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January 2010 Issue of Wines & Vines

How Appraisers Value Vineyards

Wine prices ultimately drive land prices, but variables exist

by Paul Franson

Anyone who owns a vineyard is interested in what it’s worth—particularly in these times of turmoil in the economy and reduced real estate values. Fortunately, the dramatic drop in residential property hasn’t hit prime vineyards, but understanding how appraisers value land is helpful. At a recent wine industry-oriented seminar of the California chapter of the American Society of Farm Managers and Rural Appraisers, Tony Correia of Correia-Xavier Inc., a leading appraiser for vineyard property, discussed how appraisers value vineyards.

Correia said that appraisals are needed for many reasons, including any financing, because the lenders require a valuation of any collateral. They also may be needed to sell or buy property, for financial reports, and to settle disputes arising among stakeholders in divorces and in eminent domain proceedings.

They are also necessary in many tax reports, including allocations for income tax depreciation, appeals of property tax assessment (an increasingly common issue) and for calculations of capital gains. Correia noted that the United States likely will eventually adopt global financing reporting standards, too.

He emphasized that wine prices drive grape prices, which drive vineyard values. That can be well demonstrated by tracking grape prices to land values in different areas. Though the ratio between grape prices and wine prices is a little more difficult to determine, studies by growers like Andy Beckstoffer suggest that a ratio of 100 times retail bottle price is fairly consistent for grape prices. In other words, a bottle of wine that costs $20 at retail should be made with grapes that cost about $2,000 per ton.

Many factors affect vineyard characteristics, of course. The first is location—a key factor in climate. California, for example, has the Winkler Regions I through V, but it can be further subdivided by district, a state classification of farming area; appellation, an undefined term in the U.S.; and by American Viticultural Area, the federal designation.

Climatic characteristics include minimum and maximum temperatures, amount and timing of precipitation, and microclimates and mesoclimates of a vineyard.

Soils also are important. Critical issues include general soil characteristics and types, fertility (generally not desirable for winegrapes), limitations such as inadequate or excess water-holding capacity, undesirable mineral content and erosion.

Water has always been important, and it’s becoming more so as weather conditions, population, farm growth and increasing limitations challenge growers. An appraiser looks at the source of water, its cost and any timing restrictions, as well as existing or required permits, licenses and storage ponds and reservoirs.

The water distribution system, including pumps, could represent considerable value, and sprinklers for frost protection, drainage systems including recovery and erosion also must be considered.

Aspects of location
Location is important, not only because vineyards in certain areas produce grapes that fetch higher prices, but also because of nearby support systems, including proximity to vendors, management, labor, wineries or crush facilities and even other vineyards. An isolated vineyard may produce remarkable grapes, but its location may also complicate growing and selling the fruit.

In most areas, the value of the land for other uses, notably homesites, subdivision development or resorts, must be considered; in Napa Valley, by contrast, local regulations greatly restrict alternatives.

And of course, competition affects land values. A vineyard in a famous AVA or with a strong reputation is likely worth more than its competitors.

Assuming vines, or “living improvements,” are planted on the property, many factors affect their value. The varieties and specific cultivars, the rootstocks, spacing, plant density and population are important. Production per acre and trends in production are important, too. Age is a factor; up to a point, older vines are valued by most wineries, particularly for red wines, but vines planted on rootstock tend to decline after some time. Many observers consider 30 years to be the average life of most vines. Obviously, diseases and pests such as viruses, nematodes, Pierce’s disease and the almost ubiquitous phylloxera (in California) are factors.

Likewise, the nonliving improvements like trellis systems, irrigation systems and frost protection systems have value; oddly, trellises can be classified as “machines” in some tax situations.

Many other characteristics affect vineyard value: partial interests in the property such as leaseholds, leased fee and undivided status. Topography, terrain and access are important. In some cases, as in most California wine country, zoning can determine whether the land can be used for a vineyard. Grape contracts could be a negative or positive factor.

The values attributed to various components of the vineyard are highly dependent on the total value of the property. For expensive property, the underlying land value dominates, but for less expensive land, the vines and infrastructure are a much larger portion by percentage. Only overhead remains fairly constant.

Appraisal methods
Three methods are used to appraise vineyards: sales, cost and income.

To compare a vineyard with others, various units of measure are used, notably the price of comparable vineyards per acre. Sometimes, other measures are used, including price per ton of grapes or even price per foot of cordon. These must be factored with other characteristics of the property.

Homesites can be a key element in appraising vineyards, of course. They can add considerably to the value of the land even if the buyer doesn’t intend to develop them. The homesite value itself tends to become more important on smaller plots. Some areas, such as Napa County, have severe restrictions that can make homesites more valuable.

A second way to appraise vineyards is based on their costs. This starts with the cost of the land as a capital cost, which is based on the return possible on its use or the opportunity cost of the land. Added to this are area and specific costs; entitlements such as water; the cost of capital; entrepreneurial profit; depreciation of both living and nonliving improvements, and whether it’s mature or developed. Correia pointed out that it makes sense only to develop vineyards that can make a profit. This is often overlooked by would-be vintners seduced by the wine country lifestyle.

The third method for appraising vineyards looks at the income the property is capable of producing. One consideration is what it’s worth if operated by the owner compared to what it would be worth leased, although vineyards are usually not leased to an operator to develop. Usually the owner operates the property.

The value is estimated from grape price trends and market demand based on prior price and production of the land, contracts and cultivating, harvest and overhead expenses.

A discounted cash-flow analysis more accurately judges returns. That must take into account the time value of money, projected cash flows, industry cycles, consumer preferences and general economic trends, which can be impacted by global factors.

Correia ended his talk with a quote from Omar Khayyam to remind the audience of the realities of the wine business: “I often wonder what the vintners buy/One-half so precious as the goods they sell."

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