Can a distillery and residential space be together in a Mixed use building?

[jumpstone]

We are early in the process and are still doing business planning while we are looking for a location for our distillery; we own real estate in a re-development district where the zoning allows and encourages mixed use.  The local officials have already approved having the distillery (as well as other commercial uses) along with residential units, in the same building, with separation/firewalls/sprinkling.  Some of what I have read as I look at the ATF regs makes me concerned about this. 

§19.52   Restrictions on location of plants.

A person who intends to establish a distilled spirits plant may not locate it in any of the following places:

(a) In any residence, shed, yard, or enclosure connected to a residence;

(b) On any vessel or boat;

(c) Where beer or wine is produced;

(d) Where liquors are sold at retail; or

(e) Where any other business is conducted except as provided in §19.54

 

 

Does anyone know if we will have problems with licensing approval with the residential use in the same building?  Thanks for any information!

[Silk City Distillers]

You might want to touch base with your insurance agent too.

[Sator Square Distillery]

While nothing is impossible, you may have a very hard time getting that past the feds. They almost didn't approve my application because my DSP was located 100 feet from a residence located on the same property parcel. They asked me to put up a dividing fence between the residence and the building where the DSP is located. I would anticipate they would deny your application, but it's worth trying.

My day job is in insurance. I brokered my own insurance policy for my DSP. Your insurance carrier would be very very adverse to having a mixed use building where a DSP is located, particularly residential. That may also be a big stumbling block even if you can get it past the feds. You should have a serious conversation with your insurance agent/broker about eligibility.

[LibertyCall]

Jumpstone, talk to Laura at You and Yours in San Diego. She can tell you what she went through in regards to opening a space inside a residential area. We looked at doing the same thing, where it was commercial on the ground floor with apartments overhead. It can be done, but you need to know the CFR's.

We are working with a local ABC Consultant that also does TTB work. I highly recommend them, or someone like them to help navigate you through the process. 

 

[InsuranceMan]

jumpstone,

     I work with several distilleries that are in mixed use locations (distillery on the main floor and condo homes above), as well as ones that share the same parcel of land as their own private residence.  If you would like to reach out to me at some point I could potentially put you in touch with some of my clients who have gone through this process.  

 

     Oh, and @Silk City Distillers, that is where you tell him to contact me ....... not just some random insurance guy  

[dhdunbar]

PM me and we can discuss this - no charge for the first talk. You are right to be concerned, but it is certainly doable.  That said, every situation is different and I don't like to offer specific comments in the forum, because I am pretty sure that at least some people would misunderstand how they might apply to their different situation.

That said, all situations are similar in that,  in all cases, the principal issue is curtilage, a term that TB does not employ,  but it is nevertheless at the heart of the matter.   You can look it up in a legal dictionary.  I've helped maybe ten persons through the process.  That includes mixed use buildings and DSP's in a separate building on the same tract of land as a residence.  I've also posted about this on other threads in this forum, but have no idea how to find them.   

I will say that safety is not a TTB concern.  Safety is a state and local issue.  State and local come first.  Then TTB.  

[Jhart]

Hi, 

Same issue, only in New York. Trying to put a distillery on the ground floor with two floors of residential on top. Any advise or contacts to a consultant would be much appreciated. 

dhdunbar please reach out to me (you weren't accepting messages) and we can discuss?

Best.

[dhdunbar]

I don't know why I'm not accepting messages. I have received them in the past I'll look into that. I will PM you with my email address and telephone number. It depends upon the degree of separation that exists between the upstairs residence areas and the downstairs DSP. We can talk about it.

[bluestar]

The Feds will require a full secure separation, preferably masonry, with no operable doors, conduits, etc. Fire codes may require a 3 or 4 hour separation, also easiest with masonry, and independent ventilation.

[Silk City Distillers]

Also consider that there may be insurance implications for the policies that cover the other units in the building.  Meaning, not you or your policies, but them and their policies.

One of the other tenants in our building had their insurance policy declined because there was a distillery in the building.

 

[dhdunbar]

With TTB, the issue is always separation.  I've not run across a situation in which the material separating was an issue, perhaps because no residence is ever going to want to be separated from a DSP by a chain link fence, which is an acceptable partition for DSP premises from the rest of the world - witness outside tanks.  With TTB the only issue I have ever encountered is whether the resident can possibly object to TTB's right of entry to the DSP.  TTB is not concerned with safety, because it has no authority in law to be concerned with safety.  Those are local issues.  As to insurance for the residences, Silk City's report is the first instance I've heard of about the issue. Since other of my clients have not told me about any such problems, if you want the lease, I don't know if I would  raise the possibility with the landlord. 

