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Route One Distilling,
LLC 3501 37th Street
Mount Rainier, MD 20712
Phone: 724-290-8834
E-Mail: [email protected]:
12/2/16
ROUTE
ONE DISTILLING
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Route One Distilling, LLC Business Plan
A Thesis Submitted in Partial Fulfillment of the Requirements
For the Degree of Master of Professional Studies in Real Estate By
Joseph Casper Schaefer
Master in Real Estate School of Continuing Studies
Georgetown University
Date: 12/2/16 Word Count: 13,516____ Turnitin Comparison Score: 6%________
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Table of Contents
I. Route One Distilling, LLC Investment Thesis ........................................................................ 7 II. Status Overview ...................................................................................................................................... 9
a. Real Estate Status...................................................................................................................................... 9 b. Operating Business Status .................................................................................................................. 11
III. Investment Strategy........................................................................................................................... 13 a. Real Estate Acquisition ...............................................................................................................................13 b. Operating Business Offerings and Marketing .................................................................................15
i. Products ..............................................................................................................................................................15 ii. Onsite Sales .......................................................................................................................................................16
iii. Wholesale Business ......................................................................................................................................17 iv. Marketing Plan ................................................................................................................................................18
IV. Executive Summary ...................................................................................................................................20 a. Executive Summary ......................................................................................................................................20
V. Market Study ..................................................................................................................................................21 a. Location ..............................................................................................................................................................21 b. Neighborhood ..................................................................................................................................................23
i. Mt. Rainier, MD................................................................................................................................................23 ii. Washington, DC Metropolitan Statistical Area ...............................................................................25
c. Property Overview ........................................................................................................................................26 i. Property Zoning ..............................................................................................................................................26
ii. Existing Structure ..........................................................................................................................................27 iii. New Structure ..................................................................................................................................................28 d. Distillery Industry Overview ...................................................................................................................30
i. Distilling History ............................................................................................................................................30 ii. Current Craft Distilled Spirits Market .................................................................................................31
iii. Washington, DC Craft Distilled Spirits Market ...............................................................................34 VI. Start Up Costs .................................................................................................................................................36
a. Distillery Licenses & Permits ...................................................................................................................36 b. Real Estate Construction ............................................................................................................................39
i. Site Preparation ..............................................................................................................................................39 ii. New Construction & Leasing Cost .........................................................................................................41
1. New Construction Cost ...........................................................................................................................41 2. Leasing Cost ..................................................................................................................................................42
c. Operating Business Equipment & Set Up ..........................................................................................43 i. Equipment Set Up & Sprinkler System ...............................................................................................43
ii. Website, Logo & Label Design .................................................................................................................51 VII. Local Competitors .......................................................................................................................................52
a. Overview of Local Competitors and Offerings ................................................................................52 b. Virginia Competitors ....................................................................................................................................53 c. Maryland Competitors ................................................................................................................................55 d. Washington, DC Competitors ..................................................................................................................57
VIII. Risk Analysis- SWOT .................................................................................................................................65 a. Strengths ............................................................................................................................................................65 b. Weaknesses ......................................................................................................................................................66 c. Opportunities ...................................................................................................................................................66 d. Threats ................................................................................................................................................................67
IX. Financing ..........................................................................................................................................................68
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X. Financial Model Analysis .......................................................................................................... 69 a. Sales Pricing ............................................................................................................................................. 69 b. Financial Returns ................................................................................................................................... 70
XI. Conclusion ............................................................................................................................................... 72 XII. References ............................................................................................................................................... 74
XIII. Appendices .....................................................................................................................................................77 a. Appendix A- Route One Distilling Renderings ................................................................................77 b. Appendix B- Route One Distilling Timeline .....................................................................................80 c. Appendix C- Project Cost Assumptions ........................................................................................ 81 d. Appendix D- Financial Summary ..................................................................................................... 83
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List of Figures
Figure 1.1- Real Estate Transaction Timeline .......................................................................................... 11
Figure 1.2- Route One Distilling Timeline .................................................................................................. 13
Figure 5.1- Route One Distilling in relation to Brookland-CUA Metro Station ........................... 22
Figure 5.2- Route One Distilling in relation to downtown Washington, DC ................................ 22
Figure 5.3- Mount Rainier Development Projects .................................................................................. 24
Figure 5.4- Mount Rainier, Maryland ........................................................................................................... 24
Figure 5.5- Washington, DC Metropolitan Statistical Area Population in 2015 ......................... 25
Figure 5.6- Washington, DC Metropolitan Statistical Area Per Capita Income & Median
Household Income vs. United States Average in 2015 ........................................................................... 26
Figure 5.7- U.S. Licensed Distilleries – 1880-2011 ................................................................................ 31
Figure 5.8- New Production Craft Distilleries by Year ......................................................................... 32
Figure 6.1- Distillation Flowchart ................................................................................................................. 44
Figure 6.2- Mash Tun at Lost Ark Distilling ............................................................................................... 45
Figure 6.3- Boiler at Lost Ark Distilling ...................................................................................................... 46
Figure 6.4- Fermenter at Lost Ark Distilling ............................................................................................. 47
Figure 6.5- Still at Lost Ark Distilling ........................................................................................................... 48
Figure 6.6- Chill Plant @ Lost Ark Distilling ............................................................................................. 48
Figure 6.7- Storage Tank at Lost Ark Distilling ........................................................................................ 49
Figure 6.8- Bottling Machine at Lost Ark Distilling ................................................................................ 50
Figure 7.1- Virginia Competitor in relation to Route One Distilling location .............................. 54
Figure 7.2- Maryland Competitors in relation to Route One Distilling location ........................ 56
Figure 7.3- Washington, DC Competitors in relation to Route One Distilling location ........... 58
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List of Tables
Table 10.1- Route One Distilling Sales Pricing ......................................................................................... 70
Table 10.2- Route One Ventures, LLC Financial Returns ..................................................................... 71
Table 10.3- Route One Ventures, LLC Income Statement………………………………………………...71
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I. Route One Distilling, LLC Investment Thesis
Route One Distilling, LLC seeks to open a distillery and tasting room at 3501
37th Street, Mt. Rainier, MD 20712. The property is located just outside of
Washington, DC in the Mount Rainier neighborhood of Prince George’s County
Maryland. The business will produce both Gin and Rye Whiskey for retail sale,
wholesale distribution, onsite tasting, and cocktails.
Route One Distilling has made the decision to enter the market at this time to
capitalize on the increased interest of Millennial consumers to craft brands across
many industries including distilled spirits. “The Distilled Spirits Council of the
United States (DISCUS) defines small distillers [craft] as those producing under
100,000 nine-liter cases a year, and more than 95 percent of today’s players make
fewer than 50,000 cases annually, according to the ADI [American Distilling
Institute]” (Murphy, 2016). Consumers, in 2016, have shown an increased
preference towards the experience of their consumption from apparel choices,
urban living, farm to table dining and craft wine, beer, and spirits. The market
intelligence agency Mintel highlights the rationale for the increased demand of craft
spirits below.
“Craft spirit launches are growing at a rapid pace and will continue to
rise in more mature markets — particularly the US – as consumers
continually seek out ‘special offerings’ Despite being a relatively small sector
of the market, craft spirits are growing in response to the huge consumer led
demand for more authentic, more distinctive, more local, less processed and
more interesting spirit brands” (Mintel, 2016).
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The Route One Distilling team believes there is a surplus of demand for a locally
produced and high quality Gin and Rye Whiskey product. Also, Route One Distilling
will be the first distilled spirits manufacturer to open in Prince George’s County.
The executive team will consist of Joe Schaefer and Paul Smith. Joe Schaefer
is a real estate professional based out of Washington, DC with 8 years of commercial
real estate experience. Paul Smith has extensive experience in the distilled spirits
industry having worked for large industry figures for the last 10 years.
The property was acquired from a family that operated an automotive
business since 2002. The property is approximately 53,000-ft2 and has an existing
9,400-ft2 structure and approximately 2,000-ft2 of asphalt that will both need to be
removed and prepared for new construction. Route One Distilling will construct a
new 5,000-ft2 facility, which will include space for the distillation process and a
tasting area for customers. There will be 20,000-ft2 space built for customer
parking and food trucks during weekend events. Also, a 15,000-ft2 section of the
property will be landscaped for outdoor seating and possible entertainment in the
future.
Route One Distilling is owned by a holding company that is known as Route
One Ventures, LLC. (“Route One Ventures”). Route One Ventures will create a
second entity to own the real estate, which will be 3501 37th Street, LLC (“3501 37th
Street”). The bifurcated ownership interest results in shared risk among principals
and facilitates a seamless termination of ownership interest if deemed necessary.
Leveraging the core competencies of the team, Route One Distilling can
confidently achieve the aforementioned goals. Please see the Executive Summary in
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Section IV for a more detailed background of the ownership partners. Route One
Distilling will seek to differentiate themselves from the local competitors through
the use of high quality locally sourced ingredients, grass roots marketing of product
through events at the property and in the community, and leveraging contacts in the
food and beverage industry in Washington, DC. These strategies will reduce the
learning curve in the Washington, DC market and allow Route One Distilling to
quickly capture market share.
II. Status Overview
a. Real Estate Status
The property is located at 3501 37th Street, Mt. Rainier, MD 20712 in Prince
George’s County. The real estate entity has placed the property under contract as of
September 1st, 2016, with a 90-day due diligence period followed by period of 30
days to close. There is an option to extend the due diligence period an additional 90
days, which 3501 37th Street, LLC will use based upon environmental testing and
zoning approvals. The contracted purchase price is $1,025,000 with a refundable
earnest money deposit of $51,250 (5%) that was paid on September 1st, 2016 with
the execution of the purchase and sale agreement. The deposit will become non-
refundable on Thursday December 1st, 2016, which is the conclusion of the due
diligence period or Wednesday March 1st, 2017 if the option to extend the due
diligence period is executed.
Joe Schaefer will be listed as the managing partner for the real estate entity
and have responsibility for all real estate related operations. He will be responsible
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for the property mortgage, taxes, capital projects, and any future real estate
expansions. There is not anticipated to be any profit from the real estate operations
but if there is then it will be placed in to a reserve account for future capital projects
or expansions.
The review of historical documents show the property was used to operate a
dry cleaning and automotive businesses. The historical uses of the property will
necessitate environmental testing during the study period. The earliest records
show the property being used as a dry cleaner in 1939 up through 2002. In 2002,
the property was converted to an automotive business that would take on several
names and be operated up through early 2016 (3501 Street, 2016).
3501 37th Street, LLC intends to construct a new facility towards the
northwest corner of the property with parking and green space to the southeast of
the property, which will mitigate noise issues to the adjacent residential area. The
Prince George’s County Planning Department communicated that the property is in
the Neighborhood Arts and Production Character Area and a brewery, distillery and
winery is a permitted use with a Detailed Site Plan. This permitted use is also in
agreement with the design regulations of the Gateway Arts Sector Plan (personal
communication, July 22nd, 2016). Route One Distilling will begin this process on
October 1st, 2016 and it will take 90 to 120 days to complete which is a rationale for
the 90-day due diligence period and 90-day extension option previously mentioned.
