Alternating Proprietorship is Legal; Craft Brew Production Limit Raised

UPDATED JUNE 9, 2017:  Governor Brian Sandoval has signed Senate Bill 431, raising production limits on Nevada’s craft brewers, and allowing wineries to operate as alternating proprietors, a business arrangement where up to four wineries can exist in a single location.

The winery provision was a late amendment sought by the Nevada Wine Coalition and local vintners.

POSTED May 17, 2017: A Senate committee in the Nevada legislature passed an amendment today authorizing up to four wineries to operate under one roof, a business structure known as alternating proprietorship. The amendment made its way into a contentious bill that raises the annual production limit for craft breweries to 40,000 barrels.

Assembly Bill 431 cleared the Assembly on April 25. The bill generated a tussle at a subsequent Senate committee hearing when national beer brands objected to additional provisions designed to prevent them from inhibiting craft beer sales with perverse incentives to distributors.

If it passes on the Senate floor, AB 431 will return to the Assembly for concurrence on the amendment. Assuming approval in both houses, the bill paves the way for a stalled winery venture with three partners to open on Reno’s 4th Street corridor. Craft brewers in Nevada will nearly triple their annual production from a current limit of 15,000 barrels to 40,000, with no more than 5,000 to be sold to customers in their tap rooms. Small brewers will also be allowed to supply their product to special events, such as farmers markets, if a licensed retailer sells the beverage.

It’s a big win for small wineries, said Randi Thompson, Executive Director of the Nevada Wine Coalition.

“This will make it easier for folks to share costs and start a business,” She said.

Las Vegas Assemblywoman Irene Bustamante Adams sponsored AB 431. Senator James Settelmeyer added his name after working for months with the craft brewers on a separate proposal to increase production. The language addressing wineries was added by Senator Julia Ratti, who represents the district that includes 4th Street in Reno.

 

 

Planned Reno Winery in Legal Limbo; Change in Nevada Law Needed

415 East 4th Street in Reno. The red-roofed section is the site of the stalled winery, originally scheduled to open in October of 2016. A brew pub is operating in the other half of the building.

Business appears to be brisk at the Lead Dog Brewing Company, which since January has operated a pub in one side of a low-slung stucco building on Reno’s revitalized 4th Street corridor. The other half of the building remains dark. A venture that planned to be the city’s first urban winery sits in a state of legal limbo, months behind its construction schedule, and unable to get the state’s approval to open for business.

The principals are part of a cadre of hobbyist winemakers who want to take their products commercial following Nevada’s 2015 repeal of a ban on winery tasting rooms in Clark and Washoe Counties. Among the local winemaking community, enthusiasm for the 4th Street winery is high. But there is also hushed recognition that it stalled because its business structure is illegal – and that its future is in jeopardy.

By the letter of Nevada law, the 4th Street establishment can’t open because it consists of three wineries under the same roof, a business structure known as an alternating proprietorship. The arrangement is permissible federal law. It allows several licensed wineries share a facility, with one as the “host.” Tenant wineries must maintain separate identities and separate physical spaces for manufacturing, storing, and selling their wines. The stringent rules keep the finished products apart so they can be tracked for tax purposes.

Participants in an alternating proprietorship enjoy cost savings from shared overhead. States are free to authorize the arrangement or not. It’s legal in neighboring states, but Nevada law forbids it.

Reno’s wine insiders meet mentions of the 4th Street project with shrugged shoulders and sidelong glances. Some are quietly wondering whether Reno’s first urban winery could be doomed.

“What’s next? Who knows?” the shrugs seemed to say. One industry professional who spoke with Grape Basin News was more blunt.

“They didn’t read the law,” he said.

Now, in an auspicious turn of events, the group may have a shot at changing the law. A state legislator has agreed to get behind a statutory amendment. Language has been drafted to expand Nevada’s definition of a winery to include the alternating proprietorship, according to Randi Thompson, Executive Director of the Nevada Wine Coalition.

“It’s not a slam dunk,” Thompson said, but she’s working with influential players in the industry to get the change done this legislative session. The proposed language would allow alternating proprietorships, but limit them to a maximum of four wineries.

The effort is notable because it was initiated well after the beginning of the 2017 legislative session. It was late February when the group received final word from the Nevada Department of Taxation – an advisory opinion explaining the denial of the 4th Street license. Lawmaking was already underway in Carson City, and the Wine Coalition’s 2017 agenda was focused on other issues. Getting attention for a new issue is a tall order once the 120-day legislative session begins.

“They brought me in very late,” Thomspson acknowledged.

Three of the five principals in the project declined to be interviewed for this story. Nevada Sunset, LLC assumed the role of host winery. The company’s managing member according to the Secretary of State’s business registry is Mike Steedman. He has also recently owned a bar called The Studio, located across the street from the site of the planned winery. Great Basin Winery, LLC is owned by University of Nevada Associate Professor Adam Hand. Neither company agreed to an interview.