[Wise Men Distillery]

A local moonshine operation did get approved in a new building, where the distillery is on the bottom floor, and apartments are above on the second floor.  It does come down to separation.  It does really come down to the local codes, and interpretation of international fire codes as well.  

[dhdunbar]

"A local moonshine operation did get approved in a new building, where the distillery is on the bottom floor, and apartments are above on the second floor.  It does come down to separation.  It does really come down to the local codes, and interpretation of international fire codes as well."

 

 Yes and no.  For TTB it comes down to how the two are separated so as not to endanger the revenue.  A good deal of that is egress and ingress.  Separation is also important to local jurisdictions. But it is usually a different issue.  It is about safety and protecting people.  So the method of construction becomes more important.    As always, you have to satisfy both the federal and local agencies that have jurisdiction.   

It was not ten years ago that TTB presented the following slide at TTB expo when  discussing location, saying the following were prohibited because the DSP and residence were connected in TTB's opinion:

Sorry for the size, but I can't shrink it.  See the presentation at http://www.mountainmoonshine.com/images/Pittfalls_of_Artisan_Distillers_s06-bw-Amended.pdf, but remember that some water has passed under the bridge since then, so what you read there may not be accurate today.

I started arguing withg TTB about this in 2012.  O'm pretty well comfortable with the issues to address on point 1,  although some situations fall on the cusp between when I would say, "I anticipate no problem" and when I would say "we will have to try and see what happens."  Point 2 depends on the separation, access, etc.  Point 3 is still prohibited routinely,.  Point 4 -  I've been successful on three occasions, but I'm not fully confident about how to handle all  the objections TTB might raise.  There is some history here of which I am probably not aware,  because others have probably also written back and forth with TTB's Regulations and Rulings Branch, as I have, and they may have insights into the matter that I do not have. Of any of you have done so, let's share what we have learned, so that we narrow the number of "submit and see" circumstances.  Note, I don't want to hear what has been approved, I want to hear what TTB said about the circumstances that lead it to approve or not approve.  Observational  evidence doesn't do much good, because we can't assume that on every case TTB was told about residences  :-). 

 

[bluestar]

Don't forget another one of the requirements is that there must be public access to the entrance of the bonded space for the distillery, either directly from public thoroughfare or indirectly through other space the distillery controls that is itself accessible from public thoroughfare. As regards proximal residences, the idea is that no resident or other property owner can prevent access by the TTB to the distillery and bonded space, in particular by exercise of so-called "castle laws".

[InsuranceMan]

          I just wanted to take a moment to update everyone in regards to this topic and how it relates to possible insurance implications.  As recently as June, many insurance carriers have taken a step back and started to assess their book of distillery clients in order to maintain a strong program and competitive rates.  In doing so, many of the "admitted" carriers (of which there really are only about 4 that do it well) have determined that a mixed use building poses a "life-safety" hazard.  What this means is that if there are "residences" in the same building as a distillery then it is not a desirable risk and will be declined.   

          The carriers loosely define a "residence" as any unit that people occupy in the building, overnight, or as a permanent home.  So any building containing apartment units, condos, hotel/motel units, etc. are now not a desirable class of business for most "admitted" carriers.  I have defined what an "admitted carrier" and a "non-admitted" carrier are in the past under my articles that I posted as InsuranceMan, but here is a quick recap ...  Admitted carriers are admitted to do business in the state in which they write insurance, pay into the state guarantee fund, and are regulated by the state Department of Insurance.  Non-Admitted carriers (or "surplus lines" carriers) are not admitted in the state, they do not pay into the state guarantee fund, and they are overseen by the far less invasive state "surplus lines office".  So, what does that mean?  It means that admitted carriers have to file rates with the state, follow certain rules, make sure there is enough money set aside (guarantee fund) to pay claims in the state, and answer to the Department of Insurance.  These regulations tighten up what the carriers are and are not willing to write (sometimes based on their filings and rates) which makes placing more difficult accounts much harder, but it keeps premiums lower and more competitive on the more "standard" business.  Non-Admitted carriers however, can do pretty much whatever they like as they don't have to have specific rates filed (more of a range really), and can take on any risk they care to underwrite ... but it comes with a price.  Ever hear of "Lloyd's of London"!?!?!?  They will write dang near anything, but often times it comes at the price of a hefty premium.