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A summary of critical transaction dates:
Figure 1.1 – Real Estate Transaction Timeline
b. Operating Business Status
Route One Distilling is based on a partnership that combines local real estate
expertise with knowledge of the distillery operations. Joe Schaefer has worked in
commercial real estate and operations since 2008 and brings his experience to the
group. Paul Smith will bring his passion and 10 years of experience in distillation
operations to the team. The operating business and real estate entity will be formed
separately with Route One Distilling paying rent to 3501 37th Street, LLC. This
methodology is being used to mitigate risk, which will allow for a new operator to
be implemented should Route One Distilling prove unsuccessful.
Paul Smith will draw a salary as the master distiller and one assistant
distiller will be hired with the plan of hiring a second when cash flow allows. The
cash flow threshold for adding a second assistant will be met when operating
Thursday September 1st, 2016
Contract Execution/Study
Period Commences
Thursday December 1st, 2016- Study
Period Ends/Option to Extend
Additional 90 days
Monday January 2nd, 2017- Closing
Date
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revenue is equal to fifty percent of the assistant’s salary. To track the business
accounts, Route One Distilling will also hire a part time bookkeeper.
The ownership of Route One Distilling, LLC will be split 50%/50% between
Joe Schaefer and Paul Smith with equal equity investments. The full-time
involvement of Paul Smith vs. the part time involvement of Joe Schaefer will be
balanced by annual salary. Paul will be listed as the managing partner for this entity
and hold the responsibility of product strategy and brand awareness. Joe Schaefer
will assist in the operations of the business for events, weekends and when available
but will not be a paid member of the staff.
Route One Distilling will begin to file for all appropriate licenses and permits
to operate the business in Prince George’s County on or before November 1st, 2016.
These applications will have a timeline coinciding with the due diligence period of
the real estate and the required planning approvals. These licenses and permits will
include the Distilled Spirits Plant (DSP) from the Federal Government,
Manufacturers and Wholesalers License from Maryland, Sales and Use Tax License
from Maryland, a Trader’s License and a restaurant license from the Prince George’s
County Clerk of the Circuit Court, a liquor license from Prince George’s County and a
business license from the city of Mount Rainier, Maryland.
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Figure 1.2- Route One Distilling Timeline
III. Investment Strategy
a. Real Estate Acquisition
The acquisition of the property at 3501 37th Street will be an important part
of the overall investment strategy behind this opportunity. Although it will require
Route One Distilling Timeline
• Begin application process for all appropriate licenses.• Conservative estimate of 180 days
November 1st, 2016
• Begin installing equipment inside Route One Distilling facility. • Conservative estimate of 60 days
April 1st, 2017
• Finalize necessary operating/business permits.
May 2017
• Start operating distilling equipment and preparing product for sale
• Estimate of 30-45 days
June 1st, 2017
• Open Route One Distilling to the public
July 2017
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a larger initial investment, the control of the real estate will prove vital to the long-
term viability of the operating business and mitigation of risk to the investment.
The ownership of the real estate will allow Route One Distilling to control the cost of
the real estate as the values in the surrounding neighborhood begin to appreciate.
The capital investment will be evenly split between Joe Schaefer and Paul Smith for
30% equity and securing a loan for the remaining 70% of the acquisition cost. The
ownership split is expected to remain for the duration of the deal. Route One
Distilling will then pay a monthly rent to 3501 37th Street, LLC for a lease of the
property and building. This strategy will allow the operating business to depreciate
the customized equipment needed for the distillation process and the real estate
entity to depreciate the building. The depreciation of these assets by each venture
will reduce the taxable income for the Route One Ventures, LLC. These deductions
will allow the ventures to reinvest in equipment and future expansion of the
building.
As previously stated, the property went under contract for purchase on
September 1st, 2016 at a price of $1,025,000. After the transaction has been
finalized, 3501 37th Street will begin the construction of a new 5,000-ft2 operating
facility, outdoor parking and ample green space for customers and entertainment
options. There will be approximately 35,000-ft2 of outdoor space available for
parking and green area after the construction of the building. The construction
contract is currently out for proposals but the market shows pricing on the
structure will be from $44.50 to $95.00 per ft2 or $222,500 to $475,000 for
warehouse construction (RSMeans building construction data, 2014). Ideally, 3501
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37th Street will seek to be on the lower end given that the shell of the building is not
critical to the business and it will be more important to spend funds on the
equipment for the operating business.
b. Operating Business Offerings and Marketing
i. Products
Route One Distilling is strategically planning to offer three products
including a gin, white rye whiskey and an aged rye whiskey. The strategy behind
offering multiple products has a couple of components, which includes catering to a
variety of tastes but also the time it takes to make these products ready for the
market. The duration for production of a gin and white rye whiskey product could
be as little as 30 days whereas an aged rye whiskey would be a minimum of 2 years.
The selection of a gin and two whiskey products is attributed to the region’s
distilling history, experience of Paul Smith, and the full range of customers this
variety will capture.
Route One Gin
The gin product offering will be named after the company because it will be
the first product that comes to the market. During the days of Prohibition, there
were a number of stories where bootleggers were using Route One to transport
alcohol from farms in Maryland and Baltimore city into Washington, DC. The
bootleggers were always in a rush with their product so it seems fitting that the first
product to market should be named for this legacy (Leonard, 2015).
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General George’s White Rye Whiskey
The white rye whiskey will be named after our country’s first president,
George Washington. In 1797, George Washington began distilling spirits on his
property at Mount Vernon and quickly had the largest distillery in the country
capable of producing over 600 gallons of spirits at a time. During this time, the
primary product was a rye whiskey that consisted of 60% rye, 35% corn, and 5%
malted barley and was not typically aged. The connection to our country’s first
president provides a good branding opportunity (Ten facts about the distillery).
Rose Brown’s Straight Rye Whiskey
The straight rye whiskey product offered by Route One Distilling will be
named after Rose Brown who was arrested in 1932 for transporting rye whiskey in
Laurel, Maryland, by way of Route One, on her way to Washington, DC. The story
goes that she had her children in the car and the arresting prohibition agent stopped
a public bus and asked the driver to bring the children in to Washington, DC and
send them to family members in a taxi (Leonard, 2015). This product will be aged in
new charred-oak barrels for a minimum of 2 years.
ii. Onsite Sales
Route One Distilling, LLC will plan to sell product directly to customers at
the distillery during the tasting and tour weekend hours. The 750ml bottle will
retail onsite for $33, which will likely be a discount from the product offered
through retail vendors. Tastings, cocktails, and tours will be offered on Saturday and
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Sunday from 12pm-5pm. Route One Distilling will also incorporate merchandise
with the company logo such as t-shirts into the onsite sales, which will help
advertise the business. Free tastings will be available with cocktails priced at $7
available for purchase.
iii. Wholesale Business
The wholesale distribution of Route One Distilling’s products will account
for the majority of annual revenue. Route One Distilling will self-distribute their
product throughout Washington, DC and then utilize wholesale distributors in
Maryland and Virginia. The products will be priced at approximately $17 per bottle
to the wholesale distributors outside of Washington, DC and $24 per bottle to the
self-distributed locations inside the District of Columbia.
Washington, DC is a relatively small geographic area so it makes economic
sense to self-distribute the product to bars, restaurants, and retailers. This will give
Route One Distilling the ability to capture the additional $7 per bottle opportunity
that is lost when using wholesalers in Maryland and Virginia. These deliveries will
typically be performed by the distillery assistant but will be captured by others
when necessary.
In Maryland and Virginia, Route One Distilling will utilize wholesalers for
distribution. Virginia is set up as a control state for distilled spirits so all spirits
must be distributed through the state alcoholic beverage control agency at a price
point of $17 per bottle. The state of Maryland varies on a county-by-county basis for
their regulation of distilled spirits distribution so Route One Distilling will utilize a
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wholesaler to increase efficiency. The price point in Maryland will also be set at $17
per bottle.
iv. Marketing Plan
The Route One Distilling marketing plan will be focused on utilizing grass
roots methods with no formal advertising such as print or media proposed. The
Route One Distilling team will spread brand awareness through several methods.
The use of events at the property, leveraging of network in the local food and
beverage industry, and providing tasting service at local industry and nonprofit
events will be used to spread the brand’s reputation while limiting the cost.
Route One Distilling will begin holding events at the property once there is
product ready for sale. The property at 3501 37th Street will have a newly
constructed 5,000-ft2 distillation facility with approximately 15,000 ft2 of
landscaped green area and ample parking. During the warmer months, Route One
Distilling will host weekend events at the property to include food trucks and
musical entertainers. The inclusion of food trucks will be at no expense to the
company but provide guests with a food option to keep them from leaving the site
similarly to how many wineries offer food options to retain guests. The Route One
Distilling team will source local emerging musical talent to provide entertainment
while also limiting the expense. The hours for these events will be limited to the
12pm to 5pm weekend operations to prevent conflict with the neighborhood
residents. Also, it is common practice for craft distilleries to invite customers to the
facility for bottling parties. These events allow a group of customers to come to the
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property and spend a few hours helping bottle the products. The customer is
provided with an entertaining afternoon with friends and discounts on product and
merchandise. Route One Distilling will gain advertising for the brand and
discounted labor.
Route One Distilling will leverage a strong relationship in the local food and
beverage industry to place the product in front of consumers. Joe Schaefer has an
existing relationship with a group that has an ownership interest in over a dozen
local bars. The ownership group has agreed to purchase and promote the Route
One Distilling brand throughout their group of bars that are all located within
Washington, DC. They have also agreed to allow Route One Distilling to host a
promotional event once per month in a rotation of their establishments. This
relationship will give an instant boost to cash flows and help spread brand
awareness from the start of operations.
Finally, Route One Distilling will look to further the brand by volunteering
to provide tastings at local events. There are a multitude of opportunities around
the Washington, DC area to get in front of customers. The area has many food and
alcohol based events with revenue opportunities. These revenues will likely be
marginal but will expand the brand without additional expenditures. There are also
many opportunities to provide tastings at industry and charitable events. These two
types of events would likely not be a source of revenue but would provide the
opportunity to get the product directly in front of consumers with lower cost to
consumer ratio than traditional advertising.
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IV. Executive Summary
a. Executive Summary
Joe Schaefer and Paul Smith are the partnership team behind Route One
Ventures, LLC, 3501 37th Street, LLC and Route One Distilling, LLC. The two met
during their undergraduate education at Allegheny College in Meadville,
Pennsylvania, in 2002, where they were both members of the varsity football team.
Joe and Paul have remained in contact since they graduated and have had an
ongoing dialogue about coming together for this project.
