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San Diego's Crafty Subsidy

Andrew Keatts, April 10, 2014 -   

This article originally appeared in Voice of San Diego

San Diego has decided craft beer is part of its economic identity. It's even thinking of giving two breweries a subsidy to keep them from expanding elsewhere.

And the city's getting creative to do it, too. The subsidy it's contemplating hasn't been used since a pharmaceutical company got a similar deal back in 2001.

A City Council committee voted Wednesday to recommending striking "economic development agreements" to help Ballast Point Brewing & Spirits Company and AleSmith Brewing Co. go through with new expansion plans.

The last time the City Council approved such an agreement was with IDEC Pharmaceuticals Corp. in 2001, said Russ Gibbon, business development manager for the city. It's done hundreds of smaller agreements that were approved at the staff level, but this is the first in a while to require Council approval. There's a specific Council policy outlining the requirements.

"It has the potential to create a bunch of 'me-toos' out there, so we have to limit it to projects with extraordinary public benefit," Gibbon said.

Here's how the subsidy works: The breweries will pay the city all the fees required for the permits they'll need to build their new projects. Once those new facilities are up and running and generating tax revenue, the city will use those new revenues to reimburse the breweries for the fees they paid to make the expansion happen. (Again: The fees will only be reimbursed through new tax revenue that resulted from the project. The city won't give up the revenue it's collecting from the existing use of the property.)

"They pay us twice, we pay them once," Gibbon said. "It definitely has cash value for them; they get the fee value back, but only after generating additional tax revenue we otherwise wouldn't have received."

According to Ballast Point's agreement, it's expected to take three years for the city to reimburse the brewery for the fees (including affordable housing fees) it'll pay for the project out of the new revenue it produces.

After that, the city expects to collect $50,000 each year from new taxes "which would likely not be received unless the Van Can factory (the property's existing use) was re-used by a business generating an equal or greater amount of tax revenue," according to a report by city staff. The city collects about $15,000 a year from the property currently.

The Council policy outlining when such agreements can be used includes requirements for qualifying businesses. Projects need to meet at least one of the following: provide "significant" jobs or tax revenue, promote stability in city revenue, encourage growth in older parts of the city or to keep a business from relocating.  It also needs to be consistent with the city's current economic development strategy.

For Ballast Point, the agreement came after the city learned the brewery was negotiating to build its new, larger production facility on a vacant parcel in Poway. City staff offered the agreement — which still requires Council approval — to keep the brewery as a San Diego taxpayer.

The city staff report accompanying the agreement says the new facility itself will be home to 100 new jobs. To justify the agreement, the city's report also says there will be a multiplier effect from those jobs — an attempt to reflect the full effect of a new job, including the economic activity associated with it. Beer production has a high jobs multiplier, 5.7 indirect jobs for every one direct job, according to the report, so the expansion will add 470 jobs in the area, for a total of 570.

Quantifying specific multipliers is one of the times economics begins to look like a mix of art and science. But manufacturing (including brewing) is accepted as having a larger effect than other industries.

It's considered one of four "base sector" industries in San Diego's economy, along with the military, tourism and international trade. Base sectors generate wealth — rather than just moving existing wealth around — by exporting goods and services, bringing money from outside the regional economy into it.

That's why manufacturing in general, and beer production specifically, got called out in an updated economic development strategy working its way through City Hall.

One of the strategic objectives in that document calls for attracting, retaining and expanding businesses in those four base sectors, and says there should be special attention to the emerging industries of clean tech and sustainable energy, and the food and beverage industry (which includes brewing).

Ballast Point maxed out the production capacity of its 23,000 square foot manufacturing facility in 2012. It began looking for a 70,000 to 100,000 square foot replacement that could satisfy increasing demand for its products, like its award-winning and San Diego-style-defining West Coast IPA, Sculpin. CEO Jack White didn't respond to a request for comment.

That expansion plan included a 10,000 to 15,000 square foot restaurant on the premises, which wasn't allowed by the city's zoning ordinance at the time. Last year the City Council amended the municipal code to allow breweries to open on-site restaurants in industrially zoned properties. At the time, city staff acknowledged they feared losing breweries to neighboring cities if they didn't allow for the change.

While Ballast Point was negotiating with Poway, city staff learned the Van Can company was going to close its 106,000 square foot can manufacturing facility. Ballast Point still saw Poway as a better option because of the cost of improving the old building.

That's when the city began discussing the subsidy package.

The city still hadn't posted many details of the proposed agreement with AleSmith. West Coaster reported the brewery's expansion plan last month: It's moving from its current 20,000 square foot facility into a 105,600 square foot building. It's expected to produce more than 25 new jobs.

Last year Ballast Point also added a Little Italy restaurant to its citywide footprint. The company initially tried to open a tasting room with a small brewery, but decided to just open a restaurant after learning the tasting room would have required a permit that could have included additional restrictions.

Thanks to Flickr user Peter Anderson for the header image.

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