          The long and the short of what I am saying is this, if you have a location that is just so amazingly stellar that you simply MUST HAVE IT for your distillery location, but there are "residences" in the building, expect to have a hard time obtaining insurance (unless you contact me of course, I have placed dozens of these), and expect to pay at least 2 to 3 times more than if you were in a standalone building, or a location that other businesses occupy (at least in regards to the General Liability aspect of your policy).  The rule of thumb as I have come to say is, "Insurance Companies care if someone is sleeping there."

          As always, if you have questions, whether you are just thinking about fixin' to get ready to maybe start a distillery, or if you are years into your operation, I am here to help.  I love to answer questions in regards to distillery insurance and I have seen nearly everything there is to see in regards to questions and issues.  I have been doing this a long time and it is very rare that someone brings me a question or issue I have not had experience in dealing with.  Maybe you can bring something to me that is new, I would love that and to help in whatever way possible.  If you want to run something by me or have me look things over please just PM me or call my cell at 307-752-5961.

Best,

 

Aaron Linden - Insurance Superhero 

[dhdunbar]

I just wanted to take a moment to update everyone in regards to this topic and how it relates to possible insurance implications.  As recently as June, many insurance carriers have taken a step back and started to assess their book of distillery clients in order to maintain a strong program and competitive rates.  In doing so, many of the "admitted" carriers (of which there really are only about 4 that do it well) have determined that a mixed use building poses a "life-safety" hazard.  What this means is that if there are "residences" in the same building as a distillery then  it is not a desirable risk and will be declined.  

 

This is important information and I am passing it on to my clients who have established DSP's, with TTB's approval,  in buildings that also contain a residence.   We can do that, under the proper circumstances, but this raises real questions about whether you would want to.

Aaron - is there any problem with a DSP being located on the same tract of land as a residence, where the two buildings are separate, but in proximity to one another?  Is there some distance guideline?  I have ten or more clients who have done this, again with TTB's approval after full disclosure, but since they invariably construct the building, and cannot escape from a lease, if the insurance industry takes exception, or is likely to take exception, then perhaps others need to reevaluate the option before committing.

Thanks for this information and I - along with others, I suspect - am looking forward to your response about collocation in different buildings, but on the same tract.

 

[LibertyCall]

We are building out a distillery with a tasting room inside a mixed use building, apartments over commercial, and have had NO issues getting insurance. I also asked another distiller in SD that is in a mixed use building, and she hasn't had any issues either. 

[InsuranceMan]

          @dhdunbar, that is a great question and one that comes up quite often.  Interestingly, a residence on the same tract of land as the distillery is NOT an issue.  As it turns out, this setup has become quite common among several of the smaller distilleries.  they have their home, and then out on the back 40 they have a nice pole building that they have decided to set up shop in to make their product.  The COMMERCIAL insurance carriers do not seem to have an issue with this at all (as long as you are not located way out in the boonies.  There are then issues with Public Protection Classes (PPC's) that could arise, but that may be for another post).  Some separation is preferable, but it has never really been established as to what that distance is.  I will say that they do not want the distillery operation in an attached building such as a garage or something of that nature, but I have seen the distillery structure as close as 10 feet away from the home.

          The reason I said that "COMMERCIAL" insurance carriers do not seem to have an issue is due to the fact that some PERSONAL LINES CARRIERS may have a big issue with this setup.  Many homeowners policies do not contemplate any type of commercial exposure, aside from perhaps a small home office or the like.  Therefore, most homeowners policies do not like the idea of a business being set up on the same physical location as the home, especially if there is any kind of exposure to "customers" entering and exiting the property, and God forbid there may be a tasting room!!!!!!!!!!!!!!!!  That is not reason to despair, or not have your distillery located at your homes physical address, it is just yet another hurdle.  Many homeowners carriers, once made aware that there is a commercial policy in place, may be fine knowing that if there is an exposure due to the business they will not be the ones having to deal with it.  Again though, there is room for grey area here.  Quick example ...  Distillery "X" sets up his/her shop in a pole building on their home's physical property.  The distillery is down a branch of driveway separated from the home.  A tourist happens to come by and wants to see the distillery and purchase a bottle (assuming that is legal where this is), so they drive up the driveway to the distillery.  Finding no one at the distillery, they hop back in the car and head to the house to find the proprietor.  Upon getting out of their car to approach the house, they are knocked over by a goat and suffer an injury.  I know this sounds like a long shot, but I have seen this happen!  So I ask, which policy should be on the hook in this circumstance?  The commercial policy since the person was there to see the distillery after-all ... or the personal homeowners since this person was now at the residence and the goat is covered by the homeowners?