Joe Schaefer relocated to the Washington, DC area in 2008 to pursue a career
in commercial real estate. Since that time, he has worked for several commercial
real estate companies performing a variety of functions from property management
to acquisitions. He has a Bachelor of Arts in Managerial Economics from Allegheny
College and will complete a Master of Real Estate Development program at
Georgetown University in December of 2016. Mr. Schaefer has a firm understanding
of the local real estate market and the demographic shift that has occurred in the
Washington, DC Metropolitan Statistical Area (“DC MSA”) since arriving in 2008.
Paul Smith is coming to the Washington, DC area after distillery roles in
Tennessee, Oregon, and Washington state. Paul also graduated from Allegheny
College with a Bachelor of Arts in Managerial Economics and then went to pursue
his passion for craft distilling. He honed his skills over the last 10 years working for
several distilled spirits companies and now wants to pursue his passion for his own
benefit. Paul has a thorough understanding of the distillation process and would
like to bring his recipes to a DC market looking for a high quality local product.
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V. Market Study
a. Location
The property is located at 3501 37th Street, Mt. Rainier, MD 20712 in Prince
George’s County, Maryland. The property is just across the border from
Washington, DC in to Maryland. It is situated 5.1 miles and a 25-minute drive from
Metro Center in downtown Washington. The property is positioned at the
intersection of several major thoroughfares of Eastern Avenue, Rhode Island
Avenue NE, and Bladensburg Road NE. The location makes the business convenient
and accessible to visitors traveling from across the region or commuters leaving the
city after work.
Unfortunately, the closest Metro station is Brookland-CUA at approximately 2
miles away. There aren’t any direct bus routes from the metro station but a ride
from Brookland-CUA metro stations with Uber is approximately 7 dollars so it is
reasonable to assume this will be a viable option for traffic generation. There are
several bus stops within 0.25 miles of the property so it is also reasonable to assume
that traffic may be generated from customers using bus transportation to travel
from other areas of the city.
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Figure 5.1- Route One Distilling in relation to Brookland-CUA Metro Station
Figure 5.2 – Route One Distilling in relation to downtown Washington, DC
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b. Neighborhood
i. Mt. Rainier, MD
The proposed site for Route One Distilling is in the City of Mount
Rainier, Maryland which is a small area located on the northeastern border of
Washington, DC. The city has just over 8,000 residents and acts as a gateway
community to Prince George’s County along the Historic Route 1 corridor
(City of Mount Rainier, MD, 2016).
The property is located within the Gateway Arts District that spans
the communities of Mt. Rainier, Hyattsville, Brentwood, and North
Brentwood (City of Mount Rainier, MD, 2016). A distillery business is an
artisanal use that falls in with the purposes that the Gateway Arts District is
looking to promote. Also, zoning for the site allows for a brewery, distillery,
and winery with the completion of a Detailed Site Plan as communicated by a
member of the Prince George’s County Planning Department (personal
communication, July 22nd, 2016).
“The Gateway Arts District is an arts-based economic development
initiative of the Gateway Community Development Corporation that targets
the revitalization of a two-mile area of U.S. Route One/Rhode Island Avenue
in Prince George’s County, Maryland, just north of the Washington, D.C.
border.
In addition to existing arts and cultural resources, numerous projects
are planned or in development in the Gateway Arts District including
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live/work housing for artists and new homes for area arts organizations!”
(City of Mount Rainier, MD, 2016). (See Figure 5.3 below)
Figure 5.3- Mount Rainier Development Projects (City of Mount Rainier, MD, 2016)
Figure 5.4- Mount Rainier, Maryland
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ii. Washington, DC Metropolitan Statistical Area
The DC MSA is comprised of the District of Columbia and portions of
Virginia, Maryland, and West Virginia (see Figure 5.5). The area has seen a
significant increase in population from 2010-2015, which makes the area a strong
choice for opening Route One Distilling. Also, the area has a per capita income and
median household incomes well above national averages. A growing population
with higher than average incomes are the demographic that will have the taste
preferences and disposable income to purchase a craft alcohol product.
The population in the DC MSA is estimated to have increased by 461,278
(or slightly over an 8% increase) from April 2010 to July 2015. The increase brings
the total population in the area to 6,098,283 as of July 2015 (United States Census
Bureau,).
Figure 5.5- Washington, DC Metropolitan Statistical Area Population in 2015
(Census Reporter,)
Along with population growth, the DC MSA is home to a per capita and
median household income much higher than the national average. The DC MSA per
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capita was $44,677 versus the national average of $29,979 or about 1.5 times in
2015. The median household income was $99,294 versus $55,775 nationally or
nearly 1.8 times in 2015 (Census Reporter,).
Figure 5.6- Washington, DC Metropolitan Statistical Area Per Capita Income &
Median Household Income vs. United States Average in 2015 (Census Reporter,)
c. Property Overview
i. Property Zoning
The site for Route One Distilling, LLC at 3501 37th Street, Mt. Rainier, MD
20712 is in a U-L-I zoning area. U-L-I zoning stands for Urban Light Industrial and is
defined as an area “Designed to attract and retain a variety of small-scale light
industrial uses in older, mostly developed industrial areas located close to
established residential communities; establishes a flexible regulatory process with
appropriate standards to promote reinvestment in, and redevelopment of, older
urban industrial areas as employment centers, in a manner compatible with
adjacent residential areas.” (Prince George's County Planning Department, 2016).
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Along with the U-L-I zoning, the property is located within a Neighborhood Arts and
Production Character Area of the Gateway Arts Sector Plan, which allows for the use
of a brewery, distillery, and winery with the completion of a Detailed Site Plan as
communicated by a member of the Prince George’s County Planning Department
(personal communication, July 22nd, 2016).
Although the property is restricted by zoning and additional overlays, the
proposed use is included in the vision the planning department and community
have for the area. Route One Distilling plans to work with the planning department
during the Detailed Site Plan process to create a space that is compatible with the
community vision and functional for the planned distillery operations.
ii. Existing Structure
There is an existing 9,400-ft2 building on the property with approximately
2,000-ft2 of asphalt near the southeast corner of the property. The current building
was built around 1920 and has numerous items that would need to be repaired and
upgraded. The space is compartmentalized and the ceilings heights are not
conducive for the proposed use.
The historical records show the property was used as a dry cleaner from
1939 up through 2002 and it was then used for various automotive businesses from
2002 through early 2016 (3501 Street, 2016). Due to these prior uses, the property
will need to undergo a phase one and phase two environmental study before
finalizing the transaction and moving on to the construction of a new facility. 3501
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37th Street, LLC contracted the environmental studies to begin shortly after the
property went under contract on September 1st, 2016.
iii. New Structure
3501 37th Street, LLC will construct a new 5,000-ft2 distillation facility at
the proposed site to replace the outdated current structure along with parking and
green space for customers. The structure will be constructed as a warehouse to
provide an industrial appearance for customers with ample space for the
manufacturing process. For detailed renderings of the proposed construction,
please see Appendix A at the end of this document. During an interview, Michael
Lowe of New Columbia Distillers recommended the ceiling heights should be
between 20 and 25 feet high to provide extra clearance for the distillation
equipment (personal communication, May 25th, 2016).
The new facility will include an office space, restrooms, storage, retail and
tasting, and manufacturing areas. On one end of the building will be office space
used for the document storage and administrative work necessary to support
operations. There will be two restrooms in the building for staff and customers.
This section of the building will include a retail section for the sale of products,
tastings, and distillery merchandise. Also, on this end of the building will be an area
for the storage of finished product that is waiting for retail sale or distribution.
Finally, on the opposite side of the building will be the equipment and supplies
necessary to produce the distilled spirits.
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Following the construction of the new building, the team will create a
20,000-ft2 parking area and 15,000-ft2 of green space. The parking area will consist
of a gravel lot that will be used for customer parking, deliveries, and food trucks
during weekend events. Gravel will be utilized rather than asphalt or concrete to
aid in storm water management. The green space will be used for entertainment
during weekend events. Route One Distilling will place picnic tables along with
table and chair sets on the green space to provide customers a place to sit and enjoy
drinks from the distillery or food from the third-party vendors. The green space will
also be used by musical acts that will be invited to perform on weekends. Route One
Distilling will also bring lawn games to the green space to provide customers with a
low-cost entertainment option that will encourage them to spend more time and
money at the business. See Appendix A for architectural renderings of the proposed
project.
Finally, Route One Distilling and 3501 37th Street will work with the
planning department and community to determine the location of the new
construction on the property. Currently, the building is in the southeast corner of
the property away from the residential neighbors. The location of the building will
be determined during the Detailed Site Plan process. The new structure could be
built at the current site with green space towards the neighbors or it could be next
to the neighbors with the green space to the far end. There will be positives and
negatives to both layouts and the installation of a sound-reducing barrier may be
necessary.
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d. Distillery Industry Overview
i. Distilling History
The history of distilling spirits in the United States is as old as the country
itself. There are several events tied to the distilling industry that were defining
moments in the direction the country would go over the next 240 years. The
Whiskey Rebellion, events of the triangle passage, and the 18th and 21st
Amendments to the Constitution are a few of the events that helped created the
country we know today (Kinstlick, a). Also, it is widely known that our founding
father, George Washington, was involved in the production of spirits at his farm,
Mount Vernon in the late 18th century. These events and prominent figure’s
involvement in the manufacturer of distilled spirits have set the stage for a country
with a passion for the art of creating craft spirits.
The number of licensed distilleries in the United States rose from the
revolutionary era to between 5,000 and 10,000 by the end of the 19th century.
These numbers took a drastic decline after the adoption of Prohibition with the 18th
Amendment in 1920. Following the repeal of Prohibition with the 21st Amendment
in 1933, the number of licensed distilleries would rise but never regain the heights
of the prior years (Kinstlick, a).
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Figure 5.7- US Licensed Distilleries, 1880-2011 (Kinstlick, a)
The number of legal and illegal distilleries in the United States had fallen to
an all-time low in the 1980’s. Michael Kinstlick believes that the drop off in
numbers was due to a couple of factors. Michael notes in his 2011 paper “The U.S.
Craft Distilling Market: 2011 and Beyond” that it was a combination of the age of
illegal “moonshiners” from Prohibition beginning to age out of the practice and the
migration of families in the southern states from rural to sub-urban and urban
areas. The rapid decline of the distilling industry in the lead up to Prohibition and
then the inability to regain its full market after the adoption of the 21st Amendment
led to the birth of the craft distillery industry in the 1980s (Kinstlick, a).
ii. Current Craft Distilled Spirits Market
The craft distilling movement was started in California in 1982 with the
founding of Germain-Robin and the Jaxon Keys Winery. St. George Spirits and
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Domaine Charbay who were also in California followed these early entrants in 1983.
There was likely a delay in the reemergence of the distilling industry due to heavy
government regulation. As noted by Figure 5.8 below, the growth of the number of
new distilleries was very slow in the beginning but would soon begin to grow very
quickly (Kinstlick, a).
