August 8, 2022

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The Inspector in any case snags a room on the Sixteenth-century Milk Area pub in Kent

“Six years of trying to make this happen. I wasn’t going to let a pandemic...

“Six years of trying to make this happen. I wasn’t going to let a pandemic stop me,” the 47-year-old says.

After a couple of decades in which fewer old firms died and fewer new ones were born in the United States, the pandemic saw an unexpected surge in business start-ups amid the economic disruption caused by covid-19. For the past year and a half, the number of businesses started each month has been running about 35 percent above pre-pandemic levels, according to Census Bureau data.

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“This is surprising, especially given historical experience and expectations early in the pandemic,” says John Haltiwanger, a University of Maryland economist who studies business dynamics. “And it wasn’t just when people had too much time on their hands and everyone was at home. It continued when there were lots of job openings.”

More new businesses were formed in 2020 and 2021 than any year since 2004, the first for which comparable data are available. It is too soon to tell if the trend will continue, but so far, there is no sign the pace of business formation is reverting to pre-pandemic levels.

Why? The pandemic created demand for all sorts of new businesses, Haltiwanger speculates. And, unlike some other recessions, financing was relatively easy, he says.

But as Warner learned, starting a business requires extraordinary persistence, more so during a pandemic. “I’m always looking to see if someone has the stomach for this,” says Nick Freshman, a local restaurateur and early investor in and adviser to City-State. “A lot of people think they do. Most don’t.”

Warner was rejected by dozens of banks and investment funds, wasted 18 months negotiating with one landlord who reneged on a deal, tussled with city building inspectors and had to give his current landlord tens of thousands of dollars in additional security deposits. And he was not eligible for any of the billions Congress offered businesses hurt by the pandemic.

But he raised over $1 million in equity, much of it in $10,000 or $20,000 dollops, even creating his own Opportunity Zone fund — taking advantage of a controversial tax break created by Congress in 2017 to encourage investment in low-income neighborhoods.

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“The deck is stacked in numerous ways against small, first-time entrepreneurs trying to make something new and interesting in the world,” Warner says. “I come from privilege. I’m very well-versed in dealing with bureaucracies. I don’t have any lack of confidence in talking to whoever I need to talk to. It was never going to be easy, but it was harder than it should have been. And if it was that hard for me, what hope does somebody have who doesn’t come from the same background I had.”

Warner grew up on the Upper West Side of Manhattan. When he was 8 or 9, his parents gave him a taste of a nonalcoholic beer called Kaliber. “It became my soft drink,” he says. “I got in trouble for bringing it to a school picnic.” When Warner and his friends from Dalton, a private prep school, found a pub that was not fussy about IDs, his friends would order Budweiser. He would get a Guinness. Warner went to Vassar College for a year but did not like it and finished college at the University of St Andrews in Scotland where his “beer education” began. Scotland is to beer, Warner says, what France is to wine.

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In the early 2000s, Warner did a stint in the Peace Corps in Guatemala where, as he can explain at great length, a vibrant beer-brewing industry brought by German immigrants in the 19th century has been snuffed out by local (and, to his taste, low-quality) monopolies. He got a master’s degree at Johns Hopkins School of Advanced International Studies and spent nearly a decade working on energy and climate change issues in Washington — at a think tank, on Capitol Hill, at the U.S. Department of Energy, and at a trade association.

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Around 2007, a friend offered him home brewing gear she did not want. Another buddy suggested they save money on beer by making it themselves. “Which,” Warner says, “is where every home brewer starts down the wrong path.” He loved it. “I made something that is better than Budweiser in a bucket on my porch.”

In 2013, he began to get serious, spending a month between jobs volunteering at a Montana brewery to see what the business was really like. Guests at his first wedding in 2013 were offered six brews (“made by the groom, drunk by all,” the menu said) including Equal Marriage (50 percent wheat and 50 percent barley) and Self Determinator (a traditional German lager). The next year, he left a job he did not like at the Energy Department and worked briefly as a waiter at a D.C. craft beer bar, Church Key. “I knew as much or more about beer as anyone there, but I was not a very good waiter. And so I was fired.”

Around this time, he cleared $200,000 on the sale of a house, put half toward another house and set aside the other half for the business he was thinking of starting — a D.C.-themed craft brewery and taproom. He figured it would take about $700,000 to start. “I was off by a factor of three and a half,” he says today.

In April 2015, to learn the trade and earn some money, he took a job as a beer salesman for a distributor, calling on bars, restaurants and retailers in suburban Montgomery County, Md.

Warner got trademarks on several names for his beers, hired a label artist and hosted small beer-tasting parties at his house with a local chef, both to perfect his technique and to lure investors. He made a lot of cold calls. “Things you do in politics are good for that,” he says. One connection led to another. The chef at his beer tastings introduced him to Glenn Davidson, a Deloitte consultant who has invested in several other small businesses. Davidson put in more than $50,000 of his own money, but, more importantly, invited well-off friends to his Virginia home to taste the beer and hear Warner’s pitch. About half invested.

