In my experience, the first questions potential vineyard buyers ask are:
- How can I make the "dream" of living in wine country work for me?
- How does the cash flow work?
- How do the tax advantages work?
- How do I get started?
My first steps are to qualify the buyer's financial ability and attempt to match it with their dream. I ask them to go to my web site www. bergmanvineyards. com and fill in the answers to my questionnaire. These answers will give me an overview of who I am dealing with, and give me a direction to follow to get them to their goals.
After going through their questionnaire and discussing any further specific details, I begin to get a picture of who this client is and what they wish to accomplish. The following presentation is a very typical scenario of just how the plan lays out for a specific client's needs.
THE CLIENT'S QUALIFICATIONS AND DREAM
1. The client has $1,750,000 in liquid assets to work with (stock, equities, cash, pension money, CD's etc.).
2. This is a man and wife with the children already grown and out of the house.
3. They have a present income of $270,000 per year.
4. In 4 to 6 years they wish to retire to the wine country from their present location in New York.
5. They wish to build a new home on the vineyard property prior to moving. The vineyard shall act as supplemental income source for their retirement.
6. They will sell their main residence with an estimated $750,000 in equity at that time. This money can go to reduce debt on the vineyard property.
7. They like Napa, or Sonoma Counties, but will need to see both to make up their mind before buying.
THE CLIENT'S SEARCH AND ACQUISITION PROCESS
1 The clients come out for a look. We see 5 properties in Sonoma and Napa Counties. They decide on making an offer on a 57-acre parcel located in the "Carneros Appellation" of Sonoma County. The property has an approximate 1,800 square foot old farm house that is presently rented out for $1,200 per month, a 3,000 square foot barn and storage shed, and 2 other out buildings. There are 2 wells. One produces 60 gallons per minute (GPM), the other 25 GPM. There are 12 acres of existing vineyard, consisting of 4 acres of Chardonnay, 5 acres of Pinot Noir, and 3 acres of Merlot that were all planted in 1982 on AXR-1 rootstock.
2. It is discovered that the vineyard is planted on 12' X 8' spacing, and is showing a mild problem with Phylloxera. The water proved out to be clean from Boron and other bad chemicals and bacteria. It is anticipated that the existing vineyard has approximately 6 to 10 years of productive life left.
3. The property also has approximately 15 additional acres that can be planted to grapes.
4. We end up paying $1,470,000 for the property.
5. The buyer put down $600,000 cash.
6. I arranged a new first loan in the amount of $870,000. The interest rate was 7.4%, amortized over 30 years, due in 10. The monthly payments are $6,023.70.
7. We close the transaction. The costs in escrow were:
a) Points for the loan $8,700
b) Loan fee $ 370
c) Process fee $ 350
d) Appraisal fee $ 425
e) Credit Report $ 50
t) Tax fee $ 80
g) Flood Certificate $21
Total estimated lenders costs $ 9,996
8. Other costs in the escrow were:
a) Title Insurance $3,893
b) Escrow Insurance $850
c) Miscellaneous costs $150
Total estimated escrow costs $ 4,893
Down Payment $600,000
Total estimated cash costs to close the transaction $614,889
Now that they own the property, it is time to plan out their strategy toward the future. They wish to occupy a home in 4 to 5 years, and they wish to maximize the income from the vineyard to supplement their retirement income.
THE PLAN
Establish a budget to:
a) Inter plant, replant and add a new vineyard that when finished will end up being approximately 27 acres of high density, phylloxera-resistant vines.
b) Design and build a new home.
c) Renovate the existing farmhouse as an in-law, caretaker or rental unit.
THE BUDGET VINEYARD
a) Inter Plant the existing 12 acres with disease resistant rootstock and bud wood at approximately $7,000 an acre. $ 84,000
b) Plant 15 acres of vineyard from raw land at $20,000 per acre = $300,000
c) After 3 years, rip out the old existing 12 acres, and replant, trellis, run new drip irrigation lines, etc. at $14,500 an acre. $174,000
d) Other miscellaneous expenses. $ 50,000
Total estimated cost of vineyard $608,000
NEW HOUSE
a) Budget $175 per square foot times 3,200 square feet to build. $560,000
RENOVATE THE FARM HOUSE
a) Budget $65 per square foot times 1,800 square feet to renovate. $117,000
TOTAL ESTIMATED FOR DEVELOPMENT/REDEVELOPMENT $1,285,000
IMPLEMENTATION OF THE PLAN
I. Out of pocket the buyer pays for a) and b) of the vineyard expenses that add up to $384,000.
2. The owner has $998,889 invested in the property, plus any debt service and taxes paid to the date of installing the vineyard. This leaves them with approximately $750,000 remaining in their budget to finish and carry the project.
