August 1, 2014
In Part 3 of our series exploring brewing partnership relationships, we delve into alternating proprietorships.
For new brewers looking to break into the craft beer market without the full up-front cost of establishing a new brewing facility, or for existing breweries looking to begin expanding operations without expanding their physical space, alternating proprietorship arrangements can provide room to grow.
An alternating proprietorship, as defined by the Alcohol and Tobacco Tax and Trade Bureau (TTB), is an arrangement in which two or more people take turns using the physical premises of a brewery. Generally, the proprietor of an existing brewery, the host brewer, agrees to rent space and equipment to a new tenant brewer. One of the key distinctions between an alternating proprietorship and a contract brewing relationship is the fact that in an alternating proprietorship, the host brewer actually leases all, or a portion of, its physical premises to the tenant brewer (hence the name) for a period of time. This is unlike a contract brewing relationship, in which the contracting brewer never has possession of any portion of the contract brewer’s premises.
One example of a long term alternating proprietorship relationship is that of 21st Amendment Brewery in San Francisco, which owns a system for smaller production at their brewpub in California, but produces the majority of their product for distribution at Cold Spring Brewery in Minnesota. These arrangements can also be of shorter duration, however. An example of a temporary alternating proprietorship relationship is that between New Belgium Brewing and Avery Brewing. Avery announced this spring that it had signed an agreement with New Belgium that will allow Avery to make its White Rascal Belgian Style White Ale on New Belgium’s brewing system for a year while Avery completes the expansion and renovation of its own facility.
While an alternating proprietorship can allow a brewer to expand capacity without the expense that comes with building or expanding a facility, there are specific rules that brewers in an alternating proprietorship must follow carefully in order to avoid running into trouble with the TTB. First, the tenant brewer must qualify as a brewer by filing the appropriate documents with the TTB. Second, a host brewer must file certain documents with the TTB in order to establish an alternating brewery on its licensed premises. The tenant produces beer, keeps records, labels the beer, obtains the label approvals, and pays taxes. For an existing brewer in this situation, permits for this new brewing location must be obtained, however new label approvals are not required, as a new brewery address is exempt from TTB label change approval requirements.
The host and tenant brewers should act as separate entities at all stages of production. The host and tenant brewer hold title separately to the ingredients to the beer that they each individually produce. This differs from contract brewing because, as discussed in our last post in this series, in a contract brewing relationship, the contract brewer is the only party that has title to the ingredients and to the beer throughout all stages of production. (Holding title to ingredients or raw materials is essential in order for either the tenant or host brewer to brew or produce its own beer, according to the definition of a brewer under 26 USC § 5092.) In an alternating proprietorship, the host and tenant brewer must keep separate records of their respective beer production and removals and each must provide individual operational reports to the TTB. Additionally, in an alternating proprietorship arrangement, the host and tenant brewer individually pay tax, at the rate of tax applicable to each, upon removal of their own beer from the brewery.
In general, the TTB is concerned with making sure that a tenant brewer is operating in a manner independent from the host brewer with respect to its operations, production decisions, marketing, and ultimately, its final product. The TTB wants to make sure that there is no blurring of the line between alternating proprietorships and contract brewing relationships; it wants to be sure that the tenant brewer is not merely contracting production of beer to the host brewer and calling it an alternating proprietorship. Finally, the TTB is on the lookout for attempts by brewers to use an alternating proprietorship as a guise for avoiding certain regulations. For example, there is a concern that this type of relationship could be used to split production of a large company into additional smaller companies in order to qualify for a lower rate of tax on beer than would otherwise be possible.
Because of these concerns, brewers interested in entering into alternating proprietorships should be careful to have a comprehensive alternating proprietorship agreement in place and to comply strictly with TTB regulations at all times.