          The answer is, who knows!!!!!  It will be for the insurance companies to fight over and figure out.  In this scenario however, I fought that it should be the commercial policy since the proximate cause of the injury was in deed the goat, but the reasoning for the injured party to even be in that situation was due to the business exposure.  The long and the short of all of this is that if you set up shop on the same tract of land that your home is on, expect to have some insurance issues, at least of a personal lines nature.  I would contact your homeowners carrier ahead of time and see what there stance on this is.  Better to find out in advance than risk being cancelled down the road, or find out you are in violation of the contractual language of the policy.  Again though, I am here to help and can usually facilitate solutions and agreements between all parties.

 

          @bdsammy94, how in the heck are you doing, sir!?!?!?!?  We need to catch up, and soon.  In regards to what you are saying, I understand and have no doubt that you have been able to move forward into mixed use areas.  However, that is somewhat due to enjoying the fruits of already having coverage with that certain carrier and being somewhat "grandfathered in" ... thanks to me ?.  Back in the day when your insurance was written, the carrier did not have the same stance on "residences" like they do now.  As stated, they took a step back in June and started reassessing things.  Most anyone that was already with them can move forward under the old guidelines, for the most part.  It is the new folks coming in and wanting to go into mixed use buildings that are having the issue.  I have several distilleries in areas that have condos and apartments above them, but trying to place new clients wanting to do the same is becoming more difficult with each passing day.

          I hope this helps to explain some of the potential issues that can arise in choosing a location, but again, if you have any questions or want to pick my brain, the advice and experience are free for the taking.

 

Best,

 

Aaron Linden - CIC

307-752-5961

[Michaelangelo]

Unfortunately we are into “weird science” here. Much of this is left up to the interpretation of an individual sitting behind a desk, just once I would I would like to see some absolute and definitive guidelines on this topic either by the insurance carriers or the TTB or a collaboration of the two. We waste a lot of time debating these things and we all need the same answers

for example:

What is the minimum distance between a DSP and a residence?

What exactly defines separation?

Why isn’t getting your local municipality and local fire marshall to approve your plan part of the application process for the TTB?

Shouldn't there be a “basic” insurance policy that all DSP’s must have, and then options based on your particular situation?

Inquiring minds want to know these things.

[InsuranceMan]

     @Michaelangelo and others,

 

     I quite agree with what you have said.  It is up to the interpretation of someone behind a desk, whether we are talking about the Fed's, local authorities, or insurance companies.  In the case of the latter it is usually an underwriter, who is making decisions based on the companies actuarial team.  Have you ever met an actuary in person????  They are like morticians mixed with forensic CPA's, but with less personality ? .  With that being the case, it really is up to your insurance professional to do the job you need them to do.  I always tell people that I need to sell the policy twice; once to the underwriter, and then to the client.  In reality the insurance world is based on a string of events.  The client must tell me what they are doing and what they need; I have to make sure I have done all of my investigative research and put together the appropriate coverage package; I need to paint the prettiest but most honest picture of that to the underwriter; they have to accept what we are telling them and offer us a proposal based on that information.  Therein lies the problem:  Human decision making.

     Appetites of insurance risk are different for all carriers, and underwriters fluctuate wildly from carrier to carrier.  So the chances of there ever being a "standard" set of insurance provisos is slim to none.  I have had conversations with the TTB, folks from the national IFC-ICC office, and many others asking to introduce some standard of insurance across the distillery world, but to no avail.  Here is why, no one can actually make you purchase insurance.  Yes, the TTB can require you to have a bond, and your lending institution can tell you that your equipment needs to be insured if there is a loan on it, and your landlord can even require you to provide a liability policy in order to become a tenant.  However, in the grand scheme of things, there is no "requirement" that a distillery carry any type of insurance what-so-ever.  An example is a friend of mine that makes a very "top shelf" whiskey at his home residence in a very nice area of the country.  He owns his buildings, still, everything - outright with no one owed anything.  He produces under the yearly withdrawal limit for the Fed's, so he does not need a bond.  HE CARRIERS NO INSURANCE!  No general liability, no property, he does not even carry liquor liability (this part makes me absolutely crazy) !  Do you know why?  Because he does not have to and he sees no value in it.  He has said that if his place were to go to the ground, he would find something else to occupy his time.  I don't know many of us like that, but the point is that there are no standards or requirements as to distillery insurance because you do not have to have it.  You should have coverage, but you are not required to.  Each distillery is as unique as the products they are making and therefore, no one distillery has the same needs as another, and no one can make you insure your operation.

     As to minimum distances and what defines separation, again, there is no hard-fast-rule.  The TTB says the following from 27 CFR Part 19 §19.52:

§19.52   Restrictions on location of plants.

