Thank you everyone for the great reception to our original post: So you want to buy a vineyard? We have had over 300 unique visitors within the last 24 hours alone. Very humbling but also very cool. As a reminder you can click the link above to comment. We now have a twitter account at @Hollyhockvines where we will post pictures and updates when we do a new blog. You can also click on the Follow button to the right to be notified of new posts.
Once we found our ideal vineyard we needed to figure out if it could be a viable business. After all, people say the best way to make a small fortune is to start with a large one and enter the wine business. However, they also say the best day in a boat owners life is the day you sell it and I found that to be untrue. By being creative I was able to have a 2 bed, 2 bath, 750 sq ft ‘condo’ with 2 parking spots and all utilities/cleaning included on the waterfront in downtown San Francisco for only $1450/mo. By my accounting that is much less than the $5k to $7k others were paying for their condos. (Btw, the boat is for sale and I am happy to share how to do it for $1450/mo 🙂 )
So if a boat can be profitable, why not a vineyard??
Unfortunately there isn’t a whole lot of information related to vineyard business models online or in books. What is available is focused on wineries and/or Napa whose cost models are way out of whack with the rest of the normal world. Unfortunately, this paper was authored after we closed on the property: Sample Costs to Establish a Vineyard and Produce Wine Grapes – Sierra Foothills (2015 UC Davis)
Fine Print: before Julie (wife & co-owner & boss lady) shoots me for sharing too much personal information, all of the below figures are publicly accessible. Where data is private/sensitive (grape prices, mortgage rates) I substituted applicable averages or estimates.
What Would Make It Pencil?
While looking for properties I began to appreciate the difference between a residential real estate professional and a commercial real estate professional like Paul Shannon. When you house hunt with a residential realtor you hear things like:
- “Can you imagine yourself waking up to this view of the vineyard?”
- “Picture yourself with a coffee sitting out on the patio every morning.”
- “Don’t you love these granite counter tops and stainless steel appliances?”
- “This goes really well with vanilla ice cream when you drizzle it on top.” (oops… that is what every balsamic vinegar or port wine tasting professional tells me. Has anyone really ever drizzled something other than caramel or hot fudge on their ice cream? )
When you property hunt with a commercial realtor it is simple:
- “It is nice, but will it pencil? What is the Cap Rate?”
When looking at any business it is pretty simple – what are my expenses per month and what can I rent/sell it for each month? Just like fitness – Calories In vs. Calories Out. For the rental property it is a simple formula:
- (# of Units * Average Nightly Rent * # of days a year rented) –
(Mortgage, Taxes, Upkeep, Expenses)
For a Vineyard it is also a simple formula
- (# of Acres * Yield per Acre (in tons) * Price per Ton) –
(Mortgage, Taxes, Upkeep, Farming Costs)
Now the trick is to find out what the #’s are so you can “see if it pencils”. Reach back into your early school days and lets solve the Math Word Problem.
# of Acres: is easy if the property already has a vineyard. It will be listed in the property description. It gets much trickier if the property doesn’t have vines planted yet as it gets into all kinds of complications such as how much is viable for planting, soil tests, costs to clear and remediate land, etc. Lets leave that for the advanced course.
Yield per Acre: how many tons per acre will you grow? This is controlled by 2 factors, your location and your winery buyer’s preference.
For Location, look at the map of Paso Robles below. On the ‘West Side’ you have lots of green mountains and on the ‘East Side’ side you have a flat brown valley. The west side is similar to Napa with more rain, elevation, limestone, and thinner soils. The east side is similar to Lodi with large flat plots of good soil and irrigation. Finally you have the middle with low rolling hills (which we like to think is just right and where Hollyhock is). On the West Side it is harder to plant in bulk, soils are thinner, and less yield = more concentrated fruit, so the yields are lower (2.75 tons) than on the East side (8-12 tons).
The second factor is what your winery wants for yield. A rough estimate of the cost of wine is the cost of fruit per ton * .01. Just like car manufacturers, wineries try to make wine for each price point. So the $4,000 per ton fruit goes into their $40 bottles of wine and the $2,000 fruit goes into their $20 bottle of wine.
