license. • Execute forms for government authorities. • File any tax returns or pay and obtain any tax clearances as necessary. • Engage counsel to act on behalf of liquor license.

  9. Corporate Resolution • Authorization by the Company, through an individual principal, to permit the Lender or its agent to act on behalf of the Company regarding the liquor license. • In lieu of a shareholders meeting. • Must be shown to the Pa.L.C.B. to show authority granted by the liquor license owner to act on behalf of the liquor license. • Corporate permission of all permitted actions authorized under the POA.

  10. Note and Security Agreement • Memorializes the agreement between the Lender and the borrowing company. • Discusses the interest rate, payment of principal and interest, late payment, default rate, post-judgment interest, prepayments, security in the liquor license, default, rights and remedies upon default, confession of judgment and waivers.

  11. Note and Security Agreement (Cont’d) • Very important to include the liquor license information in the Security section, including the license number. • Provide a first lien interest in the license, especially if it is a newly acquired license with no previous liens. • Require company to cooperate to effectuate the granting of the security agreement, such as executing POA and Corporate Resolution. • Require company to pay any fees required by the UCC for filing UCC-1. • Authorizes the filing and recording of the Security Agreement. • Can be in the form of an addendum to standard bank loan documents.

  12. Note and Security Agreement:Default Provisions • The following are common events of default included in Note and Security Agreements: • Inaccuracy of information, representation or warranty provided by company. • Breach of the Note and Security Agreement by company. • Failure to make payment of any principal, fee, charge or interest upon its due date.

  13. Note and Security Agreement:Default Provisions (Cont’d) • Any bankruptcy, appointment of receiver, trustee or liquidator, assignment of the benefit of creditors, judgment entered against company, contesting of the enforceability of note and security agreement by company, and substantial deterioration of financial condition of liquor license or company assets. • Accumulation of citations which caused the suspension of the license for 3 or more days. • Receipt of an objection to the renewal of the license by the Pa.L.C.B.

  14. Note and Security Agreement:Rights and Remedies: • Upon default, the following remedies are included in the Note and Security Agreement: • Upon notice by Lender, all monies due become immediately due and payable. • Take any action available under the law to collect payments due. • Exercise any and all remedies under the Uniform Commercial Code and applicable jurisdictions. • Confess judgment for money as set forth in Confession of Judgment clause. • Resort to any remedies in any agreement between Lender and company with regard to the liquor license. • Act upon the Limited Irrevocable Power of Attorney.

  15. UCC-1 • Standard UCC-1 used to file a lien against business assets. • Must include Liquor License Number (R-) and License Identification Number (LID: ). • Perfects the lien interest in the liquor license upon closing of the loan. • Can include other collateral, such as business assets of the company. • Must be filed immediately upon closing of the loan to perfect security interest and ensure senior status of such interest.

  16. Important Considerations:Proof of Tax Payment • If a license is not cleared of all taxes, it cannot be sold by the Lender upon default. • The Pa.L.C.B. will not transfer a liquor license unless all taxes are paid to the Pennsylvania Department of Revenue and Department of Labor and Industry. • Tax payments can be excessive, and could result in a substantial devaluation of the license if the Lender has to pay to clear the taxes. • Lenders should require proof of tax payments from borrowers, especially sales tax returns and payments. • Can also utilize Power of Attorney to access data directly from Department of Revenue and Labor and Industry.

  17. Important Considerations:License Valuation • Pennsylvania liquor licenses can vary greatly depending on which county they are located in and what kind of license it is. • We work with experienced brokers and our own experience to determine a fair price for the license and a valuation that a Lender can trust. • Important to have an accurate value to ensure that your lien against it will cover the amount of monies loaned. • Liquor license evaluations usually required for U.S. SBA loans when liquor license is being used as collateral.

  18. Important Considerations: POA vs. Blank Stock Powers • Like New Jersey, the Bank could secure the license with blank stock powers instead of a POA. • However, we do not recommend taking blank stock powers. • You will have to file for a change of corporate structure with the Pa.L.C.B., which can take a considerable amount of time and the Bank becomes the licensee. • The POA will let you act immediately upon the liquor license without any additional filings with the Pa.L.C.B. other than the transfer application which would be required regardless. The transfer is effected from the borrower directly to the new buyer. • New Jersey requires blank stock powers instead of a POA.

  19. What to Do Upon Default • Upon default by the company or individual, the first step you should do is conduct a lien search against the business or individual. • Determine if there is any outstanding tax balances against the company regarding the license, such as Department of Revenue or Department of Labor and Industry taxes. • If so, determine how much these taxes are, and you will be required to pay off prior to executing upon the license. • We have had success in negotiating these tax balances down with the DOR and Labor and Industry, because they often assess taxes on assumptions of the amount of business, and do not consider whether the business has closed.

  20. What to Do if License is Subject toJunior Liens Upon Default • If, when completing a lien search upon default, the liquor license is subject to junior liens, you will still be able to obtain the license through a sheriff’s sale. • First, you will need to confess judgment against the company or individual for the value owed to Lender upon default in the county Court of Common Pleas where the liquor license is located.

  21. What to Do if License is Subject to Junior Liens Upon Default (Cont’d) • After judgment is confessed against the company or individual, we prefer to transfer the judgment to the Dauphin County Court of Common Pleas i.e. which has jurisdiction over the Pa.L.C.B. • Once judgment is transferred (or confessed if not transferring) you must request a sheriff’s sale to qualify as an Article 9 public sale under the UCC. • Must notify junior lien holders of the sheriff’s sale, so they are notified of their ability to bid on the liquor license.

  22. What to Do if License is Subject to Junior Liens Upon Default (Cont’d) • If outbid by a junior lien holder, the Lender will, at a minimum, receive the value of the judgment back as the senior lien holder. • Must conduct the sheriff’s sale and attend to place the bid, which is similar to a real estate foreclosure sale. • Bid is usually the amount of your judgment, plus sheriff’s costs.

  23. Executing Upon License Upon Default • Whether the license is obtained via sheriff’s sale or by transferring the license upon default if there are no junior liens against the liquor license, the Lender will have to find a buyer who will be responsible to file for transfer of the liquor license with the Pa.L.C.B. • The operative sales agreement should list the Bank as Successor to borrower/licensee as seller. It should provide that the proceeds of the sale are payable to the Bank.

  24. Executing Upon License Upon Default (Cont’d) • The Pa.L.C.B. will require evidence of the Lender’s interest in the liquor license: • Sheriff’s Bill of Sale • POA • Transfers are completed at Buyer’s cost and expense. Typical processing times can approach or exceed 6 weeks depending upon the quality of Buyer and experience of its counsel.

  25. Thank you for coming! New Jersey Office 400 Crossing Boulevard8th FloorP.O. Box 5933Bridgewater, NJ 08807-5933Phone: (908) 722-0700Fax: (908) 722-0755 New York Office 875 Third Avenue8th FloorNew York, NY 10022Between 52nd & 53rd StreetsPhone: (212) 808-0700Fax: (212) 808-0844 Pennsylvania Office 515 West Hamilton Street Suite 502Allentown, PA 18101Phone: (610) 391-1800Fax: (610) 391-1805 Theodore J. Zeller III, Esquire 515 West Hamilton Street, Suite 502Allentown, PA 18101Phone: (484) 765-2220Fax: (610) 391-1805 E-mail: tzeller@nmmlaw.com

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