Figure 5.8 –New Production Craft Distilleries by Year (Kinstlick, a)
The number of craft distilleries in the United States would soon grow from
the founding two, in 1982, to 234 by the end of 2011. In Michael Kinstlick’s 2011
market analysis, he conservatively predicted that the number of craft distilleries
would grow to over 1,000 within 10 years given the growth rates of the previous
few years. By the completion of Michael’s 2015 update, he predicts there will be
over 1,000 craft distilleries operating in the United States in 2016 (Kinstlick, b).
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The rapidly growing market for craft products is due to the changing taste
preferences of the American consumer and in particular the Millennial generation.
The Millennials have been driving the growth of this market because of their desire
for exclusivity, preference for local products, longing for nostalgia and appreciation
for the experience (Flores & Marston, September 27th, 2013). Domestic consumers
have gradually made a shift over the last few decades to more authentic and
handmade goods and away from the “one size fits all” products. Whether it is
clothing, beauty, or consumable products, today’s consumers are very conscious
about where their products are made, what the ingredients are, and how they are
produced. Overall customer preferences have also shifted towards a focus on the
experience of their consumer goods.
The explosion of the craft distilled spirits market that is currently
underway follows similar growth in both the wine and beer segments decades
earlier. The first to experience this growth was the wine industry in the 1960s. At
that time, 95% of the wine consumed in the United States was classified as “jug
wine” which is a very generic and mass-produced variety. In the 1960’s the number
of wine producers in the United States was several hundred and today it has grown
to over 7,000 (Kinstlick, b).
The growth of the craft wine industry was followed 20 years later by the
beer industry. The beer industry followed next with the legalization of home beer
making in 1978. The beer industry grew from a few major producers in the 1970s
to over 4,000 craft brewers today. The craft spirits industry has been the last to
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emerge largely due to the additional regulations associated with its production
(Kinstlick, b).
As of 2015, there is a craft distillery in all 50 states and Washington, DC
with the largest concentration in the California, Pacific Northwest, and New York.
Market Watch Magazine details the industry growth below.
“Analysts at brokerage firm BNP Paribas estimate small distillers’
[craft] total spirits market share in the United States at 1.7 percent by
volume and nearly 2 percent by value, with gross income nearing $450
million in 2014.
As with craft beer, the craft spirits category is ascending swiftly. The
ADI [American Distilling Institute] estimates current growth at around 30
percent. Its market share has doubled in the past two years, and analysts at
the ADI believe it could hit 8 percent by 2020, coming close to recent share
levels achieved by craft beer” (Murphy, 2016).
iii. Washington, DC Craft Distilled Spirits Market
The Washington, DC MSA consists of parts of Virginia, Maryland, West
Virginia and all of Washington, DC. The Alcohol and Tobacco Tax and Trade Bureau
(TTB) lists a number of Distilled Spirits Permits (DSP) distributed throughout this
area. There are 46 DSPs listed in Virginia, 28 in Maryland, and 8 in DC. To the
benefit of Route One Distilling, many of the permits distributed in Maryland and
Virginia are outside of the MSA or outside of what would be considered convenient
for consumers to visit on a regular frequency (Alcohol and Tobacco Tax and Trade
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Bureau, 2016). Below is an overview of the local distilleries that will be considered
direct competitors of Route One Distilling. A more detailed analysis of the
competitors will be presented later in this document.
The craft distilleries in Virginia that Route One Distilling considers as
competitors are limited to 4 out of the 46 listed by the TTB based on location. Of
these 4 competitors, it appears that 2 of the listings have closed or never opened
their doors for business. Catoctin Creek Distilling Company, LLC and George
Washington’s Mount Vernon own the two remaining permits in Virginia. George
Washington’s Mount Vernon does have an operational distillery with spirits
available for purchase but it is also a non-profit entity so Route One Distilling will
not consider it as a competitor. Catoctin Creek Distilling Company located in
Purcellville will be the only craft distillery in Virginia that is a direct competitor of
Route One Distilling and has been open since 2009 (Alcohol and Tobacco Tax and
Trade Bureau, 2016).
There are 28 DSPs currently listed in Maryland but based upon location
there will only be 2 listed as direct competitors. There are a handful of operations
located in Frederick County and Baltimore City but they would be over a one-hour
drive without traffic congestion so they are outside the area of direct competition.
The two local competitors are Twin Valley Distillers and Lost Ark Distilling
Company. Twin Valley is in Rockville, which is in Montgomery County and has been
in operation since 2014. Lost Ark Distilling Company is in Columbia, which is in
Howard County. Lost Ark is currently completing their interior build out and
equipment set up with an opening planned for November 2016. Route One
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Distilling will be the first and only distillery located in Prince George’s County,
Maryland (Alcohol and Tobacco Tax and Trade Bureau, 2016).
Finally, there are 8 DSPs that have been issued for Washington, DC and all
of them are considered direct competitors. Of the 8 permits issued, 6 of the
companies are currently operational with the final 2 nearing completion with
openings scheduled for the Fall of 2016. The currently operating distilleries are
New Columbia Distillers, Don Ciccio & Figli, One Eight Distilling, Jos. A. Magnus & Co,
Republic Restoratives, and District Distilling. The final two that will open in 2016
are Cotton & Reed and Farmers & Distillers.
There are eleven distilleries listed above within the Virginia, Maryland and
DC area that are either open or will be opening in 2016 that can be counted as direct
competitors to Route One Distilling. The team will strive to differentiate the
company from these competitors through a combination of location, product, and
customer experience.
VI. Start Up Costs
a. Distillery Licenses & Permits
There are several licenses and permits that are necessary for the opening of
Route One Distilling at 3501 37th Street, Mount Rainier, 20712. The manufacturing
of distilled spirits is regulated on both the federal and state level in Maryland. Route
One Distilling will also secure licensing from the District of Columbia for its plan to
self-distribute products inside of the DC boundaries. The local level of Prince
George’s County requires licenses for the business operations and sales but does not
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regulate the process of distilling spirits. Finally, the business will be located inside
the city of Mount Rainier so a business license will be required to proceed with
business related operations.
The United States federal government requires that any entity involved in
the manufacturing of distilled spirits obtain a Distilled Spirits Permit (DSP). The
process to obtain a DSP is detailed and will average approximately 180 days from
submission to obtain the permit. The process can be completed through the TTB
website which provides a faster processing time than the paper submissions of the
past. The process for obtaining the permit requires very detailed information but
the advantage is that there are no associated fees. The federal government obtains
their revenue from a federal excise tax based upon the production of distilled spirits
rather than a license or permit fee upfront (Alcohol and Tobacco Tax and Trade
Bureau, 2016).
The state of Maryland has several licenses that are required for the
manufacture and wholesale distribution of distilled spirits. The associated licenses
and fees can be found on Maryland’s “Form 367 Application for Manufacturer’s and
Wholesaler’s License” and is administered by the Comptroller of Maryland’s office.
The three licenses that are obtained from this form are the manufacturer’s Class 1
Distillery, Class 2 Rectifying, and the wholesaler’s Class 8 liquor. The Class 1
Distillery allows for the production of distilled spirits and is a cost of $2,000
annually. The Class 2 Rectifying allows for the flavoring, diluting, and blending of
distilled spirits and has a cost of $600 annually. The Class 8 liquor license will allow
for Route One Distilling to self-distribute product within the state of Maryland.
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While Route One Distilling will utilize a wholesaler for the majority of its Maryland
sales, there will be local customers that it will be cost effective to distribute to
directly. Finally, the state of Maryland will require Route One Distilling to obtain a
Sales and Use license. The Sales and Use license is required for businesses operating
in Maryland, which makes taxable sales. The license is obtained by completing the
“Maryland Form CRA – Combined Registration Application” and has no associated
cost (Comptroller of Maryland, 2016).
Route One Distilling will also secure a Wholesaler A license for its self-
distribution inside of the District of Columbia. Route One Distilling intends to
distribute product to bars, restaurants, and retailers in DC to capture the profit by
removing the cost of the wholesaler because of the small geographic area. The
wholesaler’s license is regulated by the Alcoholic Beverage Regulation
Administration and has a fee of $5,200 per three years (Alcoholic Beverage
Regulation Administration, 2016).
Route One Distilling will obtain a Restaurant and Trader’s license from the
Prince George’s County Clerk of Circuit Courts office. The Clerk of Courts is a state
official but they are elected on a county-by-county basis and each office administers
to only one county. The Restaurant License is necessary because there will be
seating at the Route One Distilling site, which classifies as a restaurant operation
and the fee will be $27 annually. The Trader’s license is a requirement for any
business offering goods for sale in the state of Maryland and will be at a cost of $27
annually as communicated by a representative in the Prince George’s Clerk of Courts
office (personal communication, September 13th, 2016). Prince George’s County
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requires that Route One Distilling obtain a liquor license for the sale of alcohol on
the premises at a cost of $2,300 per year (Prince George's County, 2016). Also, the
business is located within the city limits of Mount Rainier, MD, which requires an
annual business license be obtained at a cost of $790 (City of Mount Rainier, MD,
2016).
b. Real Estate Construction
i. Site Preparation
The site of Route One Distilling will be at 3501 37th Street, Mount Rainier,
MD 20712 on approximately 53,000-ft2 of property. The site currently has an
existing building that was built in the 1920s and used for dry cleaning and
automotive businesses. The Route One Distilling team plans to conduct
environmental testing, remove the existing building, and perform site work on the
entire property for the new structure.
The Route One Distilling team contracted the environmental testing
company to begin a Phase One and Phase Two study shortly after the property went
under contract on September 1st, 2016. The property’s history as a dry cleaning and
automotive business raised questions about the potential for environmental issues.
Both studies were completed in September and came back with positive results.
The contractor found there to be trace amounts of petroleum products in the soil
borings that will naturally degrade over time and did not find any concern areas for
asbestos in the building. The combined cost of the Phase One and Phase Two
studies is $12,000 (3501 Street, 2016).
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The site has an existing building of 9,400-ft2 and 2,000-ft2 of asphalt that
will need to be removed in preparation for the construction of Route One Distilling’s
new facility. In a conversation with a representative at ACECO, it was determined
that it would cost approximately $5 per ft2 to remove the building and $1 per ft2 to
remove the existing asphalt (personal communication, September 7th, 2016). In a
second conversation with the owner of Whitworth Excavating, the cost of removing
the building would be $15 per ft2 and $1 per ft2 to remove the asphalt (personal
communication, September 7th, 2016). The price quotes above would create a cost
range of $49,000 to $143,000 for demolition of the existing building and asphalt
driveway. To complete this work, the Route One Distilling team will secure a Raze
Permit from the Prince George’s County Department of Permitting, Inspections and
Enforcement. According to the department’s 2016 fee schedule, the cost of a Raze
Permit for the existing building will be $929 (Prince George's County, 2016).
