City regulations could have an effect on new breweries

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Hunter Smith, founder of Champion Brewing Company, says the new city brewery regulation could “disincentivize someone from locating in Charlottesville in the first place if they are going to be hamstrung down the road.” Photo by Eze Amos Hunter Smith, founder of Champion Brewing Company, says the new city brewery regulation could “disincentivize someone from locating in Charlottesville in the first place if they are going to be hamstrung down the road.” Photo by Eze Amos

Breweries have been popping up around Charlottesville like mushrooms after a rain. About a dozen beer producers are now located within an easy drive from town. But curiously, only four breweries are actually located within the city’s limits: Champion, South Street, Three Notch’d and—the newest addition in September—Random Row.

In the middle of a regional beer boom, a new city regulation on breweries was slipped into a zoning regulation change last winter. Nobody seems to know whose idea it was, but it was would-be brewer Julie Harlan who first noticed that new microbreweries within Charlottesville will have to derive at least 25 percent of their revenue from on-site retail sales.

In August 2012, Harlan bought an almost 1,500-square-foot foreclosed  home on Forest Street for the shockingly low sum of $17,700, which allowed her to purchase the property with cash. Located a few blocks from Bodo’s Bagels on Preston Avenue, it is zoned B-3, which is a flexible zoning status that allows for use as either residential or commercial purposes.

“I was looking down the list of zoning options and microbrewing was on the list,” says Harlan. “My niece had gone to Piedmont and studied viticulture and she suggested brewing. …I would take care of the business and we could have a small, woman-owned nanobrewery. …It seemed like a good idea because everything I read about the Virginia laws seemed like they were going in the direction of less regulation.”

Three Notch’d Brewing Company President Scott Roth says the brewery is expanding its operations into a larger space at IX Art Park next year that will include an outdoor beer garden and an event space. The company will keep its Grady Avenue facility for production and storage. Photo by Eze Amos
Three Notch’d Brewing Company President Scott Roth says the brewery is expanding its operations into a larger space at IX Art Park next year that will include an outdoor beer garden and an event space. The company will keep its Grady Avenue facility for production and storage. Photo by Eze Amos

The 25 percent requirement was tacked on to a change in law that Three Notch’d Brewing Company requested. Previously, breweries within Charlottesville were limited to a 15,000-barrel annual cap for production. As Three Notch’d has won fans both locally and around the region for its inventive range of beers, demand has increased beyond the 15,000-barrel limit and the company was concerned about possibly having to relocate outside of the city. Its owners asked that the limit be raised to 30,000 barrels, and the city agreed.

Three Notch’d’s management team realized they would need the increase as they prepared to move into a new, larger space at the IX Art Park that will include an outdoor beer garden and an event area (they will maintain their existing space in the old Monticello Dairy on Grady Avenue for storage and production).

“When we were contemplating the move it was necessary to ensure that we wouldn’t be regulated in terms of the amount of barrels we can produce,” says Scott Roth, president of Three Notch’d Brewing Company. “The city was very understanding and took a good look at the code and understood the need for a few changes.”

“We have been busting at the seams in our current location and wanted to find a more permanent home where we could focus on maximizing our production facility without being so hindered by space constraints,” Roth says. Three Notch’d’s new presence at IX will include “food and beer in a relaxing atmosphere that is comfortable for everyone, including families.”

But the changes aren’t settling well with everyone seeking to become part of the beer industry. The new 25 percent requirement has given Harlan pause and may scuttle her plans to open Charlottesville’s fifth brewery (C’ville-ian Brewery closed in October after two years in business). To start, she doesn’t understand how it would be enforced.

“Are the sales net or gross?” she asks. “I’m also worried, would we be pushing beer to make the 25 percent? Like, we’d be looking at the clock thinking we would like to close now but we haven’t made our 25 percent. …There’s no clear guidelines. How do you report it? What if you don’t make your 25 percent quota? Is there a penalty? Is it a zoning violation? Do they shut you down? …I couldn’t find anyone who could give me any reason behind the 25 percent, which would help me understand where they were going with it.”

