Issue link: http://read.dmtmag.com/i/52389
Financing estate vineyards and small wineries can be challenging because they are a very diverse group, often with a different focus than more traditional farmers. "It's more about quality of lifestyle, unique varieties, special niches, and there's much higher third-party risk. The focus is usually not about return on investment." Shibley points out that vineyard financing is depend- ent on the owner, vineyard management ability, parcel size, site, variety, financial position, earnings history of the owner, and balance sheets of other entities owned. Operating loans for vineyards are generally for 12- month terms, and usually no more than 65 percent of the growing cost will be loaned. "You put in a third, and we'll put in a two-thirds," he said. Equipment loans are avail- able at most dealers, with terms generally from three to seven years, requiring 15 to 20 percent down. Vineyard real estate loans are generally for 10 to 20 years and require 35 percent down. "For new entrants to the wine industry, you can't finance 90 percent of the vineyard for 30 years. This isn't a house loan." New vineyards can be high-risk investments because of the capital needed for establishment. Those new to the wine industry often forget about costs that are needed for years two and three before the vines really start produc- ing, he said. Loan rates can be adjustable or fixed, with annual payments and there is usually a penalty for prepayment. Winery financing Winery loans are similar to vineyard loans. Operating loans also are set for a 12-month term, but for real estate and construction loans, banks generally require 40 per- cent down. "But we may require much more if you're building your dream winery with lots of customization," he said. "You're the only one with that dream and if we take it back, is the winery really worth $3 million?" Construction loans for wineries can be brutally painful for both parties, he noted. Cost overruns are often a problem, and wineries are expensive to build. Lessons learned Shibley shared lessons he's learned through nearly two decades of lending experience with Farm Credit Services and commercial banking: • Partnerships are only as strong as the weakest link. Avoid them unless the other partner brings something unique to the table. • If you want to buy on future appreciation (high-value vineyard real estate), you will need an equity owner or partner. • A poor site is always too expensive and rarely profitable. • Vineyard development needs an experienced project leader for two to three years, not just the first year. • Estate wineries need a balance of capital, proven pro- duction ability in the vineyard and winery, and strong marketing skills. • The wine industry attracts individuals who have been very successful, but perhaps not in running a business. • Lifestyle and family living expectations often can be an issue. • Don't get caught up in the hype of the industry. • Value wine inventory at cost, not through accrual adjustments, which can make any winery look profitable on paper. • Be cautious about growth expectations. Rule of thumb: Winery operating loans should be no more than 50 percent of the annual sales. • Proven experience in the industry almost always trumps a great business plan. • Capital investment for an expensive winery always has a low rate of return. • Wineries are like sheep. They are better off in a flock and need traffic from each other. • www.goodfruit.com Vineyard & Orchard Production & Processing… Industrial Safety, Fire Protection and PPE Products, Farmworker Protective Spray Clothing, Sanitation and Processing Equipment, Industrial and Specialized Gases. Serving all of the Inland Northwestern Agricultural Industries PASCO: 509-547-2494 Call your local OXARC® sales representative today! YAKIMA: 509-248-0827 MOSES LAKE: 509-765-9247 WENATCHEE: 509-662-8417 OKANOGAN: 509-826-3205 WALLA WALLA: 509-529-3060 GOOD FRUIT GROWER JANUARY 15, 2012 31 PRODUCTION SAFETY