A big hello from Hollyhock Vineyard to our 600+ readers.  As a reminder you can subscribe to updates via email on the right hand side.  Apologies on the delay in updating it has been a crazy few weeks with the recent Hospice du Rhone event (topic of next post) and Bill getting a new ‘day job’.

As you can from the picture of Julie and I with the Mourvedre bloc the vineyard is in full growth mode!  It is exciting times.

A Frosty Reception

This has been an odd year so far in Paso Robles with a very warm winter and a major el nino that ended up being a bit more temperamental with only spurts of rain.  One of the major side effect of this weather was the earliest bud break ever recorded in Paso Robles.  Early by a whole 2-3 weeks.  Bud break is when the grapevine has been dormant/sleeping for the winter and starts to wake up.  The vine begins drawing water from the soil and growing the buds until they burst into new shoots and leaves.  On the right is a picture of a young Grenache vine whose bud had burst open into small leaves and a baby shoot (the stem).  This picture was taken in mid February.  Happy Valentines day!  Early bud break by itself isn’t a bad thing by itself.  Jason Haas at Tablas Creek does a good job describing how if the weather remains warm and tropical due to el nino everything will be fine (Budbreak, 2015: Early, like 2014. Cue the frost alarms. – Tablas Creek).  However, this can be a very sensitive time for the young fragile new shoot.  If frost does come, the shoots haven’t hardened off yet and they can easily be damaged and die.  Why is this bad, won’t more just grow back?  Yes and No.  Unfortunately the buds that will create ‘fruiting’ shoots/canes (the stems) are actually developed last year and are only sprouting now.  If those die then any new shoots are unlikely to create fruit at worst or product it late or at a much lower yield at best.  For the impact that can have just look back to 2011 and the worst case scenario in our Small Vineyard Business Plan.  Instead of an average yield of 18 tons of Grenache only 5 tons was harvested.  This is a difference of $26,000 (13 tons * $2000) and wipes out your entire profit and puts you into the red.

As new owners we were crossing our fingers that bad luck like that happens only once a decade and we would get beginners luck.  For weeks we were safe and temperatures hovered in the low 40’s.  Until one afternoon we get the following text…. “burned”…. “frozen”… “No we can’t do anything, try again next year”.  Doh!

Grape Growing is definitely a business where you have no periods of no action and then 4 hour bursts that make or break your entire year (frost, harvest).  Game over, try again next year.

I am a glass half full kind of guy which is a good balance to Julie whom I affectionately refer to as being “Hampty” (Glass Half Empty).  Maybe it is the Maine’ah in me but when hit with a bad situation just assess the damage, figure out what is in your control and what isn’t.  We immediately looked at our satellite maps to see how bad it was and how much actually got hit with the frost.   Our top block is our Morvedre and the lower block where the house is contains the Grenache.  The red areas are below the Walnut tree and the low depression area next to our neighbor.    It was here that the cold air rushed down from the hills and settled creating the frost.  Glass half full = ‘Oh, thats not too bad, it is only about 5-10% of our harvest, we aren’t that $%&!’ed”.  I won’t share what the Humpty view was 🙂

Grenache is the closer block where the house is.

So what does frost look like?  Below is one of the mature Grenache vines.  On the left you can see brown curled up leaves and brown dead stems.  You can also see a frost damages shoot above the new baby ones on the right.  Grenache is a very vigorous vine and loves to grow.  That is a good thing.  The bad thing is that those new shoots are not in ideal position.  They are on the underside of the vine rather than the top.  That means they will have a harder time being sturdy and carrying what ever fruit may grow.  It is geometry and mechanics.

A bit further up the hill on the border of where the frost occurred is a younger replacement Grenache vine.  Here you can see on the right that all of the shoots were burned and died.  On the left those new buds hadn’t burst until after the frost hit and are growing as normal.  

Happy our trusty golden retriever is out there to let us know it is all ok (and campaigning to be included in the next Wine Dogs coffee table book https://www.winedogs.com)

So where do we go from here?  Well, you irrigate that area a bit, cross your fingers, hope you get some fruit out of that section, and then plan for next year.  Another shout out to Tablas Creek and their entry on Frost Damage and Recovery.  Amazingly and thankfully they are one of the few wineries/vineyards out there posting information on these topics that growers like us can leverage.

Of course, these secondary buds are not always in the places you’d prefer, and it means a summer for the vineyard crew of carefully selecting which canes are allowed to grow and which will inhibit the air flow around the vines and have to be removed.  On the positive side, all of the rain that we received last winter means that the vines grow vigorously, and should have enough energy to spare to still produce decently off the secondary buds. (2011)

Juan, Dee (our consultant), Jordy (Tablas Creek viticulturist) will need to brainstorm on frost protection strategies for next year.  Most likely we will put in some sprinkler systems.

