Vineyards: Grape Expectations

Retiring from the 8 to 5 grind and opening a winery sounds like a dream come true for many—especially baby boomers who want to follow their passion rather …

Retiring from the 8 to 5 grind and opening a winery sounds like a dream come true for many—especially baby boomers who want to follow their passion rather than fully retire. Opening a winery is just one of many ways for oenophiles to turn their interest into an investment. Investors should be aware, however, that wine-related investments are typically more about the lifestyle and experience than the returns

Fractional ownership

Fractional ownership is directed at those who wish to keep their time and money invested low. In most cases, investors receive an annual allotment of wine, among other benefits.

Buy estate ownership

Arjen Pen left a commercial airline industry career to pursue his passions: wine and real estate. His company, Wine Estate Capital Management, sells fractional wine estate ownership. The wine produced at WECM’s estates, located in France and South Africa, is “among the world’s best,” Pen said.

Investments start at €100,000; annual benefits include 12 cases (144 bottles) of wine; free lodging for three to five weeks at the estate; and financial returns in the form of dividends, profit sharing and value appreciation of the estate.

Before purchasing an estate, WECM does careful research into terroir potential, real estate value growth potential, brand equity and existing commercial strength, Pen said. Terroir is French for “soil” and is a term that reflects the characteristics a soil imparts to wine. Pen invests personally in each of WECM’s estates.

“We carefully select wine estates with economic potential,” he said. “Due diligence has to show that we feel that we can improve the wine, upgrade the estate and achieve higher margins than before.”

Investors are guaranteed a minimum 6 percent return, according to WECM’s website, www.wineestatecapital.com. Investors should keep in mind that this is a five to 10 year investment, Pen said.

Fractional ownership is one way to strive for a balance between lifestyle and financial benefits.

Buy part of a vineyard

Domaine Gayda, which owns and manages vineyards in the Languedoc region of France, sells vineyard parcels of about 1,200 square meters, or about one-third of an acre, to investors. For a minimum investment of €20,000, or about €21 per square meter, investors take ownership of vineyard parcels for a period of 10 years.

In this structure, the investor owns part of the vineyard and agrees to a 10-year winemaking contract with Domaine Gayda. At the end of the 10 years, investors are essentially tied to Domaine Gayda, since there is little else they would be able to do with the land they own, other than attempt to sell it to another wine enthusiast.

Domaine Gayda handles growth and production and insures vines “against the normal natural perils such as Hail damage,” according to their website, www.gaydavineyards.com.

For the duration of the 10-year contract, investors receive eight cases (96 bottles) of wine per year per parcel owned. For a small fee, investors can request customized labels and can have wine shipped to others as a gift. Investors can visit their vineyard at any time and can even participate in harvesting and winemaking.

All investors receive membership in the Wine Fellow Society, which grants them permanent discounts on Domaine Gayda wines, a winemaking newsletter and other special offers, such as invitations to events in the Languedoc region and the United Kingdom.

There is an option for renewal at the end of the 10-year period. “As you already own the land, the ‘fruit for management exchange’ would be calculated on current costs at that time and the sales value of the wine,” the website said. If investors want to sell their parcel at the end of the term, they can sell to a third party or have Domaine Gayda sell it for a fee of 15 percent of the sale price.

Domaine Gayda focuses more on lifestyle returns than financial returns.

Buy vineyard stock shares

Steve and Linda Wilhoit have owned shares in Silver Lake Winery, the seventh largest winery in Washington state, since 1995.

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At less than $2 per share, “We invested in Silver Lake principally as something fun to be involved in that didn’t require a lot of money to get into. We didn’t and still don’t anticipate reaping any great financial rewards,” the Willhoits said.

They enjoy discounts and credits for wine and merchandise; access to limited-release wines; shareholder-only meetings, parties and other events; industry progress reports; and priority use of the winery’s facilities, according to the winery’s website.

The drawbacks are that “we have a modest amount of money sunk in an investment that pays no dividends, is closely held and therefore not easily traded and has a small likelihood of a real return,” the Wilhoits said.

Should they decide to sell their stock, “We would basically go to the corporation, in writing, asking to have our stock put on the block. We don’t know how one would go about a valuation for the sale, but we will cross that vineyard when we come to it.”

The Wilhoits said they plan to continue to enjoy their Silver Lake Winery investment. They did not invest in Silver Lake Winery to make money; they did so because they enjoy wine.

Owning a vineyard

Those with more time and money to spend can buy a vineyard. Vineyards offer a variety of ways to profit and are especially popular among investors seeking lifestyle benefits.

“A purchase of a vineyard by a lifestyle buyer has two aspects: it’s a financial investment as well as an emotional investment, because 99 percent of the time, they’re going to want to stay there, live there, enjoy the property,” John Bergman, founder and owner of Bergman Euro-National, a real estate brokerage specializing in vineyard and winery-related properties in Napa, Sonoma and Mendocino counties, said.

A lifestyle investor is one “whose dream is to live in the wine country, drink wine, watch [his or her] grapes grow and have bragging rights…and live a nice lifestyle, surrounded by nice restaurants and some fabulous wineries to visit,” Bergman said. “About 80 percent of our buyers are lifestyle buyers.”

“A lot of our big investors are more interested in having their name on a wine bottle than the actual returns, so it’s not always a net income situation,” Tom Larson of NorCal Vineyards, a real estate company specializing in vineyards, wineries and estates in California, said.

Vineyard owners also stand to receive financial gains. “I figured out that vineyard values from 1950 on have appreciated more than 100 [percent] and sometimes up to 250 percent, every decade, for 50 years,” Bergman said. “If you bought a million-dollar property and put 33 percent down on it…if the property went up 100 percent, you’ve made a 400 percent return on your cash investment in 10 years….That’s 40 percent a year.”

