Issue link: http://winesandvines.uberflip.com/i/498427
34 WINES&VINES May 2015 Viewpoint First, the price paid for an asset in a free market represents either the market value or the market value as modified by irrational deci- sions. Quantifying a premium paid above mar- ket value therefore measures, at best, how good a deal the seller struck and not intangible asset value. My second objection is that this methodology necessitates comparing different properties, as in a conventional real estate appraisal. This involves a slew of challenge- able, subjective decisions, as no two properties are truly alike and comparisons are not in- formed by sufficient data. My strongest objection is that this method fails to capture all of the value of the intan- gible, AVA asset. In a buyer's market, transac- tion prices are depressed; therefore, no premium is paid over the supposed market value. This leads to the illogical conclusion that during difficult times a vineyard in Napa, Calif., that borders Lake County should be worth the same amount as an identical vine- yard in Lake County that borders Napa. Clearly, there will be an enormous price dif- ference, fully attributable to the intangible worth of the AVA. To properly assess the value of an AVA in- tangible asset, an appraiser should determine the present value of the vineyard as-is and then subtract from this the present value of the W inegrowers in well-regarded appellations have been neglecting to make the best investment they can: the amortization of their vineyard's appellation value. When a grower purchases a vine- yard, he purchases not only the land and the vineyard planted on it, but also an intangible asset—the right for his grapes to be bottled and labeled with the name of the American Viticutural Area (AVA). This distinction is important, as land cannot be depreciated as an expense against income. The intangible asset's value, however, can be amortized over the course of 15 years. This rule applies to any vineyards purchased after 1993. It only applies to vineyards whose appellation actually creates value beyond what the land itself cre- ates. For instance, vineyard land does not sell for a premium because it is in the Madera AVA, but it does sell at a premium because it is in the Oakville AVA. The former has no AVA value to appraise and amortize; the latter most certainly does. The benefits of AVA amortization AVA appraisals cost several thousand dollars, but I have yet to perform one that had a cash flow break even of more than one year for new purchases. For properties that did not have value allocated to the AVA upon purchase, 100% of the accumulated amortization can be deducted the first year after filing for it, depending on the date of purchase. The financial result varies depending on location, vineyard value and tax bracket. The table "Hypothetical Cash Flow Enhancement from AVA Amoratiza- tion" shows a few scenarios, roughly based off real cases, all at a marginal tax rate of 40.7%, for simplicity's sake. As you can see, the benefits of AVA amortization are substantial. Not included in the chart is what may be the most important factor: how the appraisal is performed. Clearly, with these returns, a price difference of $1,000 or $2,000 is not important. Instead, growers should find an appraiser who is able to capture all of the AVA's value to maximize the deduction and provide the data and justification to make an ironclad case for that deduction. How different valuation methods affect cash flow The most common method for appraising an AVA is to determine the premium paid for the land above the "market value." I would caution growers against appraisers who rely solely on this method, for three reasons. n GABRIEL FROYMOVICH How to Get the Most From an AVA Appraisal DORIT PHOTOGRAPHY HYPOTHETICAL CASH FLOW FROM AVA AMORTIZATION Purchase year Total value of vineyard site % of site value attributable to AVA AVA value Immediate benefit Ongoing benefit Period of amorti- zