Beer and biotech: Two industries San Diego wants to lure

A new incentive program aims to spur more rapid expansion of San Diego’s already thriving biotech and craft brewing industries.

City officials say the two industries are engines of the local economy because most biotech jobs come with high salaries and because breweries typically have large workforces that boost other area businesses such as restaurants, grocery stores and dry cleaners.

Modeled after a program in Sacramento, the incentive will lower the steep cost of expansions such businesses face because they use large amounts of water, requiring them to pay sewer hook-up fees that often exceed $100,000.

Such high fees can persuade businesses to pursue smaller expansions, delay expansion plans or abandon them altogether.

Using $750,000 from a defunct state tax credit program, the city will buy “stranded” sewer capacity controlled by businesses that use little water but occupy buildings where the previous tenant used lots of water and consequently paid a high hook-up fee.

The city plans to buy the excess capacity back at roughly half price and then sell it to businesses pursuing expansions at roughly 60% of what they would normally pay, said Erik Caldwell, the city’s economic development director.

“When the new use that’s less water-intensive comes in, we can buy that excess capacity that they’re not using,” Caldwell said. “That’s all capacity that the Public Utilities Department has anticipated would be in the system anyway. We want to make sure it’s creating jobs, not sitting idle somewhere because the previous tenant needed it and the current tenant doesn’t.”

Councilman Chris Cate, whose north city district includes many of the region’s roughly 130 craft breweries, predicted the new program would spur many expansions that might not have otherwise happened.

“One of the biggest costs and hurdles to investment is the capacity fees,” he said. “We’re looking for ways to offset some of those capital costs.”

Cate also said he thinks breweries are overcharged for sewer hook-up fees, which the city uses to expand its capacity for sewage treatment. He said breweries pay high fees because they use a lot of water, but that most of it never hits the drain because it’s in the beer.

“Even though you’re not putting anything into the sewer system, you’re still paying those fees,” he said.

Jeff Silver, president of 5-year-old Rough Draft Brewing Company in Miramar, said the incentive would help both small breweries considering moderate expansions and larger breweries planning more significant upgrades.

“It’s good for any brewery that’s considering expansion — it just lowers that calculation,” he said. “They’re going to get hit with this charge and it’s pretty expensive.”

Silver said the incentive could make San Diego more attractive to breweries looking to relocate or considering leaving for other parts of the county.

He said that might become more important with San Diego’s city-only minimum wage scheduled to increase to $11.50 an hour Jan. 1 — doubling the difference between the minimum wage rate in the city versus the state.

The city’s rate is now $10.50 an hour, 50 cents higher than the $10 required by the state. When the city goes to $11.50 it will be $1 more than the state rate, which will increase to $10.50 on Jan. 1.

The biotech industry is also likely to embrace the incentive, said Joe Panetta, chief executive of Biocom, a San Diego-based life sciences trade group.

“For people to be able to buy credits is a great incentive,” said Panetta, predicting the program could spur some expansions that didn’t previously make financial sense.

He praised the city for aiming to boost one of its most important and thriving business sectors.

“It’s one of the key industries in the city and it’s growing all the time,” Panetta said.

Caldwell said pharmaceutical companies and medical device manufacturers would also probably pursue the new incentive.

He said the $750,000 will be “seed money” to get the process started. Because the city won’t be losing money on any of the transactions, he said it’s possible no additional contributions will be needed.

“Our hope is this money allows us to do a couple transactions and get it up and running,” he said. “It will give us the working capital to always have one or two transactions that we’re working on.”

He said the city has identified roughly a dozen businesses with stranded capacity.

The number of businesses considering expansions but facing high hook-up fees is harder to estimate, he said.

“I would imagine once we start doing the transactions and word gets out, there will be a lot of businesses that approach us,” Caldwell said.

He said the program should be up and running by midsummer, which he called a conservative estimate.

Though the program is modeled on a similar incentive in Sacramento, Caldwell said a local situation also played a role.

Two years ago two companies tried to exchange sewer capacity and discovered it was illegal without the city acting as a middleman.

“We are facilitating a transaction that otherwise couldn’t occur,” Caldwell said.

The seed money comes from a defunct state tax credit program to support economic and workforce development initiatives. Though the program was terminated in 2013, the San Diego Regional Enterprise Zone had $2.5 million in remaining administrative funds.

david.garrick@sduniontribune.com

Garrick writes for the San Diego Union-Tribune.