Culling the Herd – Shoot Thinning

So what is next?  Shoot thinning!  This is when you go vine by vine and pluck off the new baby shoots that you don’t want.   “Why would you do that?!  Don’t you want all the shoots you can get so you can grow the most fruit and make the most profit?”  Actually no.  If you look back at the Small Vineyard Business Plan it calls out the concept of yield vs. price.  The less yield you get the more concentrated the grapes and flavors.  That is why some bottles cost 2 bucks (chuck) and some are $45.  That is because some vineyards grow 20 tons of fruit per acre and some do 2.

At Hollyhock vineyard each vine (trunk) has 2 arms (the vines going sideways).  Each arm has about 4 spurs (last years shoots that were trimmed back to a stub).  Each spur is trimmed back so that there are 2 buds on it that will grow into a shoot (the green vines you see growing straight up with leaves).  Each shoot can carry 1-2 clusters of fruit on it.  What happens is that even though you may trim back last years shoots to only 2 buds, vines are vigorous creatures and tend to still put out lots of new shoots in unexpected places.  Right now while they are short (6-18″) you are able to go vine by vine and pluck off the extras so you only keep the two best upward facing strong shoots per spur.  It is best to do it early because if you allow them to grow the unwanted shoots will tangle with the desired shoots and it becomes much more labor intensive to pull them off and it increases the likelihood you will break or damage them.

Shoot thinning is one of the major activities in the vineyard for the spring (pruning, shoot thinning, mowing), this will be followed by canopy management and dropping fruit later in the year.  Since this activity is very labor intensive and time sensitive (the shoots are growing!) we will be bringing in a small labor crew of 4-5 additional people to help Juan.

The Mourvedre block growing well with shoots about 12″ long.

A Mourvedre shoot.  If you look close enough you can see the berry clusters already forming!  The shoot is the green stalk.

Juan our vineyard help (aka the guy who knows what he is doing) is teaching this me (aka the guy who has no idea what he is doing) how and why you shoot thin.

Thanks for checking in on the vineyard and we will post again this weekend on the Hospice Du Rhone event and the helpful culture in Paso!

Thanks everyone for the great reception.  So far we have had over 575 unique visitors from 22 different countries.  As a reminder you can subscribe on the right to get email updates of all new posts or follow us on twitter @HollyhockVines and on Facebook.

Following our last post, Small Vineyard Business Plan, was the topic of financing the vineyard.  Today we will cover the types of loans and pros and cons.   This is an area where I am not a complete expert but will endeavor to share what we learned.   However, financing is highly variable and each lender has their own criteria.  This is where an experienced commercial realtor or contacts you make at other local vineyards and wineries can really provide value.

Differences between Vineyard & Residential

During our evaluation we found the following differences between purchasing a typical first or second home and purchasing a second home + vineyard:

• Acreage: conventional loans via Fannie/Freddie have provisions on what constitutes a residence.  In particular it must first and foremost be a residence as its primary use and it must be similar to nearby residences.  This means if the property you want to purchase is 10+ acres and most nearby residences are all under 1 acre then it may not qualify as a residence and instead as a farm.
• Vines: via the same qualifiers as above a conventional residential loan cannot loan on a commercial/income producing farm.  That means if you want a residential loan on a vineyard + house property the appraiser cannot assign any value to vineyard and cannot include any income produced by it when assessing whether or not you can afford it.
• Distance from Civilization: I am not sure about all of the details on this one but all of the banks and insurance providers asked about it.  Even though our property was only 5 miles from town it almost prevented us from getting home owners insurance until our agent ‘found a loop hole’.  Sometimes I just don’t want to see how the sausage is made…
• Rentals: this one seemed to be bank specific.  Some banks were ok with having a rental unit or renting the property out part time and others disqualified it.

Loan Types

• RESIDENTIAL
  • Down Payment: 35% for a second home (10-20% for primary)
  • Interest Rate: typically the same or 0.25% higher than prevailing mortgage rates for primary homes.
  • Terms: the same as a primary home mortgage, typically 15/30 year fixed or a 5/1 or 7/1 ARM.
  • Lender Types:
    • National Bank & Resale to Fannie/Freddie: these include banks like Wells Fargo, Bank of America, etc.  These banks have very strict qualifying criteria because they package up your loan and typically sell it to Fannie Mae or Freddie Mac.  They can usually offer a better interest rate.
    • Local Bank and Portfolio Loan: A locally owned and operated bank like Heritage Oaks Bank in Paso Robles or Saco Biddeford Savings in Maine.  These banks have their own money that they lend and therefore they can decide on their own criteria.  This allows them to include a vineyard, extra acreage, etc.
• COMMERCIAL
  • Down Payment: 50% if you have not previously owned a farm and cannot show multiple years of commercial experience.  35% for qualified commercial growers.
  • Interest Rate: typically the same or 0.5% to 1% higher than prevailing mortgage rates for primary homes.
  • Terms: the majority of the commercial loans we looked at were ARMs.
  • Lender Types: these can include Agricultural lenders or specialty banks like Silicon Valley Bank (SVB) and their Wine Division.