Price per Ton: is a critical factor and where every dollar matters. Luckily there is a ton of public data released via the Grape Crush Report (United States Department of Agriculture). It lists all of the grape lots sold and what the prices were. The good news is that they break out California into 16 different districts. The bad news is that District 8 not only lumps together the very different East and West Sides of Paso but also San Luis Obispo and surrounding areas. So you have to do a little bit of excel work to try and estimate what the price for your specific area would be. Below are two plots showing how many tons were sold at each price point. For our purposes we will assume the high tonnage and low priced sales were all for the East Side and the $3750+ was for the West Side. We should be somewhere in the middle.
To summarize the research, lets chart it. Ironically, it seems that no matter the yield you end up with a similar Total per Acre. Welcome to the rather un-romantic reality of grapes as a commodity (a raw material or primary agricultural product that can be bought and sold).
|Yield per Acre|| Price Per Ton
||Total per Acre|
|Ultra Premium (West Side)
||2 to 2.5 tons||$3,500 to $4,000||$7,000 to $10,000|
|Premium (Hollyhock)||4 tons||$1,750 to $2,500||$7,000 to $10,000|
|Bulk (East Side)||8 to 12 tons||$500 to $800||$4,000 to $9,600|
So for Hollyhock Vineyard lets assume we do 4 tons an Acre at a price per ton about 10% above the average ($2,400 for Mourvedre and $2,000 for Grenache).
- (4 Acres * 4 tons per Acre * $2,000 + 4 Acres * 4 tons per Acre * $2,400) –
(Mortgage, Taxes, Upkeep, Farming Costs)
Now you need the Expense part of the equation. This was the hardest part for us to figure out. The mortgage and taxes are straightforward enough, but how much does it cost to upkeep (replace old vines, irrigation repair, well, etc) and farm. Heck we didn’t even know what went into farming. I was able to find a UC Davis study on Production and Sample Costs to Establish a Vineyard in Paso Robles but unfortunately it was from 20 years ago (1996). Thus the only other semi applicable data sources I found were from a Tablas Creek blog and a student project for a Bachelors Degree from SLO.
- Feasibility And Economic Viability Of Establishing A Wine Grape Vineyard in Moraga
- Tablas Creek Blog – 2009 – “Whither Inexpensive, Artisanal Wine?”
The most valuable information ended up coming from the property seller’s disclosures. Below I have created a table showing the vineyard costs from 2012-2015 for Hollyhock. The Tablas Creek example is included for comparison. The top section summarizes expenses where you can see that Hollyhock comes in around $8k per acre vs $6.5k for Tablas. This makes sense given their economies of scale.
The second section shows the yields and income using the estimated price per ton from above. You can see that 2012 to 2014 were very productive years at over 4 tons per acre. However, in 2015 the harvest was down 20-50% due to shatter, drought, and weather and yields were down to 12.53 and 13.74 tons vs. goals of 16 tons each.
At the bottom we take into account the costs of financing the property (Farming + Finance) and you can see the net loss on paper of $50k to $70k a year . What the !#$!?
Good thing that there is more to the story…
Show me the Money!
The Kennebunkport Cottage we referenced in our last post was purchased at the height of the real estate bubble for $350k with 10% down and had rents of a paltry $9k/year. It doesn’t take an MBA to see that was not exactly a winner. However as a good investor you need to think long term and find ways to improve the business. In this case, the costs per month was fixed via a 30 year mortgage and then thanks to inflation (rent increases) and better marketing the rents increased to $35k/year (vs expenses of $25k) by year 7. The property then sold for $400k. So what started in year 1 as a small loss resulted in an average annual return of 44% at the end of 7 years.
Going back to the vineyard example, it is obvious an 8 acre vineyard can not pay for the entire property. But don’t forget the property also has a house and two cottages on it. When you put those to use as vacation rental units (2 cottages at $125 and 1 House at $300) and assume that only weekends will be rented (27% of the year) you have the following equation which adds up to the $48,000 of rental income from the table.