Annual returns are not necessarily more than 5 to 7 percent, according to Claudia Voss, a broker with Studio Montagliari, which specializes in the sale, rental and development of residential and agricultural estates in Tuscany. “I think what is happening is these estates are growing in their value over time, very much. During operation, very often, there are so many investments [into the vineyard itself]…so the return is sort of long term. The actual overall value of the estate increases.”

Such appreciation is not guaranteed, however; there are many variables in the wine industry. Location, for example, plays a huge role in property values. “It’s like zip codes in real estate,” Jenny Heinzen, director of winery and vineyard sales for WineryX Real Estate in Napa Valley, said.

Grapes are also crucial to success, of course. “The more expensive wines are experiencing higher growth rates,” Heinzen said. “The high end of the wine market is growing by more than 20 percent a year at present.”

For first-time wine investors, size is also important; too many acres might be overwhelming, while too few acres might not have much profit potential. “Typically, 10 to 40 acres is a great starting point,” Tony Ford of NorCal Vineyards said.

Voss recommended a minimum of 25 acres to be worthwhile for the investor. “It doesn’t really make sense for an investor to take anything smaller than that if [they] want to do business with that project.”

Sell grapes

“Many people that are going to buy a vineyard have no intention of ever making wine,” Larson said. “They’re just looking to sell their grapes to wineries.”

Growing and selling grapes is a lower-risk initial business move than making and selling wine, because there is a large market for grapes. “A vineyard investor generally gets paid once a year after harvest on a price per ton basis,” Heinzen said. Grapes are harvested in September or October.

Owners typically use a vineyard management company and sell the grapes to a local winery, Heinzen said. Vineyard owners can establish relationships with wineries to ensure they have buyers. As the vineyard becomes successful, relationships with wineries will expand and vines can be added.

When researching vineyard purchases, investors should consider “farming costs per acre, how much an acre produces, variety, vineyard age, spacing, water source, disease, clone, rootstock, contracts, etc.,” Heinzen said.

“You want to look at the soil content, you want to check the water…there are diseases that the vineyards can have, they’re a living thing like you and I, and you want to make sure that they’re healthy,” Bergman said. “You want to make sure that your grapes are sold and that you have a good grape purchase agreement, and most important is vineyard management.”

Vineyard investors who are not genuinely experts in growing grapes and managing vineyards should hire professionals. “I do not advise anybody to buy a vineyard and expect to go out there and take care of it because they will do it wrong, they will kill their grapes, they will not have quality fruit,” Bergman said. “If you want to learn, you go to classes.”

“Wine grapes are an agricultural product and it takes about four years before a newly planted vineyard comes into production,” Heinzen said. “Therefore it is very difficult to plan for and keep up with trends. Many growers find themselves behind the curve. The best approach is to grow what is best suited to the site.”

Sell wine

Wine production is an option for vineyard owners; wise owners ensure that their wine has a market before producing it. There are two main strategies to profit from making wine: through wide distribution or through drawing people to the winery.

Vineyard owners who want to make wine are advised to work with professionals for that process because the wine industry requires extensive knowledge and experience. “It’s always best to learn the business before diving off the deep end,” Heinzen said.

It is important to research wine professionals before hiring them. “Once you’re introduced to a vineyard manager, the first thing to do is go down and see some of the vines that they manage,” Ford said. “Then go and talk to some of the winemakers that are making wine from those vines.”

“Success is a combination of a viable sales plan, experienced sales managers and a good handle on costs. Don’t spread yourself too thin,” Heinzen said. “Many who thought they were going to take on owning a small winery or vineyard have been surprised at the extensive demands.”

Running a winery “takes seven days a week, eight months out of the year, at least eight hours a day,” Larson said.

The wine industry requires close attention to trends and demand.

“There are periods of, I would say, five to seven years which the wine business goes through, and one has to adapt to them,” Voss said. “There needs to be probably more monitoring than in many other businesses.”

“Wine is sort of a living organism. It needs to be monitored, really, right from the time when the vines are clipped to when it is in the bottle and when it is marketed,” Voss said.

Marketing of the wine is also a big issue for the investor, Voss said.

Part of that is because of the current state of the wine industry. “The wine industry is less homogenous then ever before,” Heinzen said. “Smaller brands have a hard time without brand pull already established.” Effective marketing and business plans are crucial for success.

Rental income (from houses, facilities and/or vines)

Vineyard owners can literally rent out their vines and rent or sell residences on the estate. “The return on a vineyard investment can be quite attractive if you are able to subdivide the parcels and sell several homesites that could generate several million dollars,” Heinzen said in an article she co-wrote with Kate Somple, broker and owner of WineryX Real Estate.

Visitors to tasting rooms and vacationers who stay at a hotel or house on the property also provide profits. “Agritourism has become very popular. It’s a way of traveling where people can stay at vineyard estates and at bed and breakfasts or apartments,” Voss said.

Tourism can be supplemented with special events and courses, such as cooking or painting courses, Voss said. “All this rental business is…actually a large part of the income, because it is maybe a little more steady than the market itself. And you have your feet on the ground with different incomes.”

Conclusion

Those who dream of owning a vineyard or winery, but don’t want to commit themselves to the reality of running one, have a variety of investment options. Fractional ownership allows investors to choose an investment that strikes the balance between lifestyle and financial returns.

Those who do want to turn their passion for wine into a job as well as an investment can opt to purchase a vineyard or winery.

Investing in wine may not bring especially competitive return rates, but it can pay high lifestyle dividends—a unique return on an investment that may be attractive for baby boomers who prefer semi-retirement to full retirement.

 

Additional Information: Vineyard Resource List, Vineyard Service Provider Directory

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