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Can’t buy a vineyard? Lease it

MORE SMALL, HIGH-END WINERIES CHOOSE LEASING; MANY LEGAL ISSUES EXIST

NORTH BAY – With a growing demand for high-end wine and an ever-shrinking pool of available land in the Napa Valley and other premium appellations, vineyard leasing is becoming an attractive offer for small to medium-sized boutique wineries looking to avoid the large upfront capital expenditures involved in purchasing and maintaining their own land.

“More recently we’re starting to see winery owners asking themselves, ‘Do we really want to be in both the wine and real estate business?’” said Patrick Mahaney of Premier Pacific Vineyards, a Napa-based vineyard leasing company. “'Or should we just lease the land and focus on our core competency of making wine?'”

Focus on the very best vineyards

Founded in 1998, Premier Pacific Vineyards owns 2,500 plantable acres in such premier appellations as Santa Rita Hills, Napa Valley, Russian River Valley, Alexander Valley, Sonoma Coast and Anderson Valley. The company is also developing a property in the Columbia River area of Washington state. “We only develop high-end vineyards,” Mr. Mahaney said. “We have a laser-like focus on just the high end.”

Premier Pacific contracts with individual wineries to lease out blocks of specific vineyards. And as they need to grow, Premier Pacific grows with them by providing incrementally more acreage. “Our customers are small to medium-sized high-end wineries that are looking to grow but for various reasons don’t have the capital or wherewithal to purchase and develop their own vineyards,” said Mr. Mahaney.

While he said there are no available statistics for how quickly vineyard leasing is growing in popularity, he attributes the upsurge to high-end wineries wanting to have more control of the source of their main ingredient: high-end grapes. Too many times, he said, wineries have come to count on grapes from a specific grower with which they have a loose agreement, only to have the deal fall through. “Wineries have been burned too many times and want to secure things for the long term.”

Many legal issues in leasing

While vineyard leasing does come with a number of financial perks – for example, lease payments are tax deductible – there are a host of legal complications, according to Matt Lewis of Farella Braun + Martel. As a partner for 14 years and head of the business transaction group at FBM, Mr. Lewis does a large amount of work in the Wine Country, including vineyard acquisitions and vineyard leasing.

“A typical lease, for example, deals with things like who can terminate under what conditions, who’s responsible for maintaining what, etc.,” he said. “And if there are common areas that need to be addressed, like roads and irrigation systems, with multiple tenants on a ranch, who gets access and at what times?” Mr. Lewis said.

“It’s worth having somebody take a look at the terms of the lease and explain what the lease means so you can clearly understand your rights and obligations. And the bigger the investment is to the size of your business, the more important that becomes.”

From the lessor side, there are also things to take into consideration, Mr. Lewis said. The owner of a large vineyard with multiple tenants is going to have to coordinate between the lessees to make sure the business practices of one don’t besmirch the reputations of the others.

For example, if the vineyard is positioned as a high-end, premium vineyard, you’re going to want wineries with similar reputations as tenants. “You don’t want somebody in there with farming practices that are going to ruin that reputation,” he said.

Despite the many difficulties that have yet to be ironed out, Mr. Mahaney thinks that leasing will only continue to grow in popularity.

“It’s a good business to be in because the real estate itself is a very valuable asset that has a lot of upside for appreciation,” he said. “And there just isn’t that much raw land left in premier appellations like Napa that can be turned into vineyard. It has pretty much hit a ceiling.”

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