A person who intends to establish a distilled spirits plant may not locate it in any of the following places:

(a) In any residence, shed, yard, or enclosure connected to a residence;

(b) On any vessel or boat;

(c) Where beer or wine is produced;

(d) Where liquors are sold at retail; or

(e) Where any other business is conducted except as provided in §19.54.

     So what does this mean ...  who knows!  Just more grey area really.  I will tell you who can define "distance" and "separation" with definitive authority though, since the Fed's cannot or are not willing to ... Your local fire Marshall and your insurance company.  Again, this is going to swing wildly depending on the "human decision maker" that happens to be your local Marshall or insurance carrier, but they can and will tell you what they are accepting of and what you can and cannot do.  Trust me, if no one cares at a federal level, someone may care at a local level, and if they don't care, I guarantee you that the insurance company will care.

     I have had carriers say that there must be a minimum distance of no less than 50' between structures, but others have said it didn't matter as long as there was separation (in that case about 10' ).  In a nutshell, there is no requirement to even carry insurance, the distances are not clearly defined, and it all depends on where you are and who you are dealing with, but at the end of the day, it is up to the locals and your insurance carrier.  They will be the ones that define what is or is not acceptable.

 

Best,

 

Aaron 

307-752-5961

[dhdunbar]

What exactly defines separation?  I think that with TTB you are looking only at curtilage, i.e.  - whether the two structures are so intimately related, the words of the Supreme Court, that the DSP premises is under the  umbrella of the privacy that extends to the residence. The Supreme Court held that four factors should be considered in extent of curtilag questions, only one of which was proximity.  I think it possible that in some cases the curtilage of a residence would not extend to an adjacent business.  For example, your public grocery store next to your house.    So, while we reduce the analysis to those four factors, it is the interaction of the factors from which curtilage emerges.  I know that reduction vs. emergence is a wonky take on the issue and that practical people will say, I want a hard rule.  But where curtilage emerges from the confluence of factors, a hard rule is not possible.  I think TTB could say, for purposes of ensuring the protection of the revenue, which lies behind the access requirement, that 37.184 feet is the minimum.  I think too many people then would see 37.184 feet and think anything outside of that, say 37.185 feet  is acceptable.  But it may not be.  There are three other factors to consider.  So, to go to your first question  -  

What is the minimum distance between a DSP and a residence?  TTB will not commit to this.  The nearest I have had is 38 feet. They turned down 25.   We disclose the full circumstances in both cases.  I am not convinced that the results are necessarily replicable, which is the basis, I think, if your complaint.  I mentioned four factors that the court says must be considered.  The distance is quantifiable.,  The other three are not. For example, one is whether there is an enclosure around the home.  If they DSP is within the enclosure, then it may be within the curtilage of the home.  If the entire lot is fenced, and the two buildings are 1000 feet apart, how does the enclosure rule play out?  And what constitutes an enclosure? If they are 30 feet apart, but have 20 foot fence between them, as opposed to a foot high, perhaps decorative fence, how does the enclosure rule play out. And what if the enclosure is a dense, eight foot hedge.  It is like scoring ice skaters in the Olympics, different judges have different perceptions.  

Why isn’t getting your local municipality and local fire marshall to approve your plan part of the application process for the TTB?  The short answer to this question - congress leaves that issue to the states to decide.  Nothing in either the FAA Act or the IRC gives TTB authority to ask the question, "Does this premises comply with state and local law?"  One of the conditions for issuing an FAA basic permit is that the operation must not be in violation of state law, but the courts have held that congress intended to required only that the state allow the activity itself, not approve of the particular operation.  That is, if Texas says no one can have a distillery in a dry county, then TTB cannot approve an application to establish a DSP in that county.  If Texas says some people can have a distillery in a county, but only under conditions it imposes, then TTB must approve a distillery in that country whether or not the distillery satisfies the conditions.  Think states rights on that one.    

Shouldn't there be a “basic” insurance policy that all DSP’s must have, and then options based on your particular situation? About this, I know nothing.  Are you suggesting that DSP insurance, like auto insurance, should be mandated?  "Should" is a really hard word.  My "should" is perhaps your "must" and someone else's "shouldn't."  I suspect the notion is fraught with unintended consequences.  

Note -   Today, on the application form, the instructions for describing the premises state you may not have a DSP on land that also has a residence.  It does so in two, not just one, of the instructions.  This goes back to TTB's position on the matter in 2009 and is clearly counter to experience.  TTB has told me that the old case by case rule still applies.  The instruction should be fixed. 

To all of this I append, I am not an attorney and none should be construed as legal advice.