Once the environmental tests have been completed and the old building has
been removed, the property will need to be prepared for the construction of the new
facility. According to a conversation with the owner of Whitworth Excavating, the
preparation of 53,000-ft2 of the property for the new construction, parking and
green space will cost between $6,500 and $10,000 (personal communication,
September 7th, 2016).
The total cost of the environmental testing, demolition of existing structure
and the site work for the new facility will range from $68,429 to $165,929. The
Route One Distilling team will explore all avenues to keep these costs at the lower
end of the proposed range.
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ii. New Construction & Leasing Cost
1. New Construction Cost
Following the site preparation detailed above, the Route One Distilling
team will construct a new 5,000-ft2 warehouse style building on the site at 3501
37th, Mount Rainier, MD 20712. The building will be used for the administration,
retail sales, tasting room, product storage, and product manufacturing. The team
will need to complete a Detailed Site Plan to obtain the necessary approvals and
secure the appropriate building permit.
A Detailed Site Plan will be necessary to proceed with construction on the
proposed site given its location within the Neighborhood Arts and Production
Character Area of the Gateway Arts Sector Plan as communicated by a member of
the Prince George’s County Planning Department (personal communication, July
22nd, 2016). The Prince George’s County Council defines the Detailed Site Plan as “A
detailed site plan shows the proposed internal roads, pedestrian walks, parking
areas, building relationships, landscaping, open space, recreation facilities, lighting,
etc.” (Prince George's County Council, 2016).
3501 37th Street, LLC will obtain the necessary Construction Permit from
the Prince George’s County Department of Permitting, Inspections and Enforcement.
The county’s 2016 fee scheduled shows a cost of $4610.97 for the permit given the
size and scope of the project (Prince George's County, 2016).
During the construction process, the team will need to increase the water
capacity at the property. It was recommended by Michael Lowe that a 4-inch water
heavy up be completed for the project at a cost of approximately $100,000.
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(personal communication, May 25th, 2016). This will ensure that the facility has the
required pressure for both the production process and for the necessary sprinkler
system. The sprinkler system will mitigate the risk for any potential fire issue
created by the distillation process.
The new construction will include office space, restrooms, storage, retail
and tasting area and manufacturing areas. The cost of the new warehouse
construction has been estimated to range from $44.50 to $95.00 per ft2 (RSMeans
building construction data, 2014). The team will strive to guide the costs of the
project towards the lower end of this range. The facility will need to adhere to a
high quality of construction but the team will pursue cost reduction avenues that do
not interfere with an efficient production process, create a product quality or safety
issue.
The construction process will require building permits, a Detailed Site Plan,
a water heavy up, and the new facility. The estimated cost of the new construction
will range from $358,540 to $758,540. Ideally, the final costs will be kept in the
$400,000 to $500,000 range.
2. Leasing Cost
3501 37th Street, LLC will lease the property and building to Route One
Distilling on a per ft2 of rentable space basis at a market rate of $15 per ft2 triple net.
With the triple net lease structure, Route One Distilling will be responsible for the
property taxes, building insurance and maintenance along with the operational
expenses such as utilities. The annual cost of the lease to Route One Distilling is
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$75,000 with an escalation of 4% per year. The pricing was calculated from
competitive set of properties within 1.5 miles of the site that have a range of pricing
between $10 and $20 per ft2 annually in a triple net lease. This pricing also
establishes a benchmark for the revenue 3501 37th Street, LLC could reasonably
assume to generate if a replacement tenant is needed (CoStar Realty Information,
2016).
c. Operating Business Equipment & Set Up
i. Equipment Set Up & Sprinkler System
The Route One Distilling facility will require customized equipment for the
distilling operations. Route One Distilling, LLC is responsible for the cost of the
operating equipment and set up. The cost of the equipment can vary widely
depending upon the manufacturing company and country of origin. During the due
diligence period, the team met with two local operators that purchased equipment
from both sides of the pricing spectrum. The teams at Lost Ark Distilling and New
Columbia Distillers were able to share information on the pricing of their
equipment. The pricing of the equipment at Lost Ark is approximately $204,000
(personal communication, September 21st, 2016) and the pricing on the equipment
at New Columbia Distillers is approximately $651,000 (personal communication,
May 25th, 2016). The Lost Ark equipment was secured through a relationship with a
manufacturer in China while the New Columbia team purchased most of their
equipment from a German manufacturer.
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The Route One Distilling team has decided to follow the approach of Lost
Ark Distilling for the equipment purchases to reduce the capital outlay necessary to
start production. This approach should not affect the quality of the product and the
opportunity to upgrade pieces of equipment in the future will be examined.
Route One Distilling will require a mash tun and still, boiler, fermenter, chill
plant, bottling machine, storage tanks, and floor scale. There will be an additional
expense for a mechanical engineer to create the design and oversee the setup of the
equipment. Finally, Route One Distilling will also be responsible for the cost of
installing the high-pressure sprinkler system.
Figure 6.1- Distillation Flowchart
The first piece of equipment needed in the distilling process is the mash
tun. The mash tun is the equipment where the crushed grains are mixed with
heated water to begin the chemical process. In this process, the grain’s starches are
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converted to fermentable sugars, which are known as the mash. This portion of the
process is important because the grain has been transformed into a state where it
can be consumed by yeast and create alcohol. The cost of a 330-gallon mash tun and
still is approximately $35,000 (personal communication, September 21st, 2016).
Figure 6.2- Mash Tun at Lost Ark Distilling (personal communication, September
21st, 2016).
The boiler will be used with the mash tun above to produce the hot water
for its process and later pieces of the distillation process. A system of this size will
need a 399,000 British thermal unit boiler, which will cost approximately $20,000
(personal communication, September 21st, 2016).
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Figure 6.3- Boiler at Lost Ark Distilling (personal communication, September 21st,
2016).
The mash is then transferred to the fermenter. The fermenter is the
equipment where the mash is mixed with the yeast. During this process, the yeast
breaks down the sugars and creates alcohol in a mixture known as distiller’s beer.
The fermenter is insulated because temperature control during the fermentation
process is critical. The optimal temperature for the fermentation process will vary
depending on type of yeast. If the temperature falls too low the process will be slow
or not occur and above the yeast enzymes will die. The cost of a 2,000-liter
fermenter is approximately $3,500 (personal communication, September 21st,
2016).
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Figure 6.4- Fermenter at Lost Ark Distilling (personal communication, September
21st, 2016).
The distiller’s beer is then transferred to the still. In the still, the mixture is
heated and the alcohol evaporates with the water and impurities are left behind.
The still in combination with the mash tun has a cost of $35,000 as previously noted.
The evaporated alcohol is captured and cooled back in to a liquid form with the use
of the chill plant equipment. Once the alcohol is converted back to liquid, it is
possible to repeat the process to create a higher alcohol content and purer product.
The chill plant will cost approximately $12,000 (personal communication,
September 21st, 2016).
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Figure 6.5- Still at Lost Ark Distilling (personal communication, September 21st,
2016).
Figure 6.6- Chill Plant at Lost Ark Distilling (personal communication, September
21st, 2016).
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The distilled alcohol is then transferred to the storage tanks. At this stage
the alcohol is a clear liquid with no flavor or smell. Depending upon the type of
alcohol that is being produced the liquid is then either flavored or transferred in to
barrels for aging. The cost of 80-gallon storage tanks is approximately $1,500 each
and Route One Distilling will start by purchasing three for a total cost of $4,500. The
53-gallon barrels for aging the straight rye whiskey product are around $250 each
and Route One Distilling will start with the purchase of 20 for a total cost of $5,000
(personal communication, September 21st, 2016).
Figure 6.7- Storage Tank at Lost Ark Distilling (personal communication,
September 21st, 2016).
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Route One Distilling will utilize a floor scale to determine the proof gallons
of distilled spirits being produced. A proof gallon is a gallon of liquid that is 100
proof or 50% alcohol at a temperature of 60 degrees Fahrenheit. The quantity of
production is subject to a federal excise tax of $13.50 per proof gallon or about
$2.13 per 750 ml bottle of 80 proof distilled spirits. The floor scale will cost
approximately $3,000 (personal communication, September 21st, 2016).
The Route One Distilling team will purchase a bottling machine to move the
finished product from either the barrels or storage tanks in to the bottles. The
bottling machine will provide the ability to fill up to six bottles simultaneously. The
bottling machine will cost around $1,200 (personal communication, September 21st,
2016).
Figure 6.8- Bottling machine at Lost Ark Distilling (personal communication,
September 21st, 2016).
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Route One Distilling is responsible for the installation of a high-pressure
sprinkler system. The system is necessary for building code and insurance
requirements given the potentially dangerous nature of the operation. The
installation of the sprinkler system will be approximately $40,000 (personal
communication, September 21st, 2016).
Finally, the Route One Distilling team will hire a mechanical engineer to
design the layout and complete the installation of the manufacturing equipment. It
is critically important that the equipment be set up safely and securely. The team at
New Columbia Distillers contracted this work at an approximate cost of $80,000
(personal communication, May 25th, 2016).
The equipment and set up detailed above will have a cost of approximately
$204,000 which will have a production capacity between 35,000 and 40,000 bottles
per year. This level of capacity will provide Route One Distilling with room to grow
for several years before a need to increase capacity is reached (personal
communication, September 21st, 2016).
ii. Website, Logo & Label Design
The development and production of a first-class website, logo and label
design for Route One Distilling will be critical for market penetration in Washington,
DC. The website plays an important role in providing consumers with information
about the Route One Distilling business and conveying the history of the product to
new customers around the region. A recognizable and memorable logo will provide
the company with brand recognition. Finally, the label’s design is very important for
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distinguishing the brand in the retail market place. There are a number of distilled
spirits in retail stores and a top-notch label will be an advantage in reaching new
customers. Also, the label must be approved by the Alcohol Tobacco Trade and Tax
Bureau before sales are approved so it will prudent to work with a quality design
firm that can efficiently navigate the approval process.
Michael Lowe at New Columbia Distillers suggested that an investment in a
quality website, logo and label design was a priority for their business. Also, he
believes in the investment because it has helped to differentiate their product in the
local market. The cost to develop the Route One Distilling website, logo, and label
will be approximately $25,000 (personal communication, May 25th, 2016).
VII. Local Competitors
a. Overview of Local Competitors and Offerings
There are currently eleven craft distilleries in the local Maryland, Virginia
and Washington, DC markets that are in operation or will be opening before the
close of 2016. The eleven competitors are split between VA (1), MD (2) and DC (8).
There are additional craft distillers in Maryland and Virginia but their distance
disqualifies them from being a direct competitor of Route One Distilling.
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b. Virginia Competitors
Catoctin Creek Distilling
Catoctin Creek Distilling is the sole distillery in Virginia that made the list of
competitors. It is in Purcellville, VA, which is just over 1 hour from the Route One
Distilling site (see Figure 7.1). At over a one-hour travel time, Catoctin Creek will be
the furthest competitor but it is reasonable to assume a customer would make a day
trip to visit their site for tastings. Becky and Scott Harris founded Catoctin Creek in
2009 as the first distillery in Loudoun County Virginia since before Prohibition.