Grape Basin News spoke earlier this year with the partners in the third company. Wade Johnston and Joe Bernardo own Basin and Range Wines, LLC. All three companies have been licensed to operate by the Federal Alcohol and Tobacco Tax Bureau.

The 4th Street winery project took shape as the three entities began charting separate courses to their own commercial wineries with tasting rooms. Winemaking is a capital-intensive affair, and the aspirants were seeking a cost-effective way to enter the business, according to Basin and Range partner Wade Johnston. After some discussion, they decided to share a space. The model for multi-winery facilities exists nearby in California and elsewhere.

But it was about more than money, Johnston said. For the wine enthusiast, three wineries in one spot is more appealing than one, he told Grape Basin News.

“To be able to market it as kind of a co-op. It’s just more fun (than a stand-alone winery). You get to see more wines, you get to see more winemakers’ approach to wines.”

Johnston said the group spent 18 months searching for a location. They settled on unit B in the 4th Street building, although it required significant upgrades. They worked to ensure that the layout would comply with federal alternating proprietorship regulations. A lab and a retail tasting room were added.

“There are no buildings amenable to this, and so when we found this one, it’s far and away the best location in Reno,” Johnston said. “So that’s another reason why nobody wants to just roll over on this. It’s because we love that location.”

As the only professional purveyor of alcohol on the team, Steedman may have seemed like the logical person to take the lead in setting up the winery. But his ownership of the bar across the street became an additional legal obstacle.

In documents obtained by Grape Basin News, the Department of Taxation laid out two legal reasons Nevada Sunset can’t be granted a license to operate. Steedman’s other bar business is listed first.

An advisory opinion dated February 24, 2017 says that under Nevada’s three-tier alcohol distribution system, a person can’t be both a manufacturer and a retailer of alcohol. The law provides exceptions for wineries, craft breweries and craft distilleries. But ownership of a separate bar was a problem.

“… you are engaged in business as a retailer as the owner of a bar, restaurant, and music venue,” the opinion says. “Thus you would also be prohibited from owning more than two percent of an organization engaged in manufacturing of alcoholic beverages, such as a winery.”

The opinion also cites the section of state law that prohibits suppliers – the wineries – from operating on the property belonging to a business that imports, wholesales, or retails alcohol. In the proposed arrangement, that would be Nevada Sunset.

“Under your proposal, the tenant wineries are all located on the premises of the host winery, and all of them are engaged in retail,” the advisory opinion says. “Without specific legislation allowing the wineries to operate on the same premises… this model is prohibited.”

Several sources with knowledge of the situation say Steedman has sold The Studio to clear the path to a license for the winery. Grape Basin News was unable to confirm the sale of the bar. If it has transferred to a new owner, that leaves only Nevada statute as an obstacle to reckon with.

Nevada’s law against the alternating proprietorship is a protective measure against out-of-state winemakers, according to an industry insider with knowledge of the 4th Street winery’s issues.

In California and other states where homegrown grapes are abundant, alternating proprietorships make perfect sense, the person told Grape Basin News. But in a state with scant supply, allowing such an arrangement would be an invitation to well-established brands from elsewhere – likely California – to locate inexpensively in Nevada, crush imported grapes, and sell their wines in on-site tasting rooms.

The rationale is that outsiders could effectively undercut Nevada’s intention to develop its own wine industry. Similar arguments are frequently employed by opponents of proposals that would favor small vintners and brewers.

With slightly more than three weeks left before the legislature adjourns, state lawmakers are swamped with demands. The end of the session becomes chaotic, as pressure mounts from all directions to approve some new laws, and to kill others. If their amendment doesn’t survive, Nevada Sunset and the 4th Street partners could be left in limbo until the 2019 legislative session.

“We can’t hang on for two years. I can’t,” said Basin and Range partner Joe Bernardo. “Not with what it’s costing to keep this going.”

He didn’t share the dollar figure, but it includes higher-than-anticipated construction costs and freezer storage for 12 tons of grapes harvested last fall from the Basin and Range vineyards. The grapes had been scheduled for production after the winery’s originally scheduled opening date last October.

“I hate to even think about it,” Bernardo said of money that’s so far garnered no return.

Craft Brew Barrelage Headed for Increase; Business Practices Mandate Roils Big Beer

It seems fairly certain Nevada craft brewers will get the green light to legally produce more beer – the only question is how much more. Two bills moving through the legislature would raise their annual production cap to either 30,000 or 40,000 barrels, from the current limit of 15,000 barrels.

Big beer brands Anheuser Busch InBev and Miller Coors have put aside earlier objections to raising the craft beer production cap, but they’ve refocused their opposition on provisions aimed at preventing them from hindering craft beer sales with perverse incentives to distributors.

At a Senate committee hearing earlier this month, the beer behemoths criticized Assembly Bill 431 for language borrowed from a federal court judgment that cleared AB InBev last year to acquire Miller parent SABMiller. The judgment prohibited coercive business practices by the newly merged company that might inhibit distributors from representing other brands.