Julie Harlan had planned to open a microbrewery on her Rose Hill property, until she learned a city code added last winter requires 25 percent of her revenue to come from on-site retail sales. Photo by Eze Amos
Julie Harlan had planned to open a microbrewery on her Rose Hill property, until she learned a city code added last winter requires 25 percent of her revenue to come from on-site retail sales. Photo by Eze Amos

Brian Haluska, principal planner for the City of Charlottesville, has a few answers.

“The rationale for the 25 percent requirement is that if we are permitting these facilities in our commercial and mixed-use districts, they need to incorporate a ‘front door’ that contributes to the activity on the street,” says Haluska. “Our commercial and mixed-use districts are intended to have activity at the street level. The fear was that without some sort of on-site sale requirement, a microproducer could locate in the commercial or mixed-use zone, have no on-site sales, and have all of their beverages leaving on trucks out of the back. That is a bottling facility—which we allow, just not in the commercial and mixed-use zones.”

Andrew Sneathern, former assistant commonwealth’s attorney in Albemarle County who is now in private practice specializing in alcohol-related law, says the likelihood of a company being a bottling-only facility is small.

“The costs of being in the city of Charlottesville versus, say, Waynesboro, for example, would be completely disparate,” he says. “I think you could probably pick up for about $3 a square foot in Waynesboro for a bottling facility. In Charlottesville you couldn’t come anywhere near that, so the chance of that happening is extremely small.”

Nor does Haluska’s concern make a lot of sense to Hunter Smith, owner of Charlottesville’s Champion Brewery and co-chair of the Government Affairs Committee for the Virginia Craft Brewers Guild.

“Any brewer would tell you that you would be nuts not to have the retail component,” says Smith. “If you’re going to have some retail component, chances are it will be a large portion of your sales early on. It’s as you grow that it becomes of concern.”

Real estate and rent in Charlottesville are so expensive that it would not typically make economic sense for someone to open a facility that only brews and bottles without selling retail. Such a facility could easily be opened in another county with cheaper land and closer access to a highway, like Devils Backbone’s outpost in Rockbridge County.

Breweries have a special legal status under Virginia state law. Most businesses that serve alcohol are required to sell a certain amount of food as well. You can’t legally open a business that is only a bar in Virginia—it also has to be a restaurant. But breweries can sell their own beer at the same site where they brew without being required to offer food.

And those on-site sales are something that small to mid-sized breweries value. A beer sold directly from the brewery keeps all of the profit in-house. All beer sold to other restaurants or retailers is required under state law to pass through a third-party distributor and then to the point of sale. Each business needs to make a profit and marks up the beer along the way. Normally, a small Virginia brewery will sell as much beer as possible through its own pub and distribute the rest for a lower profit per pint. According to Smith, a pint of beer sold to a thirsty brewpub patron typically provides about five times more profit to the brewer than the same pint sold through a distributor.

“The reason to have a business in Charlottesville is the great retail potential,” says Smith. “So this is solving a problem that doesn’t exist.”

Smith agrees with Harlan that the 25 percent requirement could scare new breweries away from Charlottesville, but he disagrees about the point in a brewery’s development that this would happen. Champion has grown from producing 500 barrels per year when it opened in December 2012 to 10,000 barrels per year in 2016. In fact, they opened the Missile Factory, a 7,000-square-foot facility with a 15,000-barrel capacity, in Woolen Mills in 2014 to keep up with distribution demand. 

“Here we are in year four and [Champion is] opening multiple extra states for wholesale distribution. It’s going to be hard for my 1,500-square-foot taproom to keep up with my multimillion-dollar wholesale business,” Smith says. “The long-term situation is that it could disincentivize someone from locating in Charlottesville in the first place if they are going to be hamstrung down the road.”

While a quality product and good marketing can dramatically expand the distribution of a brewery’s products, the brewpub located at the brewery can’t make more people walk in to have a drink. In fact, it is illegal under state law for them to try.

“It is illegal to advertise specifically alcohol or prices on alcohol because of the ABC [Alcoholic Beverage Control],” says Smith. ABC regulations, some of which date back to the era immediately following Prohibition, prevent businesses that retail alcohol from promoting their prices or doing certain other things that could encourage people to drink beer.

“So if you find yourself in a pinch on that regulation, it is hard to go out and drum up more business,” says Smith. “I can’t just go make more people to drink beer here.”

A local business might actually have to turn down orders for its beer if it is unable to increase on-site sales to 25 percent of the new total in revenue. This is deliberate.