Catoctin offers various products that are organic, kosher, gluten free and vegan.
They believe in producing a top-quality product, which starts with the best
ingredients (Catoctin creek distilling.2016).
Catoctin Creek offers an array of different spirits at their site from aged rye
whiskeys to fruit brandies. Catoctin Creek offers the Roundstone Rye, Roundstone
Rye- 92 proof, and Roundstone Rye-Cask Proof, which are three types of straight rye
whiskey. They offer Rabble Rouser, which is a straight rye whiskey that has been
aged four years. Mosby’s Spirit is an unaged clear rye whiskey and Watershed Gin is
a gin recognized for its notes of herbs and spices. Catoctin offers several types of
brandy from the grape based 1757 Virginia Brandy to the Catoctin Creek Pearousia
Pear Brandy, Catoctin Creek Short Hill Mountain Peach Brandy, and the Catoctin
Creek Quarter Branch Apple Brandy. Finally, Catoctin Creek occasionally offers
small batch releases of different variations of the products noted above (Catoctin
creek distilling.2016).
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Overall, Catoctin Creek Distilling offers a balanced selection of products.
They host private events at their property from weddings to fundraisers and a
monthly dinner series that features a rotating selection of chefs. Also, they
collaborate with vendors in Washington, DC to host events and grow their brand
recognition (Catoctin creek distilling.2016).
Figure 7.1- Virginia Competitors in relation to Route One Distilling location.
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c. Maryland Competitors
Twin Valley Distillers
Twin Valley Distillers is the first of the competitors in Maryland. The
operation is in Rockville, Maryland, which is approximately a forty-minute drive
from the Route One Distilling location (See Figure 7.2 below). Twin Valley is the
first and only distillery to open in Montgomery County, Maryland since the end of
Prohibition. Edgardo Zuniga is the owner and was previously a chef before starting
the business. Edgardo believes in the “farm to glass” concept and sources all the
grains and raw products from within a 50-mile radius (Twin valley distillers.2016).
Twin Valley Distillers website provides limited information about their
product offerings but they do provide a large number of locations that offer their
product. It does appear they are producing variations of vodka, bourbon whiskey,
rye whiskey and rum but further details on the products are not available. There
are tours with tastings available five to six days a week at a cost of $15 per ticket.
Twin Valley offers a five-day class that provides one on one instruction on the
distilling process at a cost of $3,000. The class also provides guidance on the permit
and licensing process for opening a distillery (Twin valley distillers.2016).
Twin Valley has a limited digital presence but appears to have a strong
market presence by the number of vendors that offer their products. They offer
tours and classes on the production and opening of a distillery. Also, the culinary
background of their owner gives them a strong operational core competency (Twin
valley distillers.2016).
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Figure 7.2- Maryland Competitors in relation to Route One Distilling location.
Lost Ark Distilling Company
Lost Ark Distilling Company is in Columbia, Maryland, which is
approximately a thirty-five-minute drive from the Route One Distilling operation
(see Figure 7.2 above). They will be the first distillery to open in Howard County,
Maryland in November of 2016. Brad Blackwell and Andy Debenham are the
founders and owners who will aim to source all of their ingredients from across
Maryland (Lost ark distilling company.2016).
Lost Ark Distilling will open their operations by offering a white rum,
spiced rum, and a corn whiskey. The rum products will provide the company with
early cash flow while the corn whiskey has time to mature. The Lady Anne White
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Rum has a light body with notes of molasses, caramel, berry, and tropical flavors.
The spiced rum will be known as Terra Mariae, which is Latin for “Maryland
Colony”. It will have flavors of caramel, vanilla, cinnamon, nutmeg, orange peel, and
other spices. Finally, the corn whiskey will be called the 1634 Corn Whiskey. This
whiskey will use the finest locally sourced grains available to produce this whiskey
which will be aged in oak barrels (Lost ark distilling company.2016).
Lost Ark Distilling is beginning their operations with a strong variety of
products. They also offer branded merchandise for sale to help establish Lost Ark
Distilling brand awareness. Finally, their location should prove to be an advantage
in Howard County with the closest competitor in Baltimore City (Lost ark distilling
company.2016).
d. Washington, DC Competitors
The majority of the competition for local distilleries will come from the eight
companies in the District of Columbia. Six of the eight business are currently open
with the final two scheduled to begin before the close of 2016. Also, all eight
locations are located within twenty minutes of the Route One Distilling location (see
Figure 7.3 below).
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Figure 7.3 – Washington, DC Competitors in relation to Route One Distilling
location.
New Columbia Distillers
New Columbia Distillers is located in the Ivy City neighborhood of
Washington, DC. Michael Lowe and John Uselton started the operation in 2011 as
the first distillery in Washington, DC since the repeal of Prohibition. Michael and
John take great pride in their super premium gin products that are all hand crafted
on site (New columbia distillers.2016).
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New Columbia Distillers is currently offering several types of gin. The
company uses the name of their Green Hat Gin interchangeably with New Columbia
Distillers. They began their operation with gin products because they can be
produced from start to finish in approximately thirty days with plans to begin
production of a bourbon product. New Columbia offers a Classic Gin, Navy Strength
Gin, Spring/Summer Gin, and a Fall/Winter Gin. New Columbia first offers a classic
gin known as Green Hat that includes flavors of citrus, coriander, and celery. The
Navy Strength has a similar flavor profile but produced at a higher proof. The
Spring/Summer Gin has a lighter flavor profile and is produced seasonally in limited
batches. Its profile has hints of juniper, cherry blossom, clovers, rosemary and
citrus. The Fall/Winter Gin is also produced in limited quantities and has juniper,
caraway, and rye grain flavors (New columbia distillers.2016).
New Columbia Distillers offers a nice variety of gin products with a bourbon
product currently in production. They offer tastings and tours on Saturdays with
the opportunity to participate in the bottling process for a discount on their
products (New columbia distillers.2016).
Don Ciccio & Figli
Don Ciccio & Figli has its location in the Manor Park neighborhood of
Washington, DC and was founded in 2012 by Francesco Amodeo. Francesco’s family
has a long history of producing distilled spirits in Italy and Francesco has extensive
experience in the hospitality industry (Don ciccio & figli.2016).
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Don Ciccio & Figli offers twelve different Italian spirits ranging from the 24
proof Concerto to the 58 proof Mandarinetto. Don Ciccio’s flavors range from the
Concerto’s espresso and barley coffee to the Mandarinetto’s mandarin oranges and
tangelos. Tours, tastings, and cocktails are offered on Saturdays and private in
home tastings are available for $20 per person. Also, Don Ciccio’s offers bulk spirits
for purchase in 55 and 275-gallon containers (Don ciccio & figli.2016).
Don Ciccio’s has a line of products that separates itself from the other
competitors detailed in this analysis. While their products are Italian style spirits,
they will still draw customers who are looking for a craft distilled spirit experience
with a rich backstory (Don ciccio & figli.2016).
One Eight Distilling
One Eight Distilling is also located in the Ivy City neighborhood of
Washington, DC nearby to the New Columbia Distillers location. Sandy Wood and
Alex Laufer opened One Eight Distilling in 2015 as the second distillery in
Washington, DC. The name of the company is derived from the section of the United
States Constitution that created the District of Columbia as the nation’s capital being
found in Article One and Section Eight. One Eight has a focus on connecting their
spirits to their customers, sourcing the ingredients locally, respecting the history of
the distillation process, and putting their love into the product (One eight
distilling.2016).
One Eight Distilling offers a variety of staple spirits and a selection of small
batch products. Their first product is the Rock Creek White Whiskey, which is an
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unaged rye whiskey with 100% locally grown rye. It is a Pennsylvania-style rye
whiskey that has organic rye and Virginia-grown malted rye with flavors of pepper.
Ivy City Gin is their second product that is an American dry gin that uses rye, corn,
and malted rye. This gin has flavors of juniper, spicebush, and additional botanicals.
The District Made Vodka is the final of their staple products. This vodka uses rye
from Culpeper, VA and Maryland’s Eastern Shore. It has flavors of vanilla with a
spicy finish. Finally, One Eight offers a rotating selection of small batch products for
experimenting with new combinations and techniques (One eight distilling.2016).
One Eight offers a well-rounded selection of products and is willing to
experiment with new batches. They offer free tours and tastings on Saturdays and
larger private tours by appointment with fees. Spirits and branded merchandise are
available for purchase during their tour hours. The distillery facility is available to
host private events of 50-300 people and they collaborate with outside vendors to
host events in the local businesses (One eight distilling.2016).
Jos. A. Magnus & Co
Jos. A. Magnus & Co. was opened in 2015 by the great grandson of Joseph
Magnus, Jimmy Turner, and a group of industry experts from around the country.
They are also located in the Ivy City neighborhood of Washington, DC above the
Atlas Brew Works location. The company’s website does not offer a detailed
explanation of their methodology or motivation for their operations (Jos. A. magnus
& co.2016).
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The Jos. A. Magnus website does not offer the specifics of their product line.
There is a straight bourbon whiskey with flavors of apricot, roasted nuts, caramel
and vanilla that is noted on the website. The whiskey earned several awards at the
2016 San Francisco World Spirits Competition and the 2016 American Distilling
Institute Craft Blended Spirits Competition. There is also a brief mention of a gin
product but there aren’t any details available (Jos. A. magnus & co.2016).
Jos. A. Magnus offers the widest availability of tours and tastings of the
companies noted above with evening hours on Wednesdays and Thursdays, mid-day
to midnight on Fridays and Saturdays and 11am to 7pm on Sundays. There is an
opportunity to participate in the Dream Distillers Experience at Jos. A. Magnus that
includes a one day class learning the distillation process, distillation of one custom
barrel of bourbon that will be aged four years, annual tastings of the barrel, and
bottling of barrel’s product. This experience comes with a price of $7,500 and is
available for a limited time. The smaller Murray Hill Cocktail Lounge and larger
Magnus Room are available for private events (Jos. A. magnus & co.2016).
Republic Restoratives
Pia Carusone and Rachel Gardner opened Republic Restoratives as
Washington, DC’s first female owned distillery in the summer of 2016. They are in
the Ivy City neighborhood of Washington, DC along with several of the previously
mentioned operations. The team was able to raise over $100,000 through a crowd
funding campaign. They are particularly focused on connecting with their
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customers and creating a sense of community with their products (Republic
restoratives.2016).
Currently, Republic Restoratives is focused on producing their Civic line of
vodka. It is a vodka produced from North American corn with a crisp finish. There
are plans to expand their offerings but they have not released details about the
products (Republic restoratives.2016).
Republic Restoratives offers tours and tastings during the week by
appointment and on weekend afternoons. There is a cocktail lounge that has
evening operating hours on Thursdays and Fridays with extended hours on
Saturday and daytime hours on Sundays (Republic restoratives.2016).