The Nevada bill mimics the court order, prohibiting “a supplier” from rewarding or penalizing distributors for selling beer made by a “any other supplier.” The bill also outlaws attempts by a supplier to influence advertising, retail placement, and other marketing and management decisions by distributors, related to selling beer from “any other supplier.”

Representatives for AB InBev and Miller Coors told the Senate committee they’re in favor of allowing Nevada’s craft brew sector to grow, but asked for removal of the section restricting their interactions with distributors.

Placing the merger settlement language into Nevada statute would upset the balance of power that exists within the state’s three-tier system for alcohol distribution, said Leslie Pittman, testifying for Miller Coors.

Assembly Bill 431 arose as an alternative to a bill presented earlier this year by Senator James Settelmeyer. Distributors and the large beer brands opposed production cap increases in SB 130, and Settelmeyer publicly chastised them for failing to follow through on a promise to negotiate with craft brewers who have reached the current production limit.

The lobbyist for the state’s largest distributor assured Settelmeyer that an alternative bill was in the works, and that it would loosen the hold major beer brands have on distributors. Presumably, this would free distributors to pursue more robust relationships with craft brewers.

Settelmeyer’s bill, SB 130, would raise the craft beer production limit to 30,000 barrels annually, with a maximum of 10,000 that could be sold to customers in the brew pubs. Assembly Bill 431 would raise the limit to 40,000 barrels, with a maximum of 5,000 sold to pub customers. It also contains the business practices mandate adapted from the federal court judgment. Each bill has passed in one house and is still alive.

Wine School Team to Launch Urban Winery in Henderson

Students work in the barrel room at Grape Expectations in Henderson

For a decade, Grape Expectations Nevada School of Winemaking has been teaching the art and science of making wine. The Henderson school offers class sessions twice annually featuring either Chilean or California grapes, depending on the season. Students get together in groups to make wine, supervised by Grape Expectations personnel.

This fall, Grape Expectations management will launch a separate commercial venture to make and sell wine. Key word, they emphasize, is “separate.”

Wineries with legal public tasting rooms are new to the state’s two largest counties. On both ends of the state, the applicants are getting a crash course in the legal intricacies of maintaining separate identities and physical separation between the new ventures and any existing operations with a liquor license. Such issues have stalled Washoe County’s first urban winery, which is now months behind schedule, according to a partner in the operation.

The new Clark County winery – called Vegas Valley Winery – will sit in the same building with the school. It has its own address, and the tasting room has its own front door. Management has gone to great lengths to ensure it will be isolated from the student facility and the products produced there.

“We are opening a winery, not becoming a winery,” said General Manager Mike Schoenbaechler, who became acutely aware of the degree to which Nevada’s Department of Taxation has a hand in approving public tasting facilities as he watched the neighboring breweries operate.

No legal detail was too small to sweat when the group at Grape Expectations began to contemplate a opening a winery, Schoenbaechler said. They invited personnel from Taxation to tour the site and discuss proper execution.

“We wanted separate entity, physical separation, separate address. We wanted all of that in order, just knowing that we didn’t want to run into any issues,” said Schoenbaechler

“From day one when we started this project, we had (the taxation department) on board. Even when it was a pipe dream,” he said. “I think we’ve done everything right.”

Grape Basin News recently toured the school, and the developing winery. The school’s large barrel room is adjacent to the winery’s locked bonded area. A chain link fence separates the two spaces.

“Any wine that’s produced in here stays in here until it’s in the bottle, out of bond, and then at that point it’s able to be sold,” Schoenbaechler said, showing the small winery space.

A trendy, but understated tasting room was nearly finished during the late March visit.

At the same time, the management team was preparing for spring classes at Grape Expectations. Students starting this spring will take about nine months to produce and bottle wine from Chilean grapes.

The process fosters teamwork and tight bonds among the winemakers and with the staff, says owner and self-described “Wine Wench” Patty Peters.

“It’s the strangest business ever, because they all become family for us,” she said.

The students come from all walks of life. Many are hobbyists, but some aspire to go professional, and all have had a hand in making some award-winning wines.

It was students who urged Peters to keep Grape Expectation open after the sudden death in 2012 of its founder, her husband, Charlie Peters.

“When they heard Charlie had passed, I just kept getting phone calls, one after another – ‘please don’t close, please don’t close. Keep it going,’” she told Grape Basin News.

The school had been Charlie’s vision, and he was the expert. The current team, including Schoenbaechler and colleague K.J. Howe say they’d learned “just enough” about winemaking from Charlie Peters to keep it going after his passing.

This fall, as Vegas Valley tasting room opens its doors, the Grape Expectation School of Winemaking will start its tenth year. Vegas Valley Winery expects to start with wines from other regions, but hopes to begin pouring its own Nevada-sourced product within a few years.