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Analyzing a Vineyard Investment
By John Bergman
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| The typical buyer that wishes to move to the wine country wants a home, or land to build a home. In most cases they wish to have some vineyard on their property. In some cases they wish to incorporate their desire to live in the wine country with the financial investment and return of a vineyard estate property.
Once a client's financial ability and criterion for their new lifestyle are determined, it is relatively easy to establish a formula for their success.
Client criteria
Let's assume a client has $850,000 in cash, stocks, bonds, equity or other assets, with which to develop their dream of owning a vineyard estate property. Let's further assume that they wish to establish an income from the vineyard that will eventually cover 100% of their property overhead including debt service, and even offer a nice cash flow to help with their life style.
Let's further assume that they have allowed themselves a 5 year period to get this magic "Retirement" plan in order.
Finding the Perfect Property
Lets assume that after assessing the client's needs and viewing properties on the market that fit within their critera, we find the perfect property. It consists of the following:
- It has a total of 26 acres.
- There are 8 acres of newly grafted Cabernet Sauvignon vines on disease resistant root stock. Eleven additional acres are planted in disease resistant root stock ready to be grafted to the varietal of the new owner's choice the next spring. All 19 acres have a drip irrigation system in place.
- There happens to be 4 small 1890's vintage homes on the property ranging in size from 750 to 1,200 sq. ft. They are In average condition and presently rented out.
- The client wishes to build a new 3,000. sq ft residence, costing about $175 per sq. ft. The total anticipated cost to build would be $525,000.
- I structure an offer to buy the property for $1,200,000. I design a first new "hybrid" loan for 75% of purchase plus Improvements. This will allow the client to close on the property with enough financing to build the new home as well.
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Here's How It Works
Structuring the purchase
| 1. Buy the property |
$1,200,000 |
| 2. Build a 3,000 sq/ft home at $175 p/sq/ft |
$ 525,000 |
| Total Acquisition With Home |
$1,725,000 |
| 3. Cash down (25%) |
$ 431,250 |
| 4. Acquire new (75%) loan |
$1,293,750 |
| 5. Estimated closing costs |
$ 25,000 |
| 6. Total Estimated Cash Out To Close The Transaction |
$ 456,250 |
How The Funding Takes Place
We need 75% of the property value only to close the transaction. So the initial funding of the loan is:
$ 900,000
The debt service will reflect a $900,000 loan, amortized over 30 years. We will assume a 7.2% inter- est. The debt service will be $6,109 monthly X 12:
$73,309
When the residence is about to be built, a 5 pay plan draw will begin on the remainder of $393,750. Let's say that the draws begin in the year 2002, and are funded equally throughout the year, beginning in January, and ending in September.
Now lets see just how the over all financial picture looks. I have used average farm costs, and estimated other normal operating expenses based on customary business procedures. (See 'Cash Flow Analysis' Table).
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Total Cash Outlay Until Cash Flow Turns Positive
| Cash required to close the transaction |
$456,250 |
| Cash required to carry 1999 |
$151,100 |
| Cash required to carry 2000 |
$ 98,800 |
| Cash required to carry 2001 |
$ 91,500 |
| Cash required to carry 2002 |
$ 44,500 |
| Total estimated out of pocket cash |
$842,150 |
Cash Flow Analysis
| YEAR |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
| Finish trellis system on 19 acres @ $2,500 per acre |
($47.5) |
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| Finish grafting 11 acres @ $1,500 per acre |
($16.5) |
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| Acres Planted |
8/11 |
8/11 |
8/11 |
8/11 |
8/11 |
8/11 |
19 |
19 |
| Tons per acre |
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2/0 |
4/4 |
6/4 |
7/6 |
8 |
8 |
| Total combined tons |
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16/0 |
32/22 |
48/44 |
56/66 |
152 |
152 |
| Total tons |
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16 |
54 |
92 |
122 |
152 |
152 |
| Sell grapes @ $ per ton |
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$2.2 |
$2.2 |
$2.2 |
$2.0 |
$2.0 |
$2.0 |
| Vineyard income |
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$35.2 |
$118.8 |
$202.4 |
$244 |
$250 |
$250 |
| Rental income |
$38.4 |
$30.0 |
$30.0 |
$30.0 |
$30.0 |
$30.0 |
$30.0 |
$30.0 |
| Gross operating income |
($25.0) |
$30.0 |
$65.2 |
$148.8 |
$232.4 |
$274.0 |
$280.0 |
$280.0 |
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| Management costs |
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| $2,500 per acre, per year |
($47.5) |
($47.5) |
($47.5) |
($47.5) |
($47.5) |
($47.5) |
($47.5) |
($47.5) |
| Real Estate taxes 1.2% |
($15.0) |
($15.0) |
($15.0) |
($15.0) |
($15.0) |
($15.0) |
($15.0) |
($15.0) |
| Insurance |
($1.7) |
($1.7) |
($1.7) |
($1.7) |
($1.7) |
($1.7) |
($1.7) |
($1.7) |
| Harvest Costs $125 per ton |
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($2.0) |
($6.7) |
($11.5) |
($15.2) |
($19.0) |
($19.0) |
| Net operating income |
($89.8) |
($34.2) |
($1.0) |
$77.9 |
$156.7 |
$194.6 |
$196.8 |
$196.8 |
| Debt service |
($73.3) |
($73.3) |
($73.3) |
($73.3) |
($73.3) |
($73.3) |
($73.3) |
($73.3) |
| CASH FLOW |
($163.1) |
($107.5) |
($74.3) |
$4.6 |
$83.4 |
$121.3 |
$123.5 |
$123.5 |
| In the year 2003 the property begins to not only pay for itself including all debt service, it offers the owners a nice additional cash flow. This is how I expect the cash flow to work: |
| In 2003 the expected income will be: |
$ 4,600 |
| In 2004 the expected income will be: |
$83,400 |
| In 2005 the expected income will be: |
$121,500 |
| In 2006 the expected income will be: |
$123,500 |
It is expected if the vineyard is properly maintained, the property will average from $100,000 to $125,000 a year income after all real estate costs are paid for the next 20 to 30 years. There are 3 things that determine the fate of an income producing vineyard property, they are:
- Mother Nature
- The economy
- Professional Vineyard Management
The only thing that we can control is management.
Nothing can be warranted, but the above 3 items.
In this example, I engineered a transaction that fit within the client's needs, and they are in fact moving through the process at this time.
Anyone can sell you vineyard estate property, but not everyone can or will take the time to engineer a customized plan designed just for your requirements.
If you are thinking of buying a vineyard, I suggest that you go to my web site http://www.bergmanvineyards.com and select the link for my questionnaire. Fill in the blanks and click on the submit button. I would be happy to help you create your dream of living in the wine country.
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Vineyard Shoppers Questionnaire
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