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For many winery owners and managers, purchasing a vineyard seems like an unattainable goal. But I have good news for you – you may be able to buy a vineyard, and you didn’t know it. This article will discuss how experienced winery and vineyard owners and managers can grow and expand your vineyard holdings with responsible leverage.
Benefits of Vineyard Ownership
Owning a winery or vineyard requires tremendous passion, persistence and expertise. For any wine business to be successful, you must acquire or grow quality grapes and produce innovative wines that satisfy the diverse palates of today’s wine consumers. Purchasing a vineyard can be an excellent option for an experienced winery owner or manager looking to expand operations and control your fruit source.
Tim Allen of The Allen Group provides several examples of the advantages of vineyard ownership. “Vineyards can be a great long-term investment. Real estate value, including vineyard land, continues to increase over time. There continues to be demand for quality fruit. Controlling your fruit source is crucial as viticulture costs continue to rise (new overtime rules in California, fuel, supplies). While the ability to take price increases for branded wine sales to the consumer is minimal, there can also be some beneficial tax treatment after purchasing a vineyard: AVA amortization, accelerated depreciation,” Allen states.
In addition to controlling your fruit source and tax benefits, economies of scale can also significantly benefit vineyard ownership. Depending on the vineyard infrastructure, the cost of farming additional acreage can sometimes be incremental. The ability to employ additional labor or purchase supplies in more significant quantities can result in lower overall average costs per acre farmed. Increased economies of scale also allow the vineyard owner to compete for additional or more significant contracts.
What is Leverage?
There has been a lot of buzz around leverage in the financial markets lately. So, what is leverage, and why does it matter for wine professionals interested in vineyard ownership? Responsible leverage is defined by excess cash flow after expenses and debts are paid, as well as an acceptable overall balance sheet with limited leverage and significant industry experience by the borrower. Leverage allows you to use less liquidity to purchase a vineyard, leaving you with a larger liquidity cushion for working capital, for unexpected expenses and the ability to take advantage of other opportunities that may present themselves. The less money you have in the purchase, the more money you have to run your business.
The Effect of Leverage on ROI
Responsible leverage can result in a significant return on investment (ROI) in your vineyard purchase. Here is an example of the ROI on a $1 million vineyard purchase with three different down payment scenarios. For simplicity’s sake, in the following examples, I provide a simple ROI net income method calculation where I measure net cash flow against what the borrower put into the property. I only consider leverage, no other costs. The example assumes an 8% interest rate, 20-year term/amortization and $150,000 generated net cash flow. I use round numbers for ease of calculation.
Example 1
Down payment: $1,000,000 cash
ROI = 15%
Example 2
50% down payment: $500,000
ROI = 19.6% (25% increase in ROI from example 1)
Example 3
10% down payment: $100,000
ROI = 59.6% (4x ROI compared to example 1)
While cash offers and conventional down payment amounts will hopefully produce positive ROI over time, lower down payments provide immediate ROI and free up money to run the newly purchased vineyard or buy another.
The Issue with Conventional Financing
Conventional lenders typically want a 30-50% down payment on a vineyard, typically more than owners and managers have on hand. This often prohibits winery owners from purchasing a vineyard. Bank covenants, rules stipulated by the loan that the borrower must adhere to, are another hurdle for borrowers. Conventional bank covenants can be tight, with a small margin for error. Additionally, many banks will require you to bring your entire banking relationship to them to obtain your loan, which can be an enormous chore and disruptive to operations. Collectively, this makes conventional financing unrealistic for many.
The SBA Financing Alternative
By contrast, many find Small Business Administration (SBA) terms much more reasonable. Before we dive into the benefits of SBA financing, let’s take a step back and look at what it is.
The SBA is a government agency that serves as the primary resource for government-backed business loans. The government guarantees a portion of SBA loans and allows small business owners to obtain capital with less equity than a conventional loan requires. The federal government does not lend you the money; the bank does. The SBA guarantees a percentage in the event of a default on the loan. The government guarantees enable the bank to take additional risks and provide better terms. The SBA 7(a) loan is the most common SBA loan product, offering flexibility on terms and business uses. SBA loans have many benefits, and the specific terms can be negotiated between the borrower and an SBA-approved lender. When considering an SBA loan, working with an SBA Preferred Lender (PLP) is ideal. PLP status with the SBA gives lenders authority to make final credit decisions without getting SBA approval. It is typically a sign that the lender has more experience with SBA loans, resulting in a smoother, faster process.
