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W i n e s & V i n e s n o V e m b e r 2 0 1 4 95 R E A L E S T A T E ally go to market will not obtain their price and therefore will not sell. Buyer's remorse Even when buyers and sellers come to an initial agreement on price, a significant portion of deals will fail during subse- quent contract negotiations and due dili- gence. This is because the stakes are high for individuals and companies acquiring an operating winery: Millions of dollars will be invested and borrowed; organiza- tional reputation is at risk for the com- pany and for the managers making the decision; and for most buyers, there are opportunity costs (meaning that the pur- chase of one wine company will preclude pursuing other future opportunities that might be a better fit). Having agreed to pay something near the seller's price, even the most sophisticated buyer begins to worry that he has made a mistake. No matter how well prepared the seller's offering, the typical due diligence and contract negotiation process leaves ample opportunity for the buyer to get spooked and walk away. What's behind the Northwest land grab T he Pacific Northwest has become a hotbed of wine property sales as vineyard acreage in Washington has reached 45,000, and acreage in Oregon has reached 25,000. Average revenue per acre in both states is more than $5,000 per acre, yet property val- ues have remained mostly lower than for California land with similar wine quality potential. Several speakers at the 23rd Wine Industry Financial Symposium de- scribed the current economic levers affecting vineyard purchases, and Josh Grace, managing director of International Wine Associates, noted 13 significant vineyard deals in the Northwest since October 2010– dominated by California wineries as the buyers. Size of the industry With Oregon approaching 600 winer- ies and 25,000 planted acres that produce 3.3 million cases of wine annually, Grace noted that wine grape growers have to compete for space with farmers of blueberries, hazel- nuts and hops for craft breweries, all of which are very popular. Washington has 680 bonded and virtual wineries, according to Wines Vines Analytics, and Grace estimated there are 45,000 planted acres pro- ducing 13 million cases of wine per year. There, apples, cherries and hops are alternative lucrative crops. Washington has not quite twice as much acreage as Oregon but four times the output due to yields of 4 to 5 tons per acre compared to Oregon's 2 to 2.5 tons per acre. Grape production in Oregon and Washington is similar in size to sev- eral of California's coastal counties. Sonoma has about 60,000 acres planted to wine grapes, while Mon- terey and Napa counties each report about 45,000 acres. The number of planted acres in Oregon grew by 25% between 2011 and 2012, according to survey re- sults from Southern Oregon Univer- sity, and Grace speculated that the rapid growth would continue in the near future. The yield disparity be- tween Oregon and Washington vine- yards is generally offset by the increased value per ton of Oregon grapes, of which 80% are Pinot Noir. Washington averages $1,110 per ton for a revenue per acre of $5,550, compared to Oregon's average of $2,500 per ton and $5,625 per acre. Even though Oregon commands high prices, buying vineyard property there is a very attractive option com- pared to buying in noted California Pinot Noir regions such as the Rus- sian River and Anderson Valley AVAs. Washington has had a wider range of vineyard prices from low to high com- pared to Oregon because of greater differences in growing conditions and more diverse planting of varieties. Even at a high selling price of $75,000 to $80,000 per acre in top Oregon AVAs and Washington's Walla Walla and Red Mountain AVAs, the states have a long way to go before commanding the prices paid for top California vineyards. Grace said that Cabernet Sauvi- gnon wines from Walla Walla average slightly higher in Wine Spectator rat- ings than those from Napa, and the Walla Walla bottles sell at about half the price. Not surprisingly, producers from California and France are looking to Oregon because of the high quality vineyards, good water supply and at- tractive pricing relative to California and Burgundy for planted vineyards. Planted Oregon Pinot Noir vineyards are currently selling for half the price per acre of Russian River vineyards, for example. While Washington has had com- paratively fewer investments from outside the state thus far, it has seen a few large transactions. The state has significant amounts of unplanted land with water at prices that are very attractive ($10,000- $15,000 per acre for bare land). Large vineyards can sell for $25,000- $30,000 per acre and produce wines of excellent quality in the $10-$14 retail category. Duckhorn, Gallo, Cakebread Cel- lars and Crimson Wine Group are all making wine in Washington now, and according to Grace others will join them soon. The symposium, designed to bring together lenders and decision-mak- ers in the wine business, was held Sept. 22-23 at the Marriott Napa Valley. John Mackie, the managing partner of law firm Carle, Mackie, Power & Ross, moderated a panel that in- cluded Grace, Matthew Franklin, principal at Zepponi & Co., and vine- yard appraiser Tony Correia of the Correia Co. California mergers and acquisitions Franklin with Zepponi & Co. pro- vided an overview of the situation in California. He began with a reminder of who's buying vineyards and winer- ies now: Strategic buyers are public and privately held companies already in the wine business looking to build their portfolio, expand geographi- cally and leverage their existing in- frastructure to make opportunistic buys. Financial buyers include pri- vate-equity firms and institutional investors seeking to generate ade- quate return, given the level of risk over a finite period, and lifestyle buyers such as wealthy individuals and foreign investors are seeking (Continued on page 97.) (Continued on page 96.) Not surprisingly, producers from California and France are looking to Oregon because of the high quality vineyards, good water supply and attractive pricing relative to California and Burgundy. Winery Closures by Production Size (cases) Over 5,000 11% 1,000-4,999 28% Under 1,000 61% Wines Vines Analytics. West Coast, 2005-September 2014