The Lease You Can Do - Premier Pacific Vineyards

The Lease You Can Do
Why leasing a vineyard can beat buying it
Jane Firstenfeld
ou can start a
boutique winery with
nothing more than a
label, purchased
grapes and maybe
(but not necessarily)
a production facility of your own.
Many, if not most, start-ups have no
vineyard property to call their own,
even though their owners have high
expectations and aspire to make even
higher-quality wines. Escalating prices
for premium vineyard properties
make purchasing an estate a
prohibitive expense for all but the
best-heeled boutique vintner.
Although in recent years there has
been no shortage of quality grapes
available for purchase, buying from
even the most respected grapegrower
does not necessarily give winemakers the from-the-ground-up
control they may crave in their final
product. Leasing a vineyard can
HIGHLIGHTS
☛ Vineyard leasing can provide an
attractive middle ground for winemakers who want more viticultural
control but don’t have the means or
motivation to buy premium vineyard
acreage.
☛ Boutique wineries that contract for
grapes can become the victims of
their own success, when the vineyarddesignated grapes they marketed are
sold to other buyers.
☛ A simple handshake or a two-page
boilerplate lease agreement are
rarely sufficient to protect both parties
in a modern vineyard lease. Professional help is highly recommended.
☛ Two considerations are primary in
establishing a vineyard lease: “Is the
site suitable for your purpose?” and
“What are the terms and conditions
of the lease?” Make sure your lease
conforms with state and local laws.
24 WINES&VINES • OCTOBER 2006
provide a middle ground for small
or start-up producers, reducing
capital outlay while granting total
oversight from choice of varietals,
rootstock and clones through
cultivation practices, irrigation and
trellising through harvest.
To learn more about the ins and outs
of vineyard leasing, we asked two
experts: an attorney specializing in
winery and vineyard matters and a
wine industry veteran who now,
among other endeavors, leases out
premium vineyard properties. We also
asked three vintners about their
experiences with leasing.
“Vineyard leasing, particularly at the
high end, is definitely a trend that is
growing,” according to Patrick
Mahaney, director, vineyard estate
marketing, at Napa’s Premier Pacific
Vineyards (ppvco.com). Mahaney is
well positioned to spot a trend after a
20-year career at Robert Mondavi
Winery, including five years as
director of winemaking at the
Oakville site.
“We see long-term leases as a major
part of our business, as they provide
high-end wineries a preferred
alternative to purchasing vineyards
(or) contracting with growers…We’ve
been bowled over by the level of
interest expressed by high-end
wineries in leasing vineyards in the
premier AVAs,” he said.
Mahaney pointed out that boutique
wineries can become victims of their
own success. “We’ve heard horror
stories,” he said. “A winery earns a big
score on a vineyard-designated wine,
quickly sells out of it, but then finds
that the grower…has already
contracted to sell to someone else.
These ‘lost vineyards’ are a problem
for many high-end producers, and the
problem will only get worse as demand
for fine wine grows and the supply of
truly high-quality vineyards tightens.”
The structure of your lease is allimportant. “Gone are the days of
two-page vineyard lease contracts,”
Mahaney said. Leases must be
structured to protect both the lessee
and the lessor. “Unlike a sale,” he
said, “it is vitally important in a
lease that both parties are positioned
for success.”
Premier Pacific develops vineyard
properties in the premium AVAs of
California, Oregon and Washington,
and will offer “triple-net” leases on
fully developed vineyards. Triple-
net means the winery lessee pays
rent, taxes, insurance, maintenance
and operating expenses, and in
return, enjoys virtually all the
benefits of ownership, without the
large capital outlay.
which operates in California and the
Northwest, has specialized in
winery/vineyard law since the late
1980s, and has prepared many
vineyard leases. A proper vineyard
lease involves legal services
including negotiating, drafting and
revising terms and conditions to
reflect the intent and agreement of
lessor and lessee, and issues
concerning title, boundaries,
environmental problems and water
rights, which may require separate
due diligence or legal analysis.
Leasing Legalities
Christopher Hermann, an attorney
with Stoel Rives LLP (stoel.com),
Not all vineyards and wineries use
attorneys when drawing up a lease,
and “Many have one form drafted by
an attorney and then reuse…and
revise it themselves to address
individual cases,” Hermann observed.
“In other cases (they) simply share
forms they find online, or…from
industry colleagues, or cobble
together terms from various sources.”
This type of homegrown transaction
is risky, he cautioned. Forms may
include irrelevant or harmful terms,
and may be disadvantageous to one
or both parties, who may not even
realize potential problems exist.
