Vineyards and Profits May Not Go Hand in Hand

By HOLLY HUBBARD PRESTON
Published: June 24, 2001

MANY people would never consider plunking down several hundred thousand dollars or more to own an apple orchard or soybean farm. But put a vineyard property in front of them, one perched in a romantic location, and stars light up their eyes as visions of money-producing grapes, maybe even a wine label, go swishing through their heads.
It is easy for someone to get carried away, at least until a vineyard manager or wine consultant starts outlining the amount of time and money required to turn those visions into a profit.
Alphonse Pobeda, director of L'Avenir Immobilier, a real estate agency in the Gironde region of France, said a majority of people coming to him for vineyard property were ''nonexperts -- businessmen, Parisians and foreigners who want to own a vineyard for prestige.''
''Profitability is not always going to become a reality,'' Mr. Pobeda said.

Even as a pure investment, vineyard ownership is not guaranteed to provide big returns.''With a good sales system and a good vineyard, owners can aim for a 4 percent annual profit'' selling grapes in France, said Olivier de la Selle, manager of Agri France, a Paris subsidiary of BNP Paribas, the French bank.
On the surface, an investor could buy bonds with better returns and far less outlay and headache. An investment-class vineyard property can easily cost $500,000 to $2 million, depending on the region and the specific site.
What is the minimum acreage for a commercially viable investment property? The answer varies by region. In Italy, France and parts of the United States, 8 to 10 acres of premium grape-growing land can yield long-term investment returns of as much as 20 percent a year, depending on market demand for contract grape purchases. In Australia and South Africa, brokers say 40 to 60 acres is the minimum.
''You can buy cheaper properties, but usually you get what you pay for,'' said Angelika Smith-Aichbichler, co-owner of Piedmont Properties, an Italian vineyard property broker with offices in London.
There is a good reason for the high cost of sites with good soil, elevation and position toward the sun, she said: ''They grow better-quality wine grapes.'' She and her partner, an Italian winemaker with 20 years' experience in the business, screen all properties for soil quality and position before agreeing to listings.
A single region may have a wide range of property values. Land prices in some Australian regions, like Riverland in the south, have declined as an oversupply has driven down grape prices, said Philip Shaw, a partner at Colin Gaetjens & Shaw, a vineyard property brokerage firm in Adelaide.
BUYING the land is only part of the equation. There are grape yields, agricultural costs, taxes and insurance to consider, said Ren Harris, a veteran in the real estate business in the Napa Valley of California. The state requires no permits for planting vines, but owners in Italy and France may have to pay several thousand dollars for property permits.
Although grape yields can vary widely even within a region, top-quality ground in Napa Valley might produce four or five tons an acre per year and gross as much as $20,000 an acre in grape sales, said Mr. Harris, who, along with Jean Phillips, proprietor of the Screaming Eagle Winery, owns Ren Harris-Jean Phillips Land Brokers in St. Helena, Calif. An established vintner in his own right, Mr. Harris makes the Napa Valley boutique wine Paradigm.
From the gross profit in selling grapes, an investor will need to deduct agricultural maintenance costs that in the Napa Valley run $4,000 per acre. Add insurance, mortgage interest and property taxes, and the investment might not look so hot.
It is through winemaking and producing that an investor can make some real money. Vic Motto, a certified public accountant in the Napa Valley who has worked with dozens of vineyard owners, offered the following breakdown:
Consider the vineyard investor who grows and bottles about 5,000 cases of premium cabernet sauvignon, about the average yield for a small commercial winery in the valley. If that wine is sold at $40 to $50 a bottle retail, the investor's cut will be about $1.5 million.
If the same investor just sold to another winemaker the grapes grown on such a property, annual sales would be about $350,000. Grape prices in other markets are likely to be less, and contract prices everywhere vary, depending on supply and demand.
An investor who goes the winemaking route should be ready to make a large investment in equipment and other capital assets beyond the real estate, maybe three to four times that of a normal business, Mr. Motto said. But that, he added, is not necessarily bad, even before a vineyard becomes profitable.
''I've seen people who have a zero return see a tremendous capital appreciation because of assets,'' he said.
But investors in Australia cannot expect to be bailed out by rising land prices, at least for now.
''Good profits are being made making Australian wines,'' said Mr. Shaw, the Adelaide broker. ''But we're not seeing a rapid escalation in vineyard values.''
That said, bringing a new wine to market requires substantially more work than just growing grapes. A newcomer to the industry will probably need to hire a winemaker, at least on a consulting basis, and may choose to build a winery.
It is not always necessary to have a winery to make wine. Third-party producers in all major wine-growing regions can crush, ferment, barrel, bottle and age wines to specifications set by a winemaker or vineyard owner.
Likewise, winemaking does not require owning a vineyard.
But Doug Shafer, president of Shafer Vineyards, whose Napa Valley wines sell for $50 to $150 a bottle, said: ''Quality wine is made in the vineyard. When you buy your grapes from someone else, it is hard to assure that quality.''
BEYOND requiring substantial initial outlays, vineyard investments need a long time to yield a return.
Newly planted vines need at least three years to start producing grapes suitable for wine. With two to three years of barrel aging, a vintner could wait five to seven years before seeing the first revenue.
The buyer of a plot with mature vines who chooses to sell the grapes has a good chance of seeing returns within 12 months. But Ms. Smith-Aichbichler of Piedmont Properties warned that even that investor should have about two years of working capital to fall back on.
All these costs help explain why lending institutions specializing in vineyard properties expect a huge amount of due diligence on the part of prospective investors.
''We advise clients to pay the maximum up front and limit borrowing to between 20 percent and 30 percent of purchase price,'' said Mr. de la Selle at Agri France.
Photo: The Italian town of Serralunga d'Alba is in the heart of the Barolo region, famous for the dry red wine that its vineyards produce. (From ''A Traveller's Wine Guide to Italy'' [Interlink Books, 1997]) Chart: ''The Acreage List'' Average prices per vineyard acre in U.S. dollars U.S. REGION: Napa Valley PRICE: $149,392-$199,190 Australia* REGION: Barossa Valley PRICE: $15,890-$19,078 REGION: Coonawarra PRICE: $19,079-$23,320 REGION: Hunter Valley PRICE: $12,712-$15,890 REGION: Yarra Valley PRICE: $18,016-$21,194 France REGION: Champagne PRICE: $122,267 REGION: Alsace PRICE: $30,445 REGION: Burgundy PRICE: $24,899 REGION: Bordeaux PRICE: $17,490 REGION: Rhone Valley PRICE: $10,202 REGION: Loire Valley PRICE: $6,964 REGION: Languedoc-Roussillon PRICE: $4,575 Italy REGION: Piedmont PRICE: $26,647-$35,526 South Africa REGION: Cape Winelands PRICE: $12,550 *Premium (Sources: Colin Gaetjens & Shaw [Australia]; Piedmont Properties [Italy]; Ren Harris-Jean Phillips Land Brokers [California]; Pam Golding Properties [South Africa]; Safer [France].)