- ($550 Average Nightly Rent * 87 days a year) –
($0 Mortgage , $0 Taxes, $3k Upkeep, $4k Expenses)
This leads to a break even balance sheet. In good years you will make $6k in cash flow and in a bad year like 2015 you could lose $15k.
You may think I am crazy since you can make $0 just sitting on your couch doing nothing! However, we are thinking long term and there are a number of factors that can/will impact the investment returns.
- Principal Reduction: You may be breaking even, but don’t forget that you are paying down a mortgage each year. For the first 10 years you will be paying down $25k+ a year
- Fruit/Rent Increase: Every year there is something called inflation. Things get more and more expensive every year (usually about 2-3%). This is the reason why you can’t get a hamburger for a nickel anymore. This means your income will rise by 3-5% per year but your expenses will remain mostly the same (because your mortgage is fixed). In 5 years your cashflow could be $34k higher.
- Rents have historically risen 5% a year in SLO
- Many grape contracts have an annual escalator clause where the price of grapes increases from 3-5% per year.
- Appreciation: When Jason Haas evaluated a property in his Tablas Blog he caveated his reason for passing: “a savvy investor in land might take a chance, given that the price of prime vineyard land here is almost certain to appreciate. Someone who bought it and covered most of their annual costs through selling grapes could come out ahead given that in a dozen years it might sell for double what it’s worth now.” What this means is that the price of housing increases at the rate of inflation (~2.5%/year) as a minimum and could increase more as Paso Robles Vineyards become more well known. Heck even Harvard’s endowment is betting on Paso Robles vineyard land. Assuming only a 2.5% appreciation your property value would increase by $28K+ a year
- Taxes: This is a tricky one and I will endeavor to create a standalone post to cover things like depreciation, loss carryovers, etc. For now, lets keep it simple. Any money you spend related to the house or vineyard is tax deductible. This includes portions of your vehicles, supplies, depreciation, and other ‘activities related to the pursuit of furthering your vineyard business’ 😉 In the beginning you will likely show a ‘paper loss’ but have neutral to positive cash flow. Depending on how you structure things these losses could flow through to your personal W2 and reduce your income tax. This can amount to 28-39.6% based on your tax bracket. (Caveat, I am not a tax professional and do not take this as advice).
- You own a freakin’ vineyard – duh! Don’t forget that 73% of the year when you aren’t renting the property, you get to use that romantic vineyard with the great views. Family and friends get to visit. You no longer have to spend $300 a night at the Hampton Inn – that alone should be worth $4.2k (14 nights). You get to name drop at cocktail parties, “Ya I own a vineyard, I am a bad ass”.
- Industry discount: this was a welcome surprise and I will write a complete post on it later. In a nutshell, when visiting wineries most will ‘comp’ you the tasting fees and let you visit for free. Furthermore, most will give you a 30% discount on wine purchases. If you are a big wino (you did decide to buy a vineyard after all) and assume 20 winery visits a year and 4 cases of wine that should be worth at least $2k
So add up all the variables above and that net neutral investment becomes a positive ~$70k a year. And… you own… a freakin…. vineyard!
Yeah but I don’t want to be a Landlord or a Farmer
No worries, there is an app for that. It is 2o16 and you can use an app on your iPhone to order 6 cookies from Specialty’s Bakery and have them delivered to your house in under 45 minutes. (Trust me, I just tried it out yesterday via the DoorDash App). You can do the same thing for your rentals via a service called Guesty. They will respond and manage all of your reservations for a 3% fee.
As for the vineyard, a vineyard manager is already included in the cost projections and for <10 acres it will usually run you about $5k a year.
Give Me Some Money! …. Please?
I was planning to detail the financing portion which is a better different than a standard mortgage. Unfortunately this post is already quite lengthy so I will use the topic for my next posting.
Future Topic Ideas
- Next up – Learning How to Not Fail (and ideally 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