Is equipment leasing right for you?

Wines & Vines, April, 2004 by Tina Caputo

In a slow economy--even one in recovery mode--it can be difficult to justify spending thousands of dollars to buy a new piece of equipment, whether it's a stainless steel fermentation tank or a high-tech harvester. But that doesn't mean you have to go without. Leasing is one way that wineries can get the equipment they need in order to be competitive, while reserving their cash for other projects.

Jim Summers, owner of Summers Winery in Calistoga, Calif., has been leasing equipment since 1997, a year after his winery began operation. "Initially, we leased everything we could lease," Summers said, "mainly presses, pumps, tanks and barrels." Now that the winery is up and running, he said, he continues to lease barrels through Hansel Leasing in Santa Rosa, Calif. "Barrels are a quickly depreciating product, so it makes sense to lease instead of purchase," he explained. "We spread the payments out over three years; that way we can expense them each month and write off the costs faster. This makes sense, especially since it costs about $900 per barrel to buy."

Leasing is something Summers knows a thing or two about; he started out in the leasing business 35 years ago, long before he opened a winery.

"Leasing fits a couple of different needs," he said, the first of which is helping new wineries get started. In the beginning, "you look for any kind of capital you can. Leasing is basically an installment payment program--a conditional sales contract." It also helps established wineries keep going during hard times. "Anytime there's a downturn in the economy, traditional sources of finance start to dry up," Summers continued. "Leasing companies aren't as demanding as banks, they're more liberal--they borrow money from banks and then lend it to you. It's not Las Vegas--they're not just handing out money--but if you didn't make a profit last year, that won't preclude you from leasing. It's a way to conserve your cash capital and manage your cash flow program."

Matt Buoncristiani, managing partner of Buoncristiani Winery in Napa, opted to lease portable tanks during the 2003 harvest for a more practical reason. "We don't have a lot of space here, so it's easier for us to bring them in, use them, and then get them out of here," he said. Leasing the tanks worked so well for the winery that Buoncristiani said he would "definitely" do it again, and would recommend it to other wineries.

But is equipment leasing right for your winery? To help you make the call, we asked leasing experts to talk about the benefits and practicalities of leasing.

Leasing Trends

As new wineries continue to appear on the scene, leasing professionals in Washington state have noticed a growing interest in equipment leasing over the last five years.

"I have seen an increase of wineries purchasing equipment with a lease," said Diana Hodson of Pinnacle Capital in Wenatchee, Wash. "Part of the reason is the recent explosion of new wineries, as well as old established wineries trying to reserve their cash. Times are changing, and with it, the way each customer is purchasing equipment. I feel (leasing) has increased somewhere around 35-40%."

Stacy J. Helton, owner of Wyatt Leasing, LLC, also in Wenatchee, Wash., said she has seen an even bigger increase. "It is hard to know for sure, since the growth here in Washington of new wineries is amazing," Helton said, "but I definitely have seen an increase of about 50% more opting for leasing rather than paying cash or purchasing with their operating line." Why? "I would say that utilizing someone else's money in this economy and keeping cash held back for security is one reason. Second would be that the competitive pricing of wine and moving inventory has hit the industry hard. So in order to keep pre-productive costs down, leasing barrels and equipment helps to spread those costs out so that cash can be utilized elsewhere."

The story is a little different in California. According to Jim Taylor of Hansel Leasing, the number of wineries inquiring about the benefits of leasing has increased, but he hasn't seen a dramatic change in the number of wineries leasing. "The present market has generated inquiries from those that have exhausted other sources, such as cash reserves and credit lines," Taylor explained. But it's not always easy to help those people. "They should come to us before the other finance sources are depleted," he said. "It is impossible to create a lease for someone that has a limited or exhausted cash flow."

Mary Leonard Wilson, EVP and chief credit officer for Santa Rosa's National Bank of the Redwoods, reported a decrease in wineries that are leasing equipment. "Over the recent past, our experience has been that the wineries have had sufficient production capacity and have therefore not invested in new equipment," Wilson said. "Consequently, demand has been down."

What Can Be Leased?

According to Wilson, "Leases are designed for personal property, vehicles and equipment used in a trade or business. Leasehold improvements cannot be included in most leases, but most other equipment that is used to produce your product or service can be leased. Equipment includes production and storage equipment, furniture, computers (including software), office equipment, agricultural equipment and vehicles. Used equipment can also be leased--the total dollar amount leased for used equipment is limited to the current market value of that equipment."