Owning a Vineyard: The Days of Wine Are Not All Rosy
Wealth Matters
By PAUL SULLIVAN SEPT. 9, 2016
BILL PRICE was a founder of TPG, one of the world’s largest private equity firms, and was involved in large deals, including buying Continental Airlines and J. Crew. He also invested in Beringer Vineyards and Chateau St. Jean, two California wineries.
The wine business, it turned out, intrigued him. So in 2007, he left TPG to focus full time on owning vineyards and wineries.
He wasn’t just some rich guy fulfilling a fantasy. He was a rich guy who had a real sense of what made a business work and experience investing in the wine business. Surely, he would have a leg up on the dreamers who pour cash into a vineyard without any real sense of what they are getting into.
The answer, almost a decade later, is not exactly.
“I feel like I’m a pretty sophisticated financial analyst, but I still struggle with how you value a vineyard,” said Mr. Price, who owns six vineyards and five wineries, including famous names like Kistler.
Visit any vineyard and it’s easy to imagine the lure of living in such a beautiful place. But separating the financial reality from the romantic vision of being a vineyard owner — particularly for people who get into the wine business after making a fortune elsewhere — is not easy.
Mr. Price bought Durell Vineyard in Sonoma Valley in 1997. At the time, the land was going for about $60,000 an acre. Today, comparable vineyard land there costs $140,000 to $160,000 an acre. “The price of grapes has gone up, but it’s gone up 50 percent,” he said. “Vineyards have gone up two and a half times.”
Price, though, is just one measure of a vineyard’s value, experts say — and it shouldn’t be the first consideration.
“It gets down to understanding your purpose,” said Bill Harlan, who bought his first piece of Napa vineyard land in 1979 and owns Harlan Estate, an acclaimed producer of wines. “If you’ve got somebody who says they’re interested in a vineyard, ask why. What’s their purpose? Is it a serious business? A hobby? A trophy property for them?”
And those answers, he said, are going to drive the type of land you purchase — and, of course, the cost of that land. “You could have a nice home and vineyards around it that are more for aesthetics, and someone else could take care of the wine and sell it,” Mr. Harlan said. “Some people may say, ‘I just want to share some wine with friends.’ Some see it as prestige. Some think they can make money. Some want to do something to sell.”
Kevin Kinsella, the founder of the venture capital firm Avalon Ventures, who also was one of the largest individual investors in the musical “Jersey Boys,” said he thought he was buying a peaceful weekend retreat in Healdsburg, Calif., in 2007.
He paid $2.8 million for 75 acres, 12 of them planted with grapes.
“I didn’t do a calculation that I was going to go into the wine business or even really the grape farming business,” Mr. Kinsella said. “I hoped fruit sales would break even. For me, it was a vacation property.”
After fits and starts — including his first harvest, when he realized the vineyard manager hadn’t found anyone to buy the grapes — he now produces a top-ranked cabernet sauvignon on his Kinsella Estates. It sells for $125 a bottle.
But first, he needed additional investment, including replanting 10 acres where the vines were past their prime. That generally costs $75,000 to $100,000 an acre, said Tom Palecek, founding partner at Summit Trail Advisors, an investment adviser in San Francisco.
The cost of land for growing grapes varies by both its quality and the price that can be fetched for the grapes in that region.
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Bill Price bought Durell Vineyard in Sonoma Valley in 1997, when the land was going for about $60,000 an acre. CreditJason Henry for The New York Times
Sean Maher, managing director and founder of Aspect Consumer Partners, a vineyard brokerage firm, said land in Napa was the most expensive since much of the farmable acreage had been planted. Top sites there can cost $400,000 to $500,000 an acre.
“These high-end, high-quality pieces are in great demand,” he said. “Everyone wants this land, including the wine industry guy. But it’s the lifestyle guy who is sometimes willing to pay more. The industry folks don’t want a $3 million home on it.”
In the Central Coast, the price is $150,000 an acre. Land with pinot noir grapes in Santa Barbara, made widely known in the movie “Sideways,” costs $80,000 an acre. In Oregon, the cost is about $35,000 an acre, while in New Zealand, it’s about $20,000 an acre.
What is driving the cost of the land is the price of the grapes. Mr. Maher said cabernet grapes in Napa fetch $10,000 a ton, while pinot noir grapes in Oregon sell for just $3,000 a ton. In the Central Valley, which is the core producer for mass-market wines, the grapes are $500 to $800 a ton.
“I tell people it’s fun to grow it, it’s fun to make it, fun to look at it, and fun to drink it,” Mr. Maher said. “But sometimes, it can be really hard to sell it.”
Mr. Palecek said he counseled clients thinking of buying land and turning it into a vineyard that it could take up to five years before the land was productive. Even then, the returns on average are basically 4 to 5 percent a year on the sale of the grapes.
“It’s an issue for most wineries unless they’re selling a small amount and they get a following,” he said. “But that’s not the norm.”
“If you want to do farming and make money, it’s not going to be pretty,” he added. “You’re going to farm grapes and sell them to a winemaker who knows what he’s doing.”
Kristin Nelson, head of sales strategy and business development at Bank of the West Wealth Management Group, said she often asked clients to consider what returns they could get investing in other alternative investments like real estate.
“Most of the time investing in other alternatives is going to reap longer term returns that are higher,” she said.
If that doesn’t deter them, she said she suggested that they get more educated about the wine business before making a large purchase. And if they are still ready to buy, she counsels them that starting from scratch can be a lot riskier than buying an existing vineyard.
“If you start from scratch, it could be 10 to 15 years before you reap any reward,” she said. “If you buy a winery that is already in existence and selling wine, you know what your incoming cash flow may be. You may invest $50 million but you’re receiving an income every month from that winery already.”
Of course, that could take away the fun for some investors.
Mr. Price said it helped to think of the wine business as akin to the airline business. Both need extensive capital investment, have uncertain demand and are subject to external shocks you can’t control, like higher fuel costs for planes or a poor crop in the wine business.
If that’s too daunting, Mr. Harlan owns an 80-acre parcel that allows aspiring vintners to try out the business. For a $155,000 initiation fee and annual dues of $3,000, people can become members of the Napa Valley Reserve, which is to winemaking what a country club is to golf. The 600 members, who make from six to 75 cases a year, can produce their own blend from the grapes on the property or create one of the master blends and attach their own label.
For Mr. Kinsella, who is a member of the Napa Valley Reserve, turning a vacation property into a working vineyard and a winery was, at least, less risky than investing in a musical. “Once a musical goes up and down, that’s it,” he said. “With wine, you have the land and some residual value. If you stick with it, you can be successful.”
That, of course, requires deep pockets.
