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Morgan & Moore

 

Buying Land in a Down Market

March 2009
 
by Jeff Morgan & Daniel Moore
 
 
    HIGHLIGHTS
     

     
  • With residential real estate prices bottoming out, is there a similar trend for vineyard acreage?
     
  • A top wine country realtor says he has buyers waiting for prime properties, but the best parcels are not on the market.
     
  • If you've got the liquid assets to pay for it, and find a property that matches your goals, buy it now--it probably won't be available for long.
     
With real estate on the ropes, is this a good time to invest in a new vineyard or winery? Perhaps. Home values in parts of Napa Valley have plummeted 40% to 50%, but it's important to note that this has occurred in what we would call "fringe" wine country. The big hit in residential real estate is happening in the new developments that were built at the far southern end of Napa Valley, where (until recently) sub-prime mortgages still reigned supreme, and conditions for growing classically structured Napa Valley grapes are less commonly found than in the central and northern portions of the valley. Perhaps that's why home values have only dropped about 14% in St. Helena--arguably at the heart of the region's best-known vineyards.

Not long ago, we had a street-side encounter with one of Napa Valley's more successful realtors, who has facilitated the sale and purchase of some major vineyard properties. We were chatting about the state of our wine nation--particularly Northern California--when I asked him if he knew of any good vineyard deals for would-be buyers.

He jumped on our question with surprising urgency. "Do you know anyone who's looking to sell?" he asked. "Because I've got buyers. The trouble is, there's nothing good out there."

We wondered what he was talking about, considering we were surrounded by some of the most sought-after vineyards in the New World. But that was exactly our realtor's point--none of these top-notch vineyards were for sale. In densely planted Napa and Sonoma counties, our friend was finding it difficult to locate top-notch dirt for his clients.

What would you pay?

We asked what "top-notch" dirt is going for in Napa Valley these days. The answer came without a moment's hesitation: $200,000 to $300,000 per acre. The difference in price had less to do with quality terroir than acreage purchased. For 15 acres or less, we could pay $300,000 per acre; for 40-plus acres, we could get a "deal" at $200,000 per acre. In other words, Armageddon will come before cheap vineyard land is available in prime Northern California wine country.

Vinquiry
 
While a handful of vineyards are listed for sale in Napa Valley, it is rare for prime lots (such as the one above) to become available for purchase.
 
Well, Armageddon may be on its way. The question is, when? Currently and into the near future, vineyards in appellations renowned for premium wines will continue to command high prices, particularly when they are planted to hot varieties such as Pinot Noir (in the Russian River Valley and Santa Lucia Highlands) or Cabernet (in Napa Valley).

There's psychology at work here, too. Value is not tied solely to vineyard availability and reputation, but also to the sexy "gotta-have-it" nature of certain grapes and the continued existence of a seemingly persistent group of people with personal wealth who are able to buy into the wine business. For a significant number of "newbies," it does not matter that there is an oversupply of $100-plus Cabernet and $60 Pinot Noir on the market. When one label fails, another captain of industry is in line willing to scoop up an overpriced grape contract on the premise that it will be different for him, because his $100 wine will sell.

Overvalued property leads to overvalued fruit. There is not a loan shark in the world who can't tell you what the "vig" is going to be on his next loan. So why can't some growers tell you what the price per ton will be to purchase their fruit? They prefer, instead, to wait and see what the market will bear. This would be fine if we were talking about the second coming of the New World's Domaine de la Romanée Conti, but we are not. What we are talking about is blind opportunism, and it's reflected in real estate values.

Time for a shakeout

One of our favorite sayings from pop culture comes from the movie, "Wall Street," in which the protagonist insists, "Greed is good." Realty mirrors fiction, and the wine industry seems to be taking its cue from the real Wall Street--not necessarily the best idea. We haven't seen a shakeout yet, but it's going to happen. Wine sales are down, and highly leveraged groups will have to sell something. We've been living on credit for so long that we are only now just starting to default. When that happens, more people will stop buying, and land prices will drop.

Will the silk purse in vineyard and winery real estate be there for those who wait, or will waiting for some elusive "rock bottom" value net them a sow's ear? If you find a property that is attractive, and it fits your parameters and business plan, then buy it. Indeed, buy it now. If you wait too long trying to squeeze the last dollar out of the deal, you will likely lose the dirt you covet. So if you've got good old-fashioned liquid capital on hand to purchase a property that won't come along again anytime soon, don't wait for the deals. Good land will always be hard to find.

When you do realize the fruits of your new investment, and you start selling grapes to wineries, we hope you will deal with them fairly. The grape market is a cyclical beast that can be tempered by an even-handed approach. The best and classiest growers we know always get top dollar for their grapes. They get a bit more than most in a down market and a little less when supply is tight. What goes around comes around.

Jeff Morgan of Napa Valley and Daniel Moore of Sonoma County are partners in M Squared Wine Consultants, m2wine.com, and jointly own and operate SoloRosa and ZMOR wineries. Morgan also makes two kosher Napa Valley Cabernet Sauvignon wines: Covenant and RED C. To comment on this column, e-mail edit@winesandvines.com.
 
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