3. Four years later they are ready to rip out the original 12 acres of vines (leaving the newer inter plants) and replant, trellis, and add new drip irrigation.
4. The owners have already gotten their plans approved by the county to build their new borne, and are ready to build at any time.
5. The decision is made to refinance the entire property, with a "Highbred" loan that will fund enough money to take out the existing debt, fund in stages the construction money needed to build the new home, fund the renovation money for the farm house, and the rip out and replanting of the original old portion of the 12 acres of vines.
THE REFINANCING
The new loan shall generate enough money to do the following:
a) Pay off the remainder of the existing debt. $ 860,000
b) Fund the building of the new home. $ 560,000
c) Rip and replant the 12 old acres of vines. $ 174,000
d) Fund the renovation of the farm house. $ 117,000
e) Miscellaneous costs. $ 50,000
Total Estimated loan needed $1,761,000
Now the debt service on $1,761,000 with interest of 7.2%, amortized over 30 years, jumps to $11,953.46 per month. How does this work from a cash flow and tax benefit standpoint? Let's have a look at the cash flow and the tax benefits on this property spread over a 7 year basis. The following tables detail this for you.
CASH FLOW ANALYSIS OF OWNING A VINEYARD
| Year |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
| Capital Items |
|
|
|
($,000) |
|
|
|
|
steady state |
| Property Purchase |
615 |
|
|
|
|
|
|
|
|
| Vineyard Plant and Interplant |
384 |
|
|
|
224 |
|
|
|
|
| Building/Redevelopment of Houses |
|
|
|
|
677 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Income |
|
|
|
|
|
|
|
|
|
| Acres of Vines (original/new) |
12 |
12/15 |
12/15 |
12/15 |
12/15 |
12/15 |
12/15 |
12/15 |
12/15 |
| Tons per Acre |
5 |
5/0 |
5/0 |
7/0 |
8/2 |
9/4 |
9/6 |
9/8 |
9/9 |
| Tons Harvested |
60 |
60 |
60 |
84 |
96/30 |
108/60 |
108/90 |
108/120 |
108/135 |
| Total Tons |
60 |
60 |
60 |
84 |
126 |
168 |
198 |
228 |
243 |
| Average Price per Ton |
$2,200 |
$2,300 |
$2,300 |
$2,300 |
$2,300 |
$2,300 |
$2,200 |
$2,200 |
$2,100 |
| |
|
|
|
|
|
|
|
|
|
| Gross Vineyard Income |
132 |
138 |
138 |
193 |
290 |
386 |
436 |
502 |
510 |
| Rent from Farm House |
12 |
12 |
12 |
12 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Gross Operating Income |
$144 |
$150 |
$150 |
$205 |
$290 |
$386 |
$436 |
$502 |
$510 |
| |
|
|
|
|
|
|
|
|
|
| Expenses |
|
|
|
|
|
|
|
|
|
| Vineyard Operations ($2,500 per acre per year) |
30 |
68 |
68 |
68 |
68 |
68 |
68 |
68 |
68 |
| Harvest Expenses ($150 per ton) |
9 |
9 |
9 |
13 |
19 |
25 |
30 |
34 |
36 |
| Insurance |
5 |
5 |
5 |
5 |
10 |
10 |
10 |
10 |
10 |
| Real Estate Taxes |
18 |
18 |
18 |
18 |
18 |
18 |
18 |
18 |
18 |
| Misc. |
10 |
10 |
10 |
10 |
10 |
10 |
10 |
10 |
10 |
| |
|
|
|
|
|
|
|
|
|
| Total Expenses |
$72 |
$109 |
$109 |
$113 |
$124 |
$130 |
$135 |
$139 |
$142 |
| |
|
|
|
|
|
|
|
|
|
| Net Operating Income |
$72 |
$41 |
$41 |
$93 |
$166 |
$256 |
$301 |
$362 |
$369 |
| |
|
|
|
|
|
|
|
|
|
| Debt Service |
72 |
72 |
72 |
72 |
141 |
141 |
141 |
141 |
141 |
| |
|
|
|
|
|
|
|
|
|
| Cash Flow |
$0 |
($31) |
($31) |
$20 |
$24 |
$115 |
$159 |
$221 |
$227 |
TAX BENEFIT ANALYSIS OF OWNING A VINEYARD
| Year |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
| |
|
|
|
($,000) |
|
|
|
|
Steady State |
| Cash Flow |
$0 |
($31) |
($31) |
$20 |
$24 |
$115 |
$159 |
$221 |
$227 |
| Plus: Principal Payments |
8 |
8 |
9 |
10 |
13 |
14 |
15 |
16 |
17 |