Photo: Chris Poulos
“First and foremost, any agreement
to a lease for more than a year must
be in writing to be enforceable,
especially if there is an option to
purchase,” Hermann stated. Such
unforeseen events as the death or
incapacity of the lessor, for example,
may leave the lessee without a source
of grapes, or even worse, deprived of
improvements he has made on the
leased vineyard.
Christopher Hermann, an attorney with Stoel Rives LLP, specializes in the legal concerns of
wineries and vineyards. He’s enthusiastic about the advantages of vineyard leasing, but cautions
prospects to make sure all their paperwork is in order.
(Above) This thriving parcel owned by Pisoni Vineyards is one of five Central Coast vineyards
leased by Joe Davis, Arcadian Winery. Davis favors leasing because it allows him to be
proactive in the vineyard and control how his grapes are farmed.
“They can lose the crop and the value
of those improvements (vines,
trellises, irrigation systems) if the new
owner asks them to leave the
property and refuses the (previous)
oral agreement. This is particularly
difficult and potentially financially
catastrophic,” he pointed out.
When seeking to lease a vineyard, two
sets of issues are of special concern:
the suitability of the property for your
intended use, and the terms and
conditions of the lease itself.
Suitability issues include variety and
age of planted vines, presence of
diseases such as phylloxera or leaf roll,
WINES&VINES • OCTOBER 2006 25
water availability, soil type(s), slope,
environmental issues; title, easements,
land use regulations, zoning and
surrounding uses and tax status.
Regarding the lease itself: Is there a
termination clause? This could be a
problem if it is unilateral, and the lessor
could force you to vacate without
recourse to your grapes or recovery of
any improvements you made.
Other considerations are: determining
who can make decisions about vineyard operation and maintenance;
calculation of the lease payment—per
acre, per ton or on some other
basis—insurance requirements, title
insurance, late payments. Be aware of
state and local laws: “For example,”
Hermann noted, “in Oregon, ORS
91.090 says that failure to pay within
10 days terminates the tenancy/lease.”
If your lease permits it, and you make
improvements to the property, what
happens at the termination of the
lease? “Does some or all of the
cost…get returned at the conclusion
of the term…or earlier if the lessor
26 WINES&VINES • OCTOBER 2006
Joe Davis, owner/winegrower of Arcadian Winery on California’s Central Coast, leases a total
of 52 acres in four nearby AVAs, where he keeps a close eye on his Pinot Noir, Chardonnay
and Syrah grapes.
terminates the lease, or does the
lessee forfeit its investment?”
Hermann asked.
Can you even make and label your
wine as vineyard-designated under
the terms of your lease? “If so, will
the lessor provide a cross-licensing
agreement which would allow (you)
to trademark the name” as part of
your brand development?”
In Hermann’s view, the principle
advantage to leasing a vineyard is
cost. “The cost...is substantially less
than the cost to purchase,” Hermann
pointed out. And, “A lease potentially
allows a broader range of tax deductions.” Flexibility—the potential of
eventually finding another source for
your grapes—may also be seen as an
advantage, even though a stable,
controlled supply may be the single
greatest motivation for leasing a
vineyard in the first place.
about 1 kilo per plant, averaging out
to 1.5-2.2 tons per acre.
Though the terms of each lease are
different, Davis leases acreage within
much larger existing vineyards. “We
can actually work the sites ourselves,
and take as much an active role in the
farming as logistically possible,” he
said. “The leases vary, and some are
merely handshakes,” he commented,
taking a faith-based approach to
transactions that cost him anywhere
from $5,400 to $15,000 per acre per
year. Some leases are paid monthly;
others, 30 days after harvest.
In some cases, Davis had previous
experience with the sites he now
leases. “Other sites were based on my
gut decision about the potential of
the site, which included location,
quality of the planting, varietals and
clones and the owner’s willingness to
allow me to work our pieces within
the site,” he recalled.
There are different types of leases, as
well: “One can lease bare ground,
existing vineyards or land to develop
for ancillary uses,” Hermann
explained. “There are also leases
known as ‘metayage,’ where the lessee
pays the lessor with a percentage of
the crop rather than money.”
This latter type of sharecropping
agreement, it turns out, dates back to
biblical times, when it was the subject
of a particularly grim parable
attributed to Jesus (Matthew 21:3346). An unfortunate vineyard owner
lost his crop, his slaves and eventually
his son to unscrupulous lessees who
kept the grapes for themselves and
slew the landlord’s envoys.
That outcome is unlikely these days,
especially if you take the precaution
of using a professional to establish the
terms and conditions of your lease.