“One of the chief concerns from the Planning Commission was how much truck traffic would these uses generate, especially with some of our commercial zones being close to residential neighborhoods,” says Haluska. “So, in addition to the desire to see retail sales in the microproducers, the 25 percent on-site sales rule would limit the volume of shipments.”

Haluska does not know who initially requested that a 25 percent minimum retail sales requirement be added to the city’s zoning regulations along with the production increase to 30,000 barrels annually. Smith, heavily involved with the Craft Brewers Guild, says he had not been consulted on or made aware of the proposal. The craft brewing industry currently provides about 8,900 jobs in Virginia, according to the guild.

Sneathern thinks there might be some unintended consequences of the 25 percent requirement. “It may be that a real microbrewery might have to extend its hours in order to meet that requirement,” he says. “If they had to stay open later [in order to raise their on-site sales to 25 percent of sales] and they’re in a neighborhood like Belmont where there are residential neighbors, it would probably impact those neighbors. When I practiced law in Belmont I was on Douglas Avenue, and I remember distinctly a number of neighbors being bothered by what was going on after the zoning changes happened in Belmont. Noise issues and people being out intoxicated late at night and everything that goes along with that.”

Harlan wouldn’t want her imagined brewery to stay open late.

“I could foresee doing a tasting room as part of the brewery, but if we got busy we might just want to do contract brewing,” she says. “Our goal is not to get bigger and bigger. We were not looking for the requirement for the hours to be open to the public. Staying open at night is not something we want to do.”

Andrew Sneathern, a local attorney in private practice specializing in alcohol-related law, says the likelihood of a company being a bottling-only facility on city land is small, which city staff says is the main concern behind the code change. Photo by Eze Amos

Breweries that distribute their beer to local restaurants have to walk a fine line by selling beer through a tap room but not appearing to compete with their customers.

“You don’t want to be open till 2am like they are,” Smith says about bars, “trying to steal their alcohol business and competing with them. We are in the tourism and tasting business, not in the bar or restaurant business.”

But Smith is actually planning to make that leap. At the November 5 Top of the Hops beer festival, Smith announced plans to open the first-ever brewery on the Downtown Mall.

“We intend to sell all the beer produced there, right there,” says Smith. “The business model is to sell 100 percent of the beer retail. We’ll be opening the first brewery on the Downtown Mall. It will be a new category for us to get into.”

Smith’s new brewery will offer different varieties of beer that are currently unavailable at Champion and it will be combined with a restaurant, a joint venture with Wilson Richey. Under Charlottesville’s new 25 percent rule for microbreweries, Champion can get to the 25 percent by selling anything retail, including food. But the restaurant/brewery combination is a risk that most brewers aren’t comfortable taking.

“The inherent risk of the restaurant business is higher,” says Smith. “In a restaurant you are being judged on so many other criteria. You’re getting out of your wheelhouse so you can grow the business you are good at. It’s like you would have to get better at hockey so you can play basketball. It just doesn’t make sense.”

Three Notch’d’s Roth isn’t worried about the 25 percent minimum.

“They are focused on providing a healthy combination of retail and interactive space for the city of Charlottesville,” he says, “while also providing the breweries with what they need in terms of barrel limits to succeed. …If you really dive into the numbers, the 25 percent requirement should not prove to be overly daunting.”

Harlan plans to tear down the single-family house currently on her lot and replace it with a new building that she designed herself. Right now she’s considering erecting a duplex on the site, and says parking requirements for a brewery also factored into her decision to table that business venture.

“The rules are pretty clear for anyone looking to open a facility in the city,” says Haluska. “If the sales to distributors start to rise, then those businesses need to consider how to accommodate that expansion in production—if a second site is necessary in a zone that permits a standalone bottling plant or whether to relocate to a zone that permits small breweries.”

What neither Harlan, Sneathern nor Smith understand is exactly why the city would need to limit breweries in a situation where the price of real estate already seems to be doing that. Is there something undesirable about having a brewing industry in Charlottesville?

“You have the idea of some old Guinness building with rats and the spent grain and labor strikes and things like that,” says Smith, invoking the images of American breweries from the gilded age of the late 1800s. “In 2016 it’s an irrelevant concern.”

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