So you want to buy a Winery
(this article refers to Napa Valley values on small to medium size wineries- 20,000 gallons or less)
I have assisted many buyers through the process of seeking, investigating and owning a winery over the past 14 years. While the process sounds straightforward the path to owning a winery is anything but. Here is a simplified outline of the complex process in 5 phases:
The first step toward owning a Napa Valley winery is choosing the right agent. Proudly there are more than a dozen very good Napa Valley-based Realtors who specialize in this unique, complex niche. Sadly there are also some who promote themselves as having the ability to sell you a winery, but they are merely referring to the technical ability and not to expertise and experience.
“Just because you can, doesn’t mean you should.” While licensed Realtors can sell you just about any kind of real estate, the Realtor’s law of ethics states the following:
REALTORS® shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client and their contribution to the assignment should be set forth.
In California, a buyer’s agent is typically paid by the property owner’s agent, i.e., the listing agent of the property acquired. In other words, the seller pays most commissions from the proceeds of the sale. Exceptions exist, of course, such as ‘pocket listings’ and ‘open listings’ where the seller does not commit to paying their agent a fee that would be shared with the agent who secures a buyer upon the closing of escrow.
Why does it matter to a winery buyer how their real estate agent gets paid? Because buying real estate is one of the few life situations that allows you to hire the very best without it costing you more; the "payment" required from a buyer is commitment and loyalty. Your agent only gets paid when they have the authority to represent your interests and to write an offer on your behalf. Buyers don’t often offer commitment and loyalty to a single broker. Instead, they cast a wide net over the marketplace by contacting several brokers in fear/hopes that they are gaining wider exposure to winery opportunities. That is one way to go, and I no longer argue with that logic, as some people cannot be swayed from believing that more is better. As with other things in life there are many ways to skin a cat. In the lifestyle winery buying world one of those ways is to find and commit to an experienced, knowledgeable broker and make that broker a part of your team. This allows a free-flow of exchange of knowledge about the premium opportunities reserved for buyers who are willing to commit to their agent.
The side effect, if you will, of working with multiple brokers is that a buyer winds up getting information on C-grade real estate opportunities because without a buyer's commitment brokers risk giving their time and expertise for no compensation. In winery real estate premium opportunities equate to those properties that are recently listed with another professional that has put together a comprehensive information package that is accompanied by an asking price based on a reasonable market value. This is not a sexy subject in the winery acquisition process but it needs to be communicated to prevent misunderstandings and confusion about who is representing whom.
PHASE II- NAVIGATING THE MAZE
When an experienced winery buyer contacts me and knows what they want, we skip Phase II. However, many buyers begin with an immediate desire to invest in the wine business through owning real estate, unaware of how many other options are available. One of my personal strengths is helping clients distill down what it is they really want to achieve, and providing them with an understanding of various options. Here are a few examples of these options:
Add money and stir- a turn-key, already operating winery with a brand, possibly a residential estate, a winemaker, an operations team, distribution or wine club, and inventory. As one would imagine this is the most expensive choice. In Napa County, for example, these kind of winery assets range in value from $3M to $10M.
Big Toe in the Water- for many buyers, particularly those who are risk-sensitive and those who don’t have the time or inclination to take on a full scale winery business, this option is preferred. Buy putting one’s big toe in the wine business pool involves acquiring a vineyard estate that has planted, producing, contracted vines providing revenue to the venture, but not much effort on the part of the new owner. Napa Valley is replete with cottage industries, and full-service vineyard management is one of them. With the right vineyard management team a vineyard estate owner experiences the best of all worlds in that they enjoy the benefits of being in the wine business and the lifestyle enjoyment for very limited involvement and far less risk. With this kind of acquisition a vineyard owner can participate in the fun stuff and perhaps retain some fruit for their own limited wine making venture that can be expanded in the future. A vineyard estate in Napa Valley, say 10 acres, planted with a lovely residential compound sells for between $1.5 to $5M (or more in certain locations and situations). 10 acres is an ideal minimum number because Napa County requires 10 acres in order to have a winery permit (City of St. Helena and Calistoga city limits require 5 acres to apply for a winery permit). Additionally, 10 acres of vines provide an economy of scale for farming costs.