Income

When you go to qualify for the loan banks will always want to be sure you aren’t stretching beyond your means.  This usually means that your Debt to Income ratio must be under ~43%.  Thus you have two options:

1. You are a Baller: congratulations you are inherently wealthy, have great income, low expenses and can afford a second home even if you generate no income off of it! 
2. Income from Property:
   1. Farming: if you have a contract in place to purchase your fruit for a set amount then a commercial lender and some local lenders with a portfolio loan will count ~75% of this as income.
   2. Rentals: to count rental income you usually need to have a yearly lease in place or documented proof that there have been multiple years of short term rentals and income.  Lenders will typically count ~75% of this as income.

Down Payment

Let’s assume your debt to income checks out and you can afford to pay the monthly financing costs (plus farming costs covered in Small Vineyard Business Plan).  Now you will need to pay for the 35%-50% downpayment.  What are your options?

• You are a Baller: you were employee 100 at Google and just sold off some stock or you are an oil baron who invented fracking.  Being wealthy with a ton of free cash continues to be the easiest approach
• Friends and Family are Ballers: your friends or family worked at Google or in Oil and are willing to lend you money.  Be aware of this approach though as they will likely want to spend additional quality friend and family time at the vineyard and may have opinions on how to decorate the house or operate the vineyard that may not jive with your own preferences.
• Hard Money: if you watch Flip or Flop on HGTV, this is the shady guy who will loan you money at a very high interest rate.  This is typically best for short term loans where you will be able to refinance it within a few months.
• 1031 Exchange: you purchased a different investment property before, operated it successfully, sold it for a profit.  You can now purchase a more expensive property and use the proceeds tax free.
• Home Equity Loan on Primary Residence: if you purchased a property in California between 2009 and 2013 at the bottom of the housing market you likely have built enough equity in your home to buy a McMansion in Texas or a vineyard downpayment.  Credit Unions are a great option and typically offer home equity lines of credit up to 90% the value of your primary home on a 15 year note and ~3.5% interest rate.  The benefit of this option is you can also use the line of credit for the farming portions and working capital.

Scenarios

All of these options can drastically restrict the type of vineyard + house properties you can buy.  Think of these scenarios and the impact:

1. House with land suitable for vines: if the house was owner occupied this means you cannot count any income from rentals or farming.  You will need to owner finance planting the vines yourself.  This means a lot of cash… 35% downpayment, $5k to $40k per acre planting costs, and then 3 years of farming without income.  Good news is that you can likely do a standard residential loan.
2. House with vineyard:  You have options here.  If your personal income is high then you could still do a residential loan with a 35% downpayment and not count the vineyard income.  Or, you could do a portfolio loan with 35% downpayment, count the vineyard income, but pay a slightly higher interest rate.
3. Vineyard with no House: you better have a lot of cash and time on hand.  You will need to purchase the land via a construction loan.  The valuation will likely not place any value on the vineyard so you will need to pay for that with cash on hand.  Then you will need to do approvals for building etc.
4. House + Rental Units with vineyard: this was our situation.  A purchase price of $1.135m and a commercial appraisal of $1.135m.  However, the residential appraisal came in a few hundred thousand less than the purchase price because for a residence they don’t count the full value of a commercial vineyard.
   1. Conventional Residential Loan: the loan limit for SLO is $561k so that would mean a downpayment of $574k + closing costs.  Income from the vineyard and rentals could not be counted.  The prevailing interest rate for a 7/1 ARM was about 3.375%.  However, this type of loan had a low likelihood of satisfying the Fannie/Freddie criteria above due to the income producing vineyard and rentals.
   2. Portfolio Residential Loan: would be 35% down but on an appraisal of only $950k or so.  That means a loan of about $625k at a prevailing interest rate of 3.8%.  That means a downpayment of $510,000
   3. Commercial Loan:  would be 50% down but on the whole value of the property at $1.135 resulting in a $567k loan and a $567k downpayment.  The prevailing interest rate was around 3.875%.

Summary

As you can see there are a lot of factors that go into financing a house + vineyard and it is dependent on the amount of cash you have on hand or access to, your personal income, the rental income, the farming income, and the type of loan you would like.  I am sure there are many more options and it would be great to hear about them in the comments section.