Three Who Dared
Joe Davis, owner/winegrower of the
Central Coast’s Arcadian Winery, has
leased a total of 52 acres of vineyards
from five different owners for the last
decade. He grows Pinot Noir,
Chardonnay and Syrah grapes in four
different AVAs: Santa Rita Hills,
Santa Ynez, Santa Maria Valley and
Santa Lucia Highlands, using VSP
trellising to keep yields down to
WINES&VINES • OCTOBER 2006 27
Stephen Dooley owns Stephen Ross Wine Cellars in San Luis Obsipo. He’s leased 9 acres from
Talley Vineyards since 2001, and built his vineyard from bare ground in order to guarantee his
supply of the highest quality grapes.
“We chose to lease because we could
not afford to buy and I wanted to
have control of the farming….I
wanted to take a much more proactive approach, to be in the vineyard, working with it on a regular
basis; to know ahead of time what
was going on and to respond to it
immediately,” he said. “I believe this
will be the way for small producers to
make perhaps the greatest impact,
and to make a quantum leap in the
quality of their wines.”
Davis advised other vintners, “Take
an active approach in the growing of
the grapes you use…don’t just be an
innocent bystander hoping that it all
works out in the vineyard.” Would
he renew his leases when they term
out? “Absolutely.”
Stephen R. Dooley, who owns
Stephen Ross Wine Cellars in San
Luis Obispo, has rented 9 acres of
vineyard from Talley Vineyards since
2001, under a 25-year lease with an
option to renew for another 10 years.
The two parties knew each other
before, and didn’t use a broker on
the deal.
“We wanted a high-quality vineyard,
and could not afford to buy land,”
Dooley said. “We know the Talley
family, and because of a good
relationship with them and knowing
that they farm for high quality, the
decision was an easy one. Secondarily,
the site was important.”
When the lease was signed, the ground
was bare. “The vineyard was
28 WINES&VINES • OCTOBER 2006
Six Benefits of
Leasing vs. Buying
Premier Pacific’s Patrick Mahaney
summarized six advantages of vineyard
leasing versus buying the land.
1. Leases are flexible and attractively
priced. Leasing unlocks your real estate
equity to be deployed elsewhere, such
as investing in your brand. “Leasing is
essentially a form of 100% financing, as
opposed to debt, where, if you purchase
a vineyard, you can typically only
borrow 60-70% of the value.”
2. The winery maintains full control of
vineyard/grape production. Depending
on the lease terms, the winery-lessee
controls the vineyard as if owned. Long
lease terms, up to 25 years or more,
plus renewals and buyback options,
ensure long-term control.
3. Improves the balance sheet. Leasing
increases your equity and liquidity. You
can reduce your debt and improve key
financial ratios.
4. It’s better than debt. Since a lease
provides 100% financing, it boosts
the winery’s return on equity. There
are no debt amortization, no crosscollateralization, blanket liens or
onerous covenants.
5. It’s better than equity. Leasing is
cheaper than equity, and your lessor is
not a financial partner in your winery
business.
6. Tax benefits. All payments in an
operating lease are tax deductible, and
the after-tax cost of a lease is very
attractive.
J.F.
established using the best trellis
system, vine material, irrigation system
and bird netting available at the time,”
according to Dooley, who added that
he would continue the lease.
“We needed a high-quality vineyard,
one (where) I had control over the
viticultural practices, and that is what
we have. The wine from this vineyard, Stone Corral Vineyard, Edna
Valley appellation, is our best wine,
and we currently charge $45 per
bottle,” Dooley concluded.
Not all leases work out over the long
run, though. Reed Renaudin,
president/winemaker at Napa Valley’s
X Winery and Amicus Wines, has
leased as many as 40 acres, but, as of
this year, has no leased vineyards.
“We transitioned one lease to a
(grape) contract, and exercised our
option to not extend the rest,”
Renaudin said.
Originally, he had chosen to lease
because an absentee owner did not
want to manage his vineyard, and
“We wanted more control over
viticultural practices,” Renaudin said.
“We have moved away from leases as
we’ve changed to growers who can
provide better economies of scale
with regard to managing the
vineyards. Given the current grape
market, it has been more cost
effective…to establish traditional or
per-acre contracts,” to source his
20,000-case annual production.
Renaudin has not given up on leasing
altogether, though. “We still remain
interested in leasing vineyards, and
find it to be very advantageous if the
owner is absentee, or they prefer not
to be involved with the vineyard
management,” he said.
If you’d like to be more hands-on
with your raw product, and don’t
have the financial resources or desire
to purchase a vineyard, leasing one
could be a wise decision.
WINES&VINES • OCTOBER 2006 29