Try It Before You Buy It- with the advent of custom crush and virtual wine brands many buyers are opting to test the waters by starting a small wine brand, yet owning no real estate whatsoever. According to Wines and Vines 2012 Resource Guide there are more than 800 Napa Valley wine brands, and 400+ bricks and mortar wineries. The challenge with this approach is controlling quality and sell- through of wines. Consistent access to quality grapes may land you a name winemaker, but this is challenging. Having contacts and resources is vital to make a venture like this successful. The other downfall is branding. You don’t want to introduce your Napa brand in a less than high quality manner- a few bad or under par releases and you’re pushing an elephant up a hill for a long time trying to improve your brand’s rep.
Time is Money- If you have time on your side another option is to acquire land that has a winery permit and/or an ECP (Erosion Control Plan) ready for you to implement and build. There are good equity building opportunities with these kind of acquisitions if you buy right. Location and appellation are key players in any wine-related real estate purchase, but particularly key in development projects. A small winery permit, typically limited to 20,000 gallons (approx 8K cases) is worth anywhere between $500-$2,000,000 dollars around the county. A winery permit and an approved winery plan by a renowned architect push the value to the higher end. Since Napa County is no longer issuing public tasting permits, the details of a permit’s marketing allowances and other restrictions can affect the permit’s value too.
A vineyard development deal with an ECP in place increases the property’s value per plantable acre. Be very cautious with the term “potential”. Most savvy vineyard developers know that properties that are sloped over 5% require an ECP and these are costly in both time and professional fees. Some ECPs are more difficult to obtain than others (the greater the slope the more time and money).
Raw Land Deals- Not for the faint of heart, or the low risk buyer. Costs can escalate far beyond your intended investment and it takes local resources, relationships and masters of their crafts to make these kind of projects work. Most buyers who buy raw land deals are seeking “opus” projects and have very deep pockets. Additionally, finding raw land that is plantable and suitable for building a winery and estate residence is getting harder and harder.
The Lifestyle- Many buyers who navigate the maze of options with me discover that ultimately what they really want is to live to Napa Valley lifestyle: the scenery; the rural sophistication; the architecture and interior design; bocce ball; farm-to-table dining and the big picture culture of the wine country. These buyers often end up buying a quintessential home that may or may not have a small vineyard, but has vineyard views. I also refer to this as the ‘borrowed landscape’ option, and have helped many buyers who started out wanting to own a winery or vineyard drill down to their true desire and risk assessment, which is to live the culture and not have the risk or responsibility. I originally founded WineryX with the intention of specializing in winery and vineyard properties. In 2003, I expanded the brokerage to include LifeStyle Properties because many buyers actually want the culture.
(I will also tell you that these lifestyle option buyers often transition into other real estate acquisitions once they better understand the lay of the land and how things work. In other words, they inevitably get ‘the bug’ and expand their real estate holdings armed with a greater understanding of the terrain).
Once a buyer is able to determine the kind of real estate they want to invest in the process of looking and evaluating options begins. This is another area where my experience and resources give my clients a significant advantage. Knowing the marketplace, past present and future trending, is crucial to securing a great property and deal. My database of knowledge of winery sales, vineyard sales, and winery and vineyard estate transactions is impressive. When my clients make a choice they know they have been given superlative guidance and have been presented with the widest range of opportunities and insight available. Assembling a due diligence and planning dream team is a must. My resources and cultivated relationships are at my client’s fingertips, providing a assuring edge when the time comes to write the big check and move forward.
Pulling the trigger on a multi-million dollar investment is huge, and there are no guarantees in life. Buyers who are fortunate enough to be in a place to consider investing in a Napa Valley dream acquired wealth by making wise, measured choices. I learned the hard way in my early real estate career days that the higher the price the higher the likelihood a buyer may talk themselves out of the deal at some stage within the process. It happens. I get it. No matter how well I do my job providing insight and resources for making a sound choice, it still happens.
Sometimes a deal doesn't’t close due to financing, though there are certain lenders who specialize in certain types of properties. Knowing which is which and who to partner with when choosing to purchase real estate with lending assistance makes a big difference. Winery and vineyard properties have so many variables that make appraisals the wild card in escrows.
Of course cash is still king and many winery/vineyard lifestyle purchases are cash deals.There are a number of buyers who leverage their cash to achieve better price and terms on the deal, and eventually finance the property if it suits their master financial planning.
Living the dream, enhancing your acquisition’s lifestyle value and real estate value is one of the reasons I love my career, and why I chose this specialty. Clients who have purchased Napa Valley wineries, vineyards and amazing estate homes provide an amazing and rewarding follow up chapter. Watching them enjoy the fruits (literally) of their investment, making memories, making their mark in the wine business and taking the road less traveled fills me with pride and satisfaction.
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