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Tool Shed co-owners Jeff Orr, left, and Graham Sherman are former tech consultants who turned their love of craft beer into a business. (Jeff McIntosh for The Globe and Mail)

Two years after brewing their first batch of ale in a backyard tool shed, Graham Sherman and partner Jeff Orr opened a craft brewery in an industrial warehouse in northeast Calgary in 2014. The former tech consultants, who met while working in Afghanistan, quickly won “people’s choice” awards for their flavourful, quirky-named ales and lagers, and this year expect to triple annual production to one million litres from a year ago.

The aptly named Tool Shed Brewing Co. is one of scores of small-scale breweries and distilleries popping up in urban areas and small towns across Canada, tapping a global thirst for traditional, hand-crafted beer and spirits. Fuelling growth is a loosening of land use and other regulations as governments recognize potential economic spin-offs from this fast-emerging sector.

However, commercial real estate challenges persist, from locating an appropriate site (and building) to convincing wary landlords to lease to a startup or navigating provincial and municipal rules on zoning, water and fire safety.

Mr. Orr and Mr. Sherman looked for 18 months to find the suitable site for their brewing operation. The space allows visitors to taste product and watch the beer-making in action. (Jeff McIntosh for The Globe and Mail)

“The biggest real estate challenge is not only to find a spot that supports your business but a building that will support the use as well,” says Curtis Scott, manager of market intelligence for Colliers International in Vancouver. With the explosive growth of craft breweries (and, to a lesser extent, distilleries) in the past five years, he adds, “It is an exciting thing to do but there is a long list of checks you have to go through to make sure it is appropriate for you and that the city is willing [where requested] to change land use.”

In Calgary, the Tool Shed partners took 18 months to find their site: a high-ceiling building with a thick concrete floor and sloped floor drains located in an industrial park. Vacant for more than two years for the very features that made it attractive to Tool Shed, the 1970s-era building had a landlord willing to issue a long-term lease to budding brewers.

“The beer gods were smiling on us,” says Mr. Sherman. “It was the perfect building.”

After its first year in Calgary, Tool Shed is attracting hundreds of beer lovers a week (by car or on city-wide brewery tours) to its industrial location, in part because of rule changes by Alberta Gaming and Liquor Commission in 2013, including permission for tasting rooms in facilities in industrial areas. Now Tool Shed patrons sit at a 30-metre-long bar and watch the production of their favourite brew.

Tool Shed hopes to triple its production this year to one million litres. (Jeff McIntosh for The Globe and Mail)

As in Calgary, the search for an appropriate, affordable brewery site in Vancouver is “very challenging,” says Iain Hill, a co-founder of Strange Fellows Brewing Co., and a 20-year veteran of British Columbia’s craft brewing industry.

“In Vancouver, because of the massive real estate boom since 1969, on and off, you have a lot of developers trying to turn commercial or industrial zoned [areas] into residential,” he says.

After a two-year search, Mr. Hill and his partner, Aaron Jonckheere, leased a 9,000-square-foot former carpet warehouse east of downtown. Since the commercial property was not in an industrial zone, the partners needed a Vancouver development permit to establish their brewery. While the approval never seemed in doubt, the process is still “really hard and risky,” says Mr. Hill. “You have to be especially patient with local authorities to get over what hurdles you need to get over with them. That is the greatest area where you need patience.”

Strange Fellows co-founders Aaron Jonckheere, left, and Iain Hill moved their operations into a former carpet warehouse in Vancouver but had to endure a lengthy approval process with the municipal government. (Ray Dosanj)

Mr. Jonckheere adds, “You’ve got to choose wisely in your building,” including an adequate sprinkler system and water supply and, in British Columbia, seismic upgrades. “Making that right choice will set you for success.”

Like their brewery counterparts, small-scale distillers also face real estate challenges, but their 40-per-cent alcohol products face more stringent fire code provisions than for beer.

“The most learning I have done has less to do with zoning and way more to do with fire and building code [rules],” say Mike Heisz, a former BlackBerry Ltd. engineer who founded his distillery, Junction 56, in Stratford, Ont., in 2014. It produces gin, vodka and moonshine. He expected to lease, but spotted a former 19th-century church (most recently a hardware store) on an industrial property bounded by train tracks and a residential neighbourhood, close to downtown.

He purchased the 40,000-square-foot building for its rustic look, needing just 5,500 square feet for the distillery and leasing the rest to commercial tenants. Significantly, to meet Ontario fire code rules, Mr. Heisz had to build a thick fire wall of concrete block separating the distillery from the rest of the building.

“We worked with them [Stratford fire and planning officials] and they with us, and we got through it,” he says.

Mr. Jonckheere says choosing the right building was key to getting the suds flowing, citing an adequate sprinkler system, water supply and, in British Columbia, seismic upgrades. 'Making that right choice will set you for success.' (Ray Dosanj)

Zoning rules vary by jurisdiction, with either smooth sailing or headaches for small-scale distillers.

In west-end Toronto, Charles Benoit founded Toronto Distillery in a former Canada Bread manufacturing plant, zoned industrial, that is also home to Junction Craft Brewing, owned by Tom Paterson and partners.

“It was very straightforward for us and we were very fortunate,” says Mr. Benoit, citing the city’s zoning provisions. Despite their location, the distillery and brewery are close to public transit and residential neighbourhoods, and operate with permission to offer tasting rooms and retail. “We found a location that met the rules,” he says.

Rising real estate costs put pressure on entrepreneurs to find affordable industrial locations in the $10- to $15-a-square-foot lease cost.

“There is not a ton of buildings or space,” says Mr. Paterson, noting his west-end Junction neighbourhood “has taken off with families moving in and the price of houses going up.”

In contrast to the experience in Toronto, some distillers have had difficulty setting up in rural municipalities.

Don Di Monte, owner of Last Straw Distillery, was told he would need to seek rezoning approval if he wanted to set up his facility in Erin, Ont. Ultimately, he decided to open a 2,000-square-foot distillery in Vaughn, Ont., already zoned to allow whisky making and close to a retail market in the Greater Toronto Area.

For now, the thirst for craft brewers and distillers shows no sign of slackening.

Calgary’s Mr. Sherman says he and his partner already have blown past milestones set for their seven-year business plan. “We can’t keep up with growth,” he says. “It’s terrifying, but a great thing, better than the alternative.”

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