Next Post

Julie and I will be down at the vineyard Thursday evening for the Hospice Du Rhone seminars.  Unfortunately we will be assessing our first major setback – FROST!   This was one of the primary dangers we observed in our Small Vineyard Business Plan and we hit it. Stay tuned for pictures and commentary from the vineyard coming next week!

• The market is shifting more to ‘wine tourism’ and the wine experience rather than just buying and consuming wine. (Napa just passed Disneyland as the #1 tourist attraction)
• Owning a Winery is a hard business with low margins, high opex, a sales/marketing function, and requires full time attention.  It is like the miners during the gold rush.
• Owning a Vineyard is a highly leveraged, capital intensive business (like owning rental properties!)
• Napa/Sonoma is too expensive to buy into.  Livermore land is worth more as house lots than vineyards and is too close to the Bay Area. Lodi is too farm country. Paso Robles, like the three little bears, is ‘just right’.  It is in the middle between LA and SF, has comparatively low land costs, and was named Wine Region of the Year in 2013.
• A vineyard alone doesn’t ‘pencil’ well financially.
• A rental alone doesn’t ‘pencil’ well financially.

Like in the gold rush, why be a gold miner when you could be a business selling to the gold miners?  I believed you could marry a commercial vineyard with rental units to create a leveraged investment vehicle with both cash flow and asset appreciation.  Oh, and unlike a mutual find you can stay at the property yourself and imbibe what it produces 🙂

Unfortunately after googling for weeks and reading a few books I could not find applicable information on the business economics of a vineyard.  There was a ton of information on starting and running a winery, but less so on a vineyard.  I will share more of what I found in my next post, but for the sake of discussion I found the following two sources:

• Tablas Creek Blog – 2009 – “Whither Inexpensive, Artisanal Wine?” 
• Pacifica Commercial Realty – Wine Division – Winery Buyers Guide

• Paul: “So you want to buy a vineyard?  Have you ever owned a vineyard before?”
• Me: “Nope”
• Paul: “Have you ever owned a farm or farmed before?”
• Me: “Well… I grew up in Maine, that is a farming state”.
• Paul: “Yes but have YOU farmed before?”
• Me: “Sure, I had a big vegetable garden in the backyard”
• Paul: “Ummm… OK.  Well, what type of grapes are you looking for?”
• Me: “I don’t really care, I just want a few acres so it will look pretty for the renters of the home that will be on the property”

• More than 1 rental unit (Multiple Houses, House + In law , House + Cottages)
• 6+ total acres and 5+ acres of vines
• If vines aren’t planted then the land should be ideal for planting.
• up to $1m if we need to plant vines
• up to $1.3m if planted and fully operable
• Julie wants the house to be ‘cute’
• Julie wants to see vineyards out the windows.
• West Side – because everyone told us that is where the cool kids are!

• Learning How to Not Fail (and maybe how to succeed): a list of key websites, blogs, books and magazines that we are using to learn fast
• Your Team: there are lots of people involved in a vineyard (Realtor, Vineyard Consultant, Vineyard Manager, Laborer, Contract Labor, Spraying, Trucking, Repair, Labs, Farm Insurance, Tax Expert).  Who are they, where do you find them, what do they do?
• The ‘Industry Discount’: when you are in the industry – it is a synonym for not making much money.  So what is this industry discount thing?
• Going from Conventional to Organic: if your winery isn’t paying a premium for it, should you do it?  What does it entail?  What are the costs?
• Vineyard Activities: what does it actually mean to farm a vineyard and grow grapes?  What do you do?  Explain the activities such as Pruning, Dropping Wires, Canopy Management, Spraying, Mowing, etc.
• Technology for Small Vineyard: the big boys have their toys (sap sensors, wireless meshes, cloud monitoring) but what can the little guy do?  A look at automation technologies, sensors, weather stations, etc.
• Equipment in Vineyard: it isn’t all about technology, sometimes you just got to jump on the John Deere and go for a ride
• Taxation:  if they best way to make a small fortune in the vineyard business is to start with a large one, why do so many people do it?  You usually hear ‘they need a tax write off for their XYZ uber successful business’. Lessons learned on how to account for vineyard expenses and strategies for depreciation, material participation vs. passive activity, etc.
• New Plantings – Portuguese Field Blend and Syrah: while the majority of our acreage is under contract we are able to hold back a ton or so of Grenache and Mourvedre for making a couple of barrels for ourselves.  However, for a true GSM you need the S… Syrah! We are planning to interplant 2 rows of Syrah in 2017 (400 vines).  We are also planning to plant about 100 vines of Portuguese varietals in a field blend.  Where do you source vines, how do you plan the blocks, how do you decide on the clones?
• Contracts and the Winery – Grower Relationship: the fine balance of making this a win-win