District Distilling Co.
District Distilling Co. opened its doors in September of 2016 in the U Street
neighborhood of Washington, DC. District Distilling is the first distillery operation
in the District to also include a kitchen for their location. With the onsite restaurant,
District Distilling has a wider focus on their customer’s full drink and dining
experience. The additional layer of the restaurant allows the business to capture a
wider market of customers (District distilling co.2016).
District Distilling is offering a variety of bourbon whiskey, vodka, rum and
gin to kick off their opening with plans for several more products. Backroom
Bourbon is a blend of straight bourbon whiskeys aged five to ten years with spicy
flavors. Checkerbark Gin is an American dry gin with flavors of wild juniper berries.
Corridor Vodka is made from rye and barley with a crisp, clean, and smooth taste.
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Buzzard Point is a white rum with flavors of caramel, vanilla, toasted marshmallow,
roasted yam, and molasses (District distilling co.2016).
District Distilling offers tasting tours of the distillery seven days a week at a
cost of $10 per person. The restaurant is open daily for dinner and late night drinks
with brunch offered on the weekends. Also, the restaurant is available for private
events (District distilling co.2016).
Cotton & Reed
Cotton & Reed is a distillery that will be opening in the Fall of 2016 at the
Union Market in the NoMa neighborhood of Washington, DC. The founders of the
company are Reed Walker and Jordan Cotton who met while working at NASA
(Cotton & reed.2016).
The Cotton & Reed website doesn’t provide detailed information about their
offerings but does mention a white rum and a dry spiced rum. The website will
likely be built out further once the doors are opened for business (Cotton &
reed.2016).
Farmers & Distillers
Farmers & Distillers is the newest member of the Farmers Restaurant
Group and will be located at the intersection of the Mount Vernon and Chinatown
neighborhoods. This newest distillery venture has an opening date set for
December 13th, 2016. Farmers & Distillers is framing much of their concept on the
founding father, George Washington, and his experimental and progressive distilling
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techniques. They plan to offer a rye whisky and gin along with beers from only the
DC, Maryland, and Virginia area and their own line of wines. There will also be a
full-service restaurant at the site that follows the Farmers Restaurant Group’s
principles of sustainability and supporting American family farms (Farmers &
distillers.2016).
VIII. Risk Analysis- SWOT
a. Strengths
i. Executive Core Competencies- The founding team of Joe Schaefer and Paul
Smith will utilize their expertise in real estate and distilling to reduce the
learning curve and create operational efficiencies.
ii. Vendor Network- Route One Distilling will utilize their relationship with an
owner and operator of 15 local bars to create an early demand and
exposure for their products.
iii. First in Submarket- Route One Distilling will be the first distillery to open in
the Mount Rainier neighborhood or Prince George’s County.
iv. Outdoor Space- The outdoor event space will be unique in the local
competitive set. Catoctin Creek Distilling is the only competitor with
outdoor space, which is located just over an hour away from the Route One
Distilling site.
v. Additional Outdoor Space- There is the potential to utilize the additional
outdoor space to rent to outside vendors or expand the current operation
to increase revenue.
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vi. Real Estate Control- The control of the property and building by Route One
Distilling’s parent company will allow the group to control the cost of rent
increases on the operation. The neighborhood is growing and it is
advantageous for the group to control this aspect of their operational
budget.
b. Weaknesses
i. Vendor Relationships- The Route One team doesn’t have existing
relationships with local raw material vendors, which could affect
production costs.
ii. Brand Awareness- Route One Distilling will need to build their brand
recognition and customer base from the ground up.
iii. Capital Requirements- The purchase of the property and new construction
will have a higher initial capital requirement than renting existing space.
c. Opportunities
i. Local Market- The Washington, DC MSA is home to 6,098,283 people as of
July 2015 (United States Census Bureau, ) with a per capita income of
$44,677 per year, which is approximately 1.5 times the national average
(Census Reporter, ). The large population and high incomes create a strong
market for Route One Distilling’s products.
ii. Established Industry Awareness- The established competitors have already
created the market demand for craft distilled spirits and educated the
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customer base. Route One Distilling will enter an established market and
focus on building brand awareness and loyalty rather than educating
customers about the industry segment.
iii. Market Maturation- The market has begun to grow but it is still in the
growth phase rather than a saturated and mature phase.
iv. Government Incentives- There is the potential to capture government
incentives for a distillery business in an emerging Mount Rainier
neighborhood and business friendly Prince George’s County.
d. Threats
i. Established Competitors- The first competitor to open was Catoctin Creek
Distilling in 2009 with the majority of the competitors opening since 2014.
ii. Weather/Crop Harvest- Sourcing raw materials from local farms could
result in unexpected increases in pricing and availability. A poor harvest
due to a weather or unknown event could dramatically increase pricing due
to its smaller market for providers.
iii. Government Regulation- A decision to increase government regulations or
taxes in Prince George’s County or Maryland could have adverse effects on
operating costs.
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IX. Financing
The financing for this project will be separated in to two tranches for the
acquisition of the real estate and the build out of the operating business. The
separation of the ownership entities along with their respective financing are a risk
mitigation tool if the operating business proves to be unviable.
The first tranche of financing will be secured by 3501 37th Street, LLC for
the acquisition of the subject site and construction of the base building. The total
amount allocated to this portion of the project is $1,600,165 which will include the
real estate acquisition, construction of the building shell, environmental testing
during the study period, title insurance, legal and transfer fees associated with the
acquisition, and 90% of the financing cost. The total amount will be funded with a
loan for 70% and the remaining 30% funded by equity. The total debt in the first
tranche is $1,120,116 coupled with a $480,050 equity portion.
The 3501 37th Street debt will be held for a term of 10 years at an initial
interest rate of 4.5% over a 25-year amortization term. The interest rate will adjust
after the 5th year to 300 basis points over the 30 year United States Treasury bond.
There are many variables that could affect the interest rates on a treasury bond over
the next 5 years. For this project, it is assumed that the treasury rate will be 1.0%
which will create a financing rate of 4.0% for the final 5 years of the loan. The
option to refinance the property will be available if the project is held after the 10th
year.
The second tranche of financing will be secured by Route One Distilling,
LLC for the build out and set up of the operating business. The total amount of debt
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and equity for this part of the project is $230,200. The amount includes the
purchase and set up of the distillery equipment, the website, label, and logo design,
and 10% of the financing cost. The total cost will be funded by a loan of 70% and
the remaining 30% covered by equity. The total debt in the second tranche is
$161,140 and the equity portion is $69,060.
The Route One Distilling debt will be held for a 5-year term at 5.0% with a
25-year amortization schedule. The financing for this tranche will conclude in the
60th month with a balloon payment of $204,366.
X. Financial Model Analysis
a. Sales Pricing
The financial returns of the investment include revenue derived from the
sales figures below including “blended wholesale price”, “retail price” and “bar
price”. These three figures are based on the projected revenue generated per 750ml
bottle of spirits produced. The blended wholesale price is the estimated average of
bottles self-distributed in Washington, DC for $24 and bottles distributed through
wholesalers in Maryland and Virginia for $17. The retail price of $33 represents the
pricing of the bottles that will be sold from the retail counter at the Route One
Distilling site. Finally, the bar price is calculated by determining the number of
cocktails that can be sold from a 750ml bottle. A measurement of 1.5 ounces per
drink provides the ability to sell 16 cocktails from each bottle with approximately
40ml allocated to spillage. The 16 cocktails available for sale at a price of $7 each
provides the business with $112 of revenue per bottle.
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Table 10.1- Route One Distilling Sales Pricing
b. Financial Returns
The following projected financial returns were earned over a 10-year hold
period in the most likely case scenario for Route One Ventures, LLC which is the
ownership entity of both the real estate and operating business. For the full details
of the pro forma, please see Appendix D at the end of this document. In this analysis,
the projected debt service coverage ratio minimum (DSCR), cash on cash minimum,
net present value, and internal rate of return are displayed in Table 10.2. The DSCR
minimum and cash on cash minimum have excluded the 5th year when the balloon
payment for the second tranche of debt is due. With the exclusion, the DSCR
minimum is projected at a strong 1.58 and the cash on cash minimum of 9.07%
provides a healthy return on the equity invested for the operating partners. The net
present value is projected at $412,227 using a discount rate of 10%. Finally, in this
most likely case scenario the internal rate of return is projected at 17.85% which
provides a solid return on the investment of the operating partners and any future
stakeholders. In summary, the financial returns projected for this investment are
strong over a 10-year period in the most likely scenario.
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Table 10.2- Route One Ventures, LLC Financial Returns
Table 10.3- Route One Ventures, LLC Income Statement
Financial Returns
DSCR (min) 1.58
Cash on Cash (min) 9.07%
NPV 412,227
IRR 17.85%
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XI. Conclusion
The Route One Distilling team has sought to prove the viability of a
distillery business located in Mount Rainier, Maryland. The ownership of the
distillery will also own the underlying real estate in a separate entity and seek to
capitalize from the relationship.
The ownership group has entered the investment to capture the increased
demand for distilled spirits, particularly in the Washington, DC Metropolitan
Statistical Area. The increased demand is driven by the Millennial generation and
their desire for exclusivity and experience over the generic and mass marketed
spirits products of the previous generations.
Route One Distilling will seek to leverage core competencies and
differentiate their products from the local competitors. The business will achieve
these goals through locally sourced ingredients, grass roots marketing, events at the
distillery site, and leveraging of local vendors in the food and beverage industry.
Through the preceding study, the Route One Distilling team has concluded
that the venture will prove viable in the market and provide strong returns on their
investments. The business will require annual sales of approximately $575,000
spread across their wholesale, retail, and bar sales channels to provide the projected
returns. These thresholds are attainable based upon the size and economic
characteristics of the population in the Washington, DC market.
Finally, the ten-year analysis projects the investment will provide strong
returns for the Cash on Cash minimum (9.07%), Net Present Value ($412,227),
Internal Rate of Return (17.85%) and for the Debt Service Coverage Ratio minimum
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(1.58). The strength of the returns proves the investment to be viable and desirable
for the ownership group.
