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5 4 V I N E YA R D & W I N E RY M A N A G E M E N T | J a n - F e b 2 017 w w w. v w m m e d i a . c o m easy relationship with a finance c o m p a n y i s p a r a m o u n t . R u s - sell works with Oak Tree Trad- i n g , a p r i v a t e l y f u n d e d S o u t h African company that launched two decades ago, then expanded to Australia and New Zealand. In 2012, it opened an office in Santa Barbara. Unlike H&A, Oak Tree Trading negotiates directly with cooperages of the clients' choice, purchasing barrels and then leas- ing them to the clients. "Any sav- ings are passed on directly to our customers," explains CEO Tiaan B e z u i d e n h o u t . T h e b a r r e l s a r e delivered directly to the winery, but Oak Tree owns them. At the end of the lease, wineries can choose to purchase the barrels for $1 each, but aren't required to. Russell has four different leases with Oak Tree Trading. He bottled around 85,000 cases of wine in 2016, including a premium label and a commercial label sold through Trader Joe's. He typically purchases anywhere from 150 to 300 new barrels per year. While Oak Tree's terms are comparable to a bank's, Russell says he appreciates the "That's another advantage with their resale service," Braunel says. He produced more white wine in 2016 than normal, and purchased 12 neutral barrels to age it. Work- ing with H&A, he says, "opened up a whole new source for quality used barrels." DIFFERENT PROGRAMS Traditional finance companies, like American Ag Credit, have long been in the business of helping win- eries with equipment purchases, whether through a lease or a term loan. One advantage to a lease, says Fred Dixon, American Ag Cred- it vice president/leasing manager, is that it requires no down payment while letting winery owners pay for the equipment as long as they are using it. During the term of a lease, Dixon says, the lessor is the legal owner of the barrels. At the end of the lease term, the lessor then sells the barrels to the winery for the residu- al value (often as low as $1). Leases come in different shapes and sizes. Michael Ricioli, tax part- ner in the Santa Rosa office of Moss Adams, says wineries can find advantages in all of them. C u r r e n t t a x r e g u l a t i o n s u n d e r Section 179 let businesses take up to $500,000 per year in capi- tal expenses. Under the terms of a capital lease, most wineries can immediately depreciate the value of their new barrels while still avoiding a down payment and protecting their cash position and credit ratio. With this method, the barrels show up as debt on an income statement, but because barrels rap- idly lose their value, many wineries and financiers opt instead for an operating lease. With this method, lease payments can be listed as an expense while debt is held to a minimum. "Keeping debt off your books can be important," Riciolo says. "Wineries typically are highly leveraged and it can be hard to get financing." For Erich Russell, owner of Rab- bit Ridge Winery and Vineyards in Paso Robles, Calif., a smooth and ease of working with a company focused on his needs. "Most banks really don't under- stand a winery's cash flow," he says. He tries to limit new oak to his high-end wines, but purchasing barrels still requires a huge cash outlay, so containing expenses is important. "Sometimes I think banks are only in business to create fees for their customers," Russell says. And for a winemaker responsible for managing all the details of production, marketing and busi- ness, fees can be easy to incur. "If you're one day late with a pay- ment, it can be a $200 fine," he says. "With Oak Tree, we just sat down, let them see our facil- ity, looked them in the eye and we had a deal. It literally only took 15 minutes." B e z u i d e n h o u t s a y s k e e p i n g things simple and personal is the hallmark of Oak Tree's business plan. He meets with potential cli- ents and tours their winery and vineyards to "see if they're a good operation." Despite the hassle-free application process (Russell says Oak Tree didn't even ask to see a financial statement), Bezuidenhout says the company has experienced only about 1% of bad debt world- wide. "We're not as concerned with credit ratings and credit ratios. If someone isn't going to pay you, then they're not going to pay you no matter how many papers they sign," he says. "We like to invest in our clients." All leasing and finance groups offer a version of help with cash management. With some, that means cash flow. With others, it's tax considerations or debt ratios. With huge amounts of a winery's budget flowing through its barrels, winemakers have many factors to consider. With today's evolv- ing leasing environment, they also have many options. Anne Sampson lives in Richland, Wash., where she writes about wine, food and agriculture. Comments? Please e-mail us at feedback@vwmmedia.com. Eric and Joanne Russell of Rabbit Ridge Winery and Vineyards work with Oak Tree Trading for their barrel program.