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.

April 28 is Small Business Day at Nevada Legislature

Operators of small businesses can meet their counterparts and speak their minds to state lawmakers at a Small Business Day gathering in Carson City on Friday, April 28.

National Federation of Independent Business says legislators from both political parties will show up to hear directly from Nevada’s businesses.

“It’s a two-way conversation about the 2017 legislative session so far,” said State NFIB Director Randi Thompson. “The legislators will also share their perspective with the business owners.”

Thompson will offer an overview of key bills affecting business. Among the pending bills with a fiscal impact on business, she will discuss Senate Bill 106, which would increase minimum wage by 75 cents per year over five years, or until Nevada’s minimum wage reaches $12 per hour. There are several bills mandating changes to health benefits, and requiring paid leave, including paid leave for victims of domestic violence.

The breakfast presentation starts at 7:30 a.m. in room 3100 at the legislature. NFIB has more information about the event on its website.

 

 

Pahrump Valley’s Bill Loken on Winery Success and Nevada Grown Grapes

Things are good at the Pahrump Valley Winery.

“We couldn’t be happier,” winery owner Bill Loken told Grape Basin News over coffee in his recently-expanded restaurant.

Our table was nestled against a glass-enclosed sun room with a vineyard view, where the last of the lunch crowd lingered. Behind him, an open door revealed a small banquet room. Both spaces were added in the last three years, taking the winery’s dining capacity from 50 to 124. During roughly the same period, Loken tripled the size of the tasting room.

Gretchen and Bill Loken in their barrel room

Soon, another expansion will yield 7,000 additional square feet of production, storage, and banquet space. Under Loken’s management, and with his wife Gretchen in the winemaking role, the rural winery beneath the west-facing peak of Mt. Charleston seems poised for long-term success.

“Our goal is to become a 12 to 14,000 case winery within 10 years, and be a minimum of 80 percent Nevada grown,” he said.

In pursuit of the goal, Loken has been campaigning aggressively to persuade Nevada farmers to abandon alfalfa in favor of grapes. His aspirations for his own winery will require 60-80 acres, he estimates. Beyond that, the hope is that new vineyards will supply an increasingly robust wine region, which will in turn spur demand for more vineyards.

“Since the law changed, we’ve added between 9 and 10 thousand vines,” he said, referring to 2015 legislation that was conceived to boost Nevada as a wine destination, and changed the law so wineries can operate tasting rooms in the state’s two urban counties, Washoe and Clark.

“The growers were nervous, and when the law changed I encouraged them,” Loken said. “Now you can plant with assurance that there’s gonna be demand for your product. It’s not such a risk as it was before.”

Some of Pahrump Valley’s 434 medal winners, displayed outside the barrel room

To quell any unsettled anxiety, he shares the risk with growers who agree to put in new vineyards, promising to buy up even grapes that don’t make good wine.

Loken is unmovable on the subject of Nevada grapes, which he asserts are critical to a successful wine industry in the state. Vineyards come first, then wine. Any questions?

Firmly committed to the proposition that Nevada wine requires Nevada grapes — the more the better — he showed up in Carson City in 2015 to influence statutory requirements for fruit content. He ruffled some northern winemakers, who cast his hardline stance as simple protectionism, and came to view him as an opponent to opening up the urban counties.

Loken contends that any protectionist instincts were aimed squarely at California mega-producers, who might use an urban winery law to sweep into the state with their own juice and set up shop on the Strip. He was never intent on keeping Nevadans out of the business, he said.

“Had no restrictions been put (into Assembly Bill 4),” he said, “there would have been absolutely nothing to prevent Gallo, Trinchero, The Wine Group, Franzia, Golden State Vineyards — any of these great big conglomerates – they could have gone right into downtown Reno, they could have gone right into downtown Las Vegas, and put in large bottling plants. Had tankers coming in on Monday, bottle it on Tuesday, and then selling it in their tasting rooms on Wednesday.

“If you can do that, why would you ever invest in a vineyard in a rural area? Why would you ever encourage growers to put in grapes, because you just basically cut the industry out before you got started.”

Pahrump Valley Winery

Assembly Bill 4 was introduced by Washoe County lawmaker Pat Hickey on behalf of the Nevada Wine Coalition, a northern group that formed in synergy with a viticulture and winemaking program at the University of Nevada, Reno. In AB 4, they sought only to remove a population cap that prevented them from operating tasting rooms in the second-largest Nevada county.

In the bill’s first hearing, Loken testified that Nevada wine containing anything less than 75 percent Nevada grapes would not comport with federal law. He also said he endorsed the bill’s goal for the urban counties, but warned against becoming “a wine suburb of California.”

Loken says that as the session progressed, he relaxed his insistence on a high concentration of Nevada grown fruit. He agreed on dropping the minimum from 75 percent to 50 percent, and upon further reflection, to 25.

“We want to keep it a low bar to get in and get going,” he said, because small successes would breed demand, and would fuel expansion of both growing and winemaking in the state.

The state’s largest liquor distributor also had a hand in shaping the legislation, and AB 4 was amended to place a 1,000 case cap on sales for new wineries using less than 25 percent Nevada grown fruit.

On this year’s legislative agenda, the Nevada Wine Coalition announced it would try to raise the 1,000 case limit, arguing that the cap would hobble return on investment while new wineries wait for fledgling vineyards to mature, a 4-6 year process. The plan came under immediate attack by the distributors’ lobby. The Coalition has since retreated from a case limit amendment.

Now, as the Coalition seeks other changes to the law, Loken wonders why the state’s northern wine producers believe they need more legislation to be successful.

“It’s been two years,” he said. “Where are the vineyards? Where are they? I don’t see them going in.” He points out that southern Nevada vineyards have tripled in 18 months.

“If we’re here two more years from now and nobody’s put any vineyards in, there will not be a sympathetic ear in this state to change anything in that law.”

That’s a worry, but it does not appear to be Bill Loken’s worry. As we walk through his small barrel room, Pahrump Valley is preparing to bottle 750 gallons of Pinot Grigio. They’ve outgrown this room, but by next year, a new, larger room will house 200 barrels. In the center of the new barrel room, tables and chairs will seat 80 for meetings and special events. The expanded facility will have 12 fermentation tanks, a new high-speed, automated bottling line, and will store more than 18,000 cases of bottled wine.

All of this will take shape just in time for Pahrump Valley’s thirteenth harvest.