Speaking of finance

Wines & Vines, July, 1998 by Larry Walker

Times are good right now in the wine business. More wineries are making money than at any time in recent memory, but that doesn't mean winery and vineyard owners shouldn't shop around to find the right financial fit for their needs.

Mary Martocchio, underwriting manager for American Capital, said, "There are so many choices. Wineries can really choose. Rates are better and more wineries are making money."

American Capital specializes in short-term leasing of three to five years with end-of-purchase options. Gary Heil, managing director, said that wineries have been shifting to leasing which he said offers several advantages, including tax breaks. And at the end of the lease, there is the option to buy at fair market value. American Capital deals with whatever a winery needs in way of equipment.

Martocchio said because the wine business is centered in California, most of their business is in the state, although the company does operate all over the U.S.

Asked how business now compares to five or ten years ago, she said, "In general, it's an excellent time for wineries to meet their financing needs. There is more creative financing available and I don't see any lessening in demand for the product. Of course, a startup operation may still have problems, but ten years ago, the situation was much more difficult. Rates have come down over the past five to ten years as well."

Heil said that in the past, wineries were often not run as a business but often as a "lifestyle." Now, professional managers have taken control and wineries are much more oriented toward a businesslike operation.

David Freed of UCC Vineyards founded what has turned out to be a major wine industry financial event, the Wine Industry Symposium, which holds a series of economic seminars throughout the year (on July 8 the 1998 Vineyard Economics Seminar was scheduled for Napa Valley). Freed said he started the symposium in 1992, a real low point for the wine business in California.

"At that point, a lot of wineries had hit a brick wall in looking for expansion of credit. It was a bad time in relations with banks and lenders. One banker told me he wasn't interested in taking part in the program because he didn't want to be yelled at. Now, beginning maybe 24 months ago, there is almost an over supply of lenders. A lot of banks have opened offices in the wine regions. There's been a complete turnaround," Freed said. "Lenders are talking rates in the 7% range for credit-worthy wineries, which is wonderful."

Freed said the equity side was blossoming with the surge in publicly-traded wine companies. "The main achievement in the past year has been Beringer's offering, which exceeded everyone's expectations." Freed mentioned another major wine company that is likely to go public in the next few months.

"This is a very healthy development. It means that with reporting on publicly-held stocks, there is much more information available. Now we have analysts in the wine business taking a professional look at the financial side of the industry and giving us feedback," Freed said.

He added that wineries can look at Mondavi or Beringer inventories, for example, and calculate how the numbers would work for them. "We have benchmarks that we never had before."

Freed is associated with the Silverado Real Estate Fund (SREF), a company which is moving strongly into vineyard leasing. SREF acquires vineyards then leases them to a winery under a long-term agreement. The winery rents the land on a fee-for-acre basis, so the winery can call the shots on the quantity of grapes grown and have complete viticultural control. "We are just looking at a quarterly rental payment," Freed said.

"What we are doing is extending the concept of leasing. The main achievement is that there is a base payment per acre per year that the grower knows he can count on."

Looking ahead, Freed said that a major issue that the industry must deal with soon is the production/capacity problem. "In my view, we are running out of capacity. Sometime in the next three to five years, it could be that the industry wilt not have the capacity to crush all the grapes being produced. Two back-to-back harvests like 1997 would do it. It doesn't take a rocket scientist to figure it out. Just look at the number of acres coming into production, multiply by anticipated yields and there you are. Whoops! Not enough capacity."

Lindsay Wurlitzer, regional vice president of Pacific Coast Farm Credit, agreed with the general assessment that times were good. "Profits are up and a lot of new players have been attracted to the industry, including people on the Wall Street side. There is a good supply of money and rates should be stable, maybe even down a little in the short term. There are some very aggressive lenders and there are also 'sunshine lenders.' They come in when times are good and get out fast when the situation changes."

Pacific Coast Farm Credit, founded in the early 1900s, makes shod- and long-term loans only to agriculture. The wine and grape business makes up about half of the company's $600 million annual balance, according to Wurlitzer.