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XII. References
3501 Street, L. (2016). Unpublished manuscript.
Alcohol and Tobacco Tax and Trade Bureau. (2016). Retrieved from
https://www.ttb.gov
Alcoholic Beverage Regulation Administration. (2016). Retrieved from
www.abra.dc.gov
Catoctin creek distilling. (2016). Retrieved from www.catoctincreekdistilling.com
Census Reporter. Retrieved from
https://censusreporter.org/profiles/31000US47900-washington-arlington-
alexandria-dc-va-md-wv-metro-area/
City of Mount Rainier, MD. (2016). Retrieved from
http://www.mountrainiermd.org/
Comptroller of Maryland. (2016). Retrieved from www.marylandtaxes.com
CoStar Realty Information. (2016). Retrieved from www.CoStar.com
Cotton & reed. (2016). Retrieved from www.cottonandreed.com
District distilling co. (2016). Retrieved from www.district-distilling.com
Don ciccio & figli. (2016). Retrieved from www.donciccioefigli.com
Page 75 of 84
Farmers & distillers. (2016). Retrieved from
http://www.wearefoundingfarmers.com/farmers-distillers-coming-fall-2016/
Flores, J., & Marston, M. (September 27th, 2013). Shaken, not stirred: Millennials
and the craft spirits boom. Retrieved from
http://www.mediapost.com/publications/article/210113/shaken-not-stirred-
millennials-and-the-craft-spi.html
Jos. A. magnus & co. (2016). Retrieved from www.josephmagnus.com
Kinstlick, M. (a). The U.S. craft distilling market: 2011 and beyond. Retrieved from
http://crftrs.com/blog/wp-content/uploads/2014/02/craft-distillingmarket-
2011.pdf
Kinstlick, M. (b). The U.S. craft distilling market: 2015 update. Retrieved from
http://axisofwhisky.com/wp-
content/uploads/2016/04/Craft_Distilling_2015_white_paper_update.pdf
Leonard, K. (2015, September 8th2015). During prohibition, bootleggers' boulevard
ran through laurel. Baltimore Sun
Lost ark distilling company. (2016). Retrieved from www.lostarkdistilling.com
Mintel. (2016). Retrieved from http://www.mintel.com/press-centre/food-and-
drink/craft-spirits-today-account-for-one-in-seven-global-spirit-launches
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Murphy, H. L. (2016, January/February). Craft spirits come of age. Market Watch
Magazine,
New columbia distillers. (2016). Retrieved from www.greenhatgin.com
One eight distilling. (2016). Retrieved from www.oneeightdistilling.com
Prince George's County. (2016). Retrieved from
http://www.princegeorgescountymd.gov/
Prince George's County Council. (2016). Retrieved from www.http://pgccouncil.us/
Prince George's County Planning Department. (2016). Retrieved from
http://www.pgplanning.org/Planning_Home.htm
Republic restoratives. (2016). Retrieved from www.republicrestoratives.com
RSMeans building construction data (2014). In Plotner S. C. (Ed.), (73rd ed.). Norwell,
MA:
Ten facts about the distillery. Retrieved from http://www.mountvernon.org/the-
estate-gardens/distillery/ten-facts-about-the-distillery/
Twin valley distillers. (2016). Retrieved from http://www.twinvalleydistillers.com/
United States Census Bureau. Retrieved from
http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml
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XIII. Appendices
a. Appendix A- Route One Distilling Renderings
i. Overview
ii. Front View
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iii. Interior View One
iv. Interior View Two
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v. Interior View Three
vi. Exterior Rear View
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b. Appendix B- Route One Distilling Timeline
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c. Appendix C- Project Cost Assumptions
i. Real Estate Acquisition and Construction
Real Estate Acquisition
Best Most Likely Worst
Purchase Price 1,025,000
Legal 5,000
Bank Fees 10,000
Enviromental Reports 12,000
50% Transfer/Recordation 15,375
Title Insurance 6,500
Total Acquisition Cost 1,073,875
Construction CostsPermits
Raze Permit 929
Construction Permit 4,611
Demo/Site Prep
Buiding Demolition 49,000 96,000 143,000
Site Preparation 6,500 8,250 10,000
Permits Total 5,540 5,540 5,540
Demo/Site Prep Total 55,500 104,250 153,000
Permitting/Demo/Site Prep Total 61,040 109,790 158,540
Building Construction per ft2 per ft2 per ft2
Construction Costs Per ft2 44.5 63.5 95
5,000 ft2 warehouse construction costs 222,500 317,500 475,000
4 Inch Water Heavy Up 75,000 100,000 125,000
Total Building Construction Cost 297,500 417,500 600,000
Total 3501 37th Street Construction Cost 358,540 527,290 758,540
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ii. Route One Equipment Purchase and Set Up
iii. Route One Operational Costs
Route One Equipment Purchase and Set Up
Best Most Likely Worst
Fermenter 2,625 3,500 4,375
Chill Plant 9,000 12,000 15,000
Still/Mash Tun 26,250 35,000 43,750
Boiler 15,000 20,000 25,000
Bottling Machine 900 1,200 1,500
Extra Storage Tanks 3,375 4,500 5,625
Floor Scale 2,250 3,000 3,750
Mechanical Engineer/Set Up 60,000 80,000 100,000
Barrels 3,750 5,000 6,250
Sprinkler System 30,000 40,000 50,000
Website/Logo/Design Set Up 18,750 25,000 31,250
Total Route One Set Up Costs 171,900 229,200 286,500
Route One Operational Costs
Best Most Likely Worst
Government Permits
MD State Manufacturing License 2,000
MD State Rectifying License 600
MD State Class 8 Wholesaler's License 100
DC Wholesaler's Class A License 1,733
Mt. Rainier Business License 790
Prince George's County Liquor License 2,300
Local Restaurant License 27
Local Trader's License 27
Total Annual Permit Costs 7,577
Operating Expenses
Utilities 13,950 18,600 23,250
Labor 93,750 125,000 156,250
GL/Liquor Liability Insurance 5,250 7,000 8,750
Property Insurance 5,625 7,500 9,375
Real Estate Taxes 12,758 17,010 21,263
Rent @ 5000ft2 56,250 75,000 93,750
Total Annual Operating Expenses 187,583 250,110 312,638
Total Permit and Operational Expenses 195,160 257,687 320,215
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d. Appendix D- Financial Summary i. Scenario Analysis Table
ii. Input Summary
Best Most Likely Worst
wholesale sales 27500 25000 22500
retail sales 14300 13000 11700
bar sales 11000 10000 9000
blended wholesale price 23 21 19
retail price 35 33 31
bar price 120 112 96
cogs 9.5 10.5 12.5
vacancy 0.00% 0.00% 5.00%
sales escalation 5.00% 4.00% 3.00%
utilities 13,950 18,600 23,250
labor 93,750 125,000 156,250
gl/liquor liability 5,250 7,000 8,750
property insurance 5,625 7,500 9,375
expense escalation 3.00% 4.00% 5.00%
source 1,830,365 operations units i/p Finance i/p
equity 550,000 wholesale sales $/per month 25,000 Tranche 1
investor 275,000 retail sales $/per month 13,000 principal principal_t1 1,051,165
investor 275,000 bar sales $/per month 10,000 interest 4.5% (for first 60 months)
debt 1,280,365
tranche 1 1,051,165 cogs per bottle 10.50 amortization amort_t1 25 years
tranche 2 229,200 federal excise tax per bottle 2.14 term term_t1 10.00
1,025,000
uses 1,830,365 3501 rental income per year 75,000 tranche 2
purchase price 1,025,000 vacancy 0.00% principal principal_t2 229,200
construction 527,290 amortization amort_t2 25
build out 204,200 blended wholesale price$/750ml bottle 21 interest interest_t2 5.00%
legal 20,375 retail price $/750ml bottle 33 structure structure_t2 1
legal 5,000 bar price $/750ml bottle 112 term term_t2 5.00
transfer/recordation15,375
environmental 12,000 sales escalation annual 4.00% Valuation I/P
title insurance 6,500 permits per year 7,577 Capitalization Rate Cap_Rate 8.00%
finance cost 10,000 utilities per year 18,600 Sales Expense Sales_Exp 6.00%
web set up 25,000 labor per year 125,000 Discount Rate Discount_Rate 10.00%
surplus/(deficit) - gl/liquor liability per year 7,000
property insurance per year 7,500 Sale Period Sale_Term_Yr 10
DSCR Min 0.55 property tax per year 17,010
Cash-On-min -23.76% rent per year 75,000 Scenario (Best:1,ML:2,Worst:3) 2
IRR 17.85%
MIRR 13.92% expense escalation annual 4.00%
4% (300bps over 30 day treasury
starting period 61)
Page 84 of 84
iii. Pro Forma Summary
Valuation:
Year 1 2 3 4 5 6 7 8 9 10
Revenue
Total Sales 576,000 599,040 623,002 647,922 673,839 700,792 728,824 757,977 788,296 819,828
Production Costs (253,867) (264,022) (274,583) (285,566) (296,988) (308,868) (321,223) (334,072) (347,435) (361,332)
3501 rental income 76,390 79,503 82,742 86,113 89,621 93,272 97,072 101,027 105,143 109,427
Vacancy 76,390 79,503 82,742 86,113 89,621 93,272 97,072 101,027 105,143 109,427
Total Revenue 398,523 414,521 431,161 448,469 466,471 485,196 504,673 524,932 546,005 567,923
Expense
permits 7,717 8,032 8,359 8,700 9,054 9,423 9,807 10,206 10,622 11,055
utilities 18,945 19,717 20,520 21,356 22,226 23,132 24,074 25,055 26,076 27,138
labor 127,317 132,504 137,903 143,521 149,369 155,454 161,787 168,379 175,239 182,378
gl/liquor liability 7,130 7,420 7,723 8,037 8,365 8,705 9,060 9,429 9,813 10,213
property tax 17,325 18,031 18,766 19,530 20,326 21,154 22,016 22,913 23,847 24,818
property insurance 7,639 7,950 8,274 8,611 8,962 9,327 9,707 10,103 10,514 10,943
rent 76,390 79,503 82,742 86,113 89,621 93,272 97,072 101,027 105,143 109,427
Total Expenses 262,464 273,157 284,286 295,868 307,923 320,468 333,524 347,112 361,254 375,972
Net Operating Income(NOI) 136,059 141,364 146,875 152,600 158,549 164,729 171,149 177,820 184,750 191,950
Debt
Tranche One 70,113 70,113 70,113 70,113 70,113 63,065 62,953 62,836 62,715 62,589
Tranche Two 16,079 16,079 16,079 16,079 219,104 - - - - -
Total Debt 86,191 86,191 86,191 86,191 289,217 63,065 62,953 62,836 62,715 62,589
Net Sales Proceeds - - - - - - - - - 1,538,872
Reversion FCF - - - - - - - - - 1,538,872
Operating FCF 49,868 55,172 60,683 66,409 (130,668) 101,664 108,197 114,984 122,035 129,361
Total FCF (550,000) 49,868 55,172 60,683 66,409 (130,668) 101,664 108,197 114,984 122,035 1,668,233
DSCR 1.58 1.64 1.70 1.77 0.55 2.61 2.72 2.83 2.95 3.07
Minimum 0.55
Cash-on-Cash 9.07% 10.03% 11.03% 12.07% -23.76% 18.48% 19.67% 20.91% 22.19% 23.52%
Minimum -23.76%
PV Reversion 593,302 61.66%
PV Operating 368,926 38.34%
Total 962,227 100.00%
CF0 (550,000)
NPV 412,227
IRR 17.85%
MIRR 13.92%