By year-end 2016, Warner had raised about $250,000 (including his initial $100,000). By the end of 2017, he was up to $435,000 — and he was getting divorced. In January 2018, in a burst of excessive optimism, he told a neighborhood blog that the brewery would open by the end of that year. During 2018 and early 2019, a big D.C. developer dangled several potential sites, and Warner signed a lease for one. But the developer reneged, setting Warner back nearly 18 months. Meanwhile, his housemate, a 36-year-old woman, was diagnosed with metastatic melanoma. (After a year of immunotherapy, she recovered.)

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While still working full-time as a beer salesman, Warner kept raising money — by year-end 2018, he was up to $500,000 — and kept searching for space. In mid-2019, while he was in Belgium on a trip he won for selling lots of beer in his day job, his real estate agent called to say he had a $36,000-a-month lease on a 14,000-square-foot empty warehouse with an old loading dock suitable for outdoor seating. Improbably, the building also houses one of D.C.’s many charter schools, which are popular with property owners because the city pays rent in advance.

Warner took possession in September 2019, giving the landlord $173,000 in security deposits and putting down $143,000 in deposits on beer-brewing equipment. In January 2020, he quit his job to pursue the brewery full-time and got married (for the second time) at City Hall so he could go on his wife’s health insurance. (They planned an April ceremony that was delayed by covid until August, by which time his wife was four months pregnant.)

By February 2020, Warner had raised another $100,000, but needed more to put the business on a solid footing at the scale he envisioned. Raising money when no one knew what covid would bring was nearly impossible. The ensuing months, Warner says, were some of the “darkest of my life.”

As he was casting around for ideas, Warner heard from a neighborhood activist that his brewery was in a census tract designated by Congress as an Opportunity Zone — one of 8,764 such zones that offer lucrative capital-gains breaks to people who invest in real estate and businesses located in them. Warner wrote to “dozens and dozens” of OZ fund managers. “I was told the same thing by them all: We don’t invest in operating businesses, only real estate.”

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His attempts to get a bank loan were stymied, too. At first, lenders were overwhelmed by applications for pandemic-era Paycheck Protection Program loans, for which he did not qualify. When PPP ended, he says he was told: “You’re in food and beverage. And so we’re not lending.” One big bank told him that it would not lend to a business that already had signed a lease, put a deposit on equipment and hired a contractor because it wanted to be able to approve those things in advance. In all, he says, he was rejected by 25 banks.

But while scanning a D.C. government website, Warner noticed links to a few advisers to small businesses. One was Tom Nida of City First Bank, a federally certified Community Development Financial Institution whose mission is to invest in socially valuable projects in the city. At the end of 2020, City First made him a $621,000 loan, guaranteed by the U.S. Small Business Administration.

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“That saved our life,” Warner says. At that point, he owed a contractor $400,000 and had to come up with $34,000 in additional security deposits to his landlord after he pledged beer-making equipment as collateral for the loan. “My landlord actually said to me at one point, ‘James, it’s not my job to make this easy for you.’ ” The landlord did, however, agree in November 2020 to renegotiate the terms of the lease when the brewery’s opening date kept slipping in part because it took seven months to get city building permits.

Despite the rejection from Opportunity Zone funds, the option was so tantalizing that Warner decided to try to form his own fund. Local lawyers said that would cost $30,000 to $40,000, though, and that did not seem worth it. But a Michigan law firm offered to do the paperwork for $15,000. He hired them and organized his own fund.

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One of the largest single investments — $95,000 — came from Jacob Chaney, who owns a company and website that links D.C. area landlords with college-student interns. Chaney spotted City-State on a D.C. government website listing potential OZ projects. He was primarily drawn by the tax break — the OZ law allowed him to defer and reduce capital-gains taxes on the profits from the sale of some stock, and he will escape capital-gains taxes altogether on his brewery investment if he holds on for 10 years — but he has since become a big fan of the beer and the brewery and has hosted receptions for his college-student tenants there.

In all, Warner raised $400,000 in OZ money during the first half of 2021. The OZ investors collectively own about 8.7 percent of the brewery. Including the OZ investors, Warner has raised $1.13 million in equity from 66 individuals, including several members of his family. He has borrowed a total of $686,500, not counting equipment leases, and has $850,000 in landlord-financed improvements to the property.

Warner made beer for the first time in his gleaming stainless-steel vats in May 2021. That same month he landed a $145,000 Locally Made Manufacturing Grant from the city that he used to install a canning line for his beer and other craft breweries. (For now, the beer is canned on-site periodically by a contractor who brings in a beer-canning machine on wheels.)

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City-State finally opened on June 4, 2021. It currently has 15 of its own beers on tap, employs nine local residents and hosts a steady stream of events — a weekly comedy show, an occasional live music night and book readings aimed at children who are welcomed in the taproom with toys.

The business is still losing money, though, and the omicron surge did not help. Warner hopes City-State will be profitable by 2025 or 2026.


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