| Less: Annual Depreciation (see below) |
40 |
40 |
49 |
256 |
40 |
40 |
46 |
46 |
46 |
| Taxable Income (Or Loss) |
($32) |
($63) |
($71) |
($226) |
($3) |
$89 |
$129 |
$191 |
$199 |
| Cumulative Losses as a % of Client's Invested Cash |
3% |
9% |
16% |
37% |
|
|
|
|
|
DEPRECIATION SCHEDULE
| |
|
|
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
| Description |
Life (Years) |
Cost/Basis |
|
|
|
($,000) |
|
|
|
|
|
| Original Vines (12 Acres) |
|
|
|
|
|
|
|
|
|
|
|
| Vines |
20 |
168 |
8 |
8 |
8 |
143 |
|
|
|
|
|
| Vineyard Improvements |
10 |
120 |
12 |
12 |
12 |
84 |
|
|
|
|
|
| 1999 New Planting (15 Acres) |
|
|
|
|
|
|
|
|
|
|
|
| Vines |
20 |
150 |
|
|
8 |
8 |
8 |
8 |
8 |
8 |
8 |
| Vineyard Improvements |
10 |
150 |
15 |
15 |
15 |
15 |
15 |
15 |
15 |
15 |
15 |
| 1999 Interplants (12 Acres) |
|
|
|
|
|
|
|
|
|
|
|
| Vines |
20 |
42 |
|
|
2 |
2 |
2 |
2 |
2 |
2 |
2 |
| Vineyard Improvements |
10 |
42 |
4 |
4 |
4 |
4 |
4 |
4 |
4 |
4 |
4 |
| 2003 Interplants (Replace Original 12 Acres) |
|
|
|
|
|
|
|
|
|
|
|
| Vines |
20 |
112 |
|
|
|
|
|
|
6 |
6 |
6 |
| Vineyard Improvements |
10 |
112 |
0 |
0 |
0 |
0 |
0 |
11 |
11 |
11 |
11 |
| Total Annual Depreciation |
|
|
40 |
40 |
49 |
256 |
40 |
40 |
46 |
46 |
46 |
THE HAPPY ENDING
Today these happy transplants from New York are living the life style that they had only dreamed about less than 5 years ago. They still have the $750,000 equity from their recently sold New York house, plus $690,000 of their original liquid asset budget. Their next dream is to make that 100 point bottle of wine with their own label on it. This is yet to be seen.
Structuring of the tax-advantaged portion of this presentation was created by Richard Brockmeyer, an MBA graduate of Stanford University in 1975. Richard and I first met while he was a partner and Vice President of William Hill Winery back in late 1989. I ended up working with he and other officers and directors with the William Hill Company during their sale of the company to Hiram Walker/Allied Lyons in 1990. The sale was finally closed in 1992.
Richard has his own consulting company here in the Napa Valley &endash; Wine Industry Investment Consulting &endash; based on his expertise gained during 25 years of assisting clients in the creation of vineyard and wine estates in the premium wine growing regions of California and Oregon. He recently earned the Accredited Agricultural Consultant designation from the American Society of Agricultural Consultants.
After my evaluation of developing a dream for the client that wishes to live in the country, I recommend that the client meet with someone like Richard to fine-tune our expectations. The client may also desire their ongoing services to help implement the business plan. Richard can be contacted at his office located at 2060 Big Ranch Road, Napa, California 94558. His phone number is (707) 226-8252.
We both suggest you also consult with a wine industry-based accounting professional to refine the tax planning aspects of your vineyard property. The type of ownership entity you choose can alter the methods of expensing and depreciating that are available.
If you have a dream of owning vineyard property in Napa, Sonoma, Mendocino, or Lake Counties, I would like to hear from you. You may wish to go to my web site www.bergmanvineyards.com and scroll down to my questionnaire, and fill in the blanks first. I will pay close attention to your desires and would like to help you create your dream of living in the wine country.
Vineyard Shoppers Questionnaire