Now that we’ve established what the SBA is, let’s consider the advantages of an SBA loan. The SBA offers smaller down payment options. Typically, a 10% down payment is required for SBA 7(a) loans and 15% for SBA 504 loans. If you have sufficient appraised equity in an existing winery or vineyard, you may be able to use that as your down payment and achieve 100% financing on 7(a) loans. Also, the SBA doesn’t have any financial covenants, so you don’t have the stress of maintaining a specific debt-to-equity ratio on top of making your payments and running your business. SBA vineyard financing terms also tend to be longer, up to 20-year terms and amortization, which usually means smaller monthly payments. Live Oak Bank can provide higher leverage using SBA 7(a) and SBA 504 loans.
Financing Scenario
Jill, a vineyard manager, is currently leasing a vineyard. The owner of the vineyard she is leasing offers to sell her the vineyard for $5,000,000. The vineyard has historically generated $650,000 in net income. Assuming an 8% interest rate, 20-year term/amortization and 100% financing via an SBA 7(a) loan, her debt service is $501,864. Therefore, her debt service coverage is 1.30X ($650,000 / $501,864). The bank likes to see minimum historical debt service coverage of 1.15X – 1.25X. So, in this example, the vineyard’s historical cash flow is sufficient for loan approval. Jill generates $148,136 in excess cash flow after debt service that can be used to run her business. When calculating historical cash flow, we add historic lease payments that will go towards principal and interest payments in the future.
Other Considerations
Vineyard properties being purchased are evaluated on several metrics, including age, varietals, overall health, AVA, historical yields, water rights, existing contracts and more. Any disease issues, varietals that are not in demand, a lack of contracts, below-average yields, etc., can complicate the financing. Availability of labor is another critical consideration. The ability to mechanically manage canopies and harvest a vineyard is a plus. In addition to the appraisal, the bank requires a certain level of environmental due diligence depending on the property’s history.
Any planned property improvements must factor into the financial metrics. For example, if the borrower intends to pull a significant amount of vines to replant, we must determine how that will impact future cash flows. Live Oak places a premium on industry experience. If the vineyard owner is utilizing contract farming services, the bank will also perform due diligence on those companies.
Lenders have varying requirements, so having a solid business plan, strong personal credit and a passionate, entrepreneurial spirit is essential.
Winery & Vineyard Lending
As the owner of a wine business, access to adequate financing and partnerships with people you can trust are critical components to achieving your goals. You’ve poured too much passion, time and energy into producing and selling quality products to settle for anything less than the best service and solutions.
If you’re interested in buying a vineyard but don’t have the capital on hand, Live Oak may be able to help. Live Oak’s wine & craft beverage team works exclusively with experienced vineyard managers and owners to expand their vineyard acreage. The group collectively has almost 50 years of vineyard lending experience. We have financed vineyards across the West Coast and in other states. We understand how you make money with a vineyard and what it takes to be a prosperous vineyard owner. We are also the country’s #1 SBA 7(a) lender by dollar amount.* Live Oak’s industry knowledge and lending expertise are your most significant advantages. Our understanding of the industry makes the process more efficient. Because our team only works with wine and craft beverage small business owners, you can trust us to provide the right loan solutions for your goals.
Many factors go into deciding if the loan will be good or not, and our lenders will help determine that, but the goal is always to use leverage responsibly to help you reach your goals and accelerate business growth. So, if you don’t think you can purchase a vineyard, let’s crunch numbers. If we don’t think you can, we will tell you why and what you must do to get there.
If you’re interested in winery or vineyard financing, connect with me by email at Jeff.clark@liveoak.bank or by phone 707.331.9098 and let’s discuss your options. – By Jeff Clark, Vice President of Wine & Craft Beverage Lending, Live Oak Bank
*The data supplied by the SBA reflects 7(a) highest dollar volume during FY 2022.
Jeff Clark
VP of Winery and Vineyard Lending, Live Oak Bank
707.331.9098
Liveoakbank.com/wine
Jeff is the founder of Live Oak Bank’s craft beverage group. He began his craft beverage lending career in the Napa-Sonoma area and works with craft beverage producers throughout the United States. His lending experience spans the spectrum from small family-operated businesses to publicly traded companies. Jeff is a frequent guest speaker and has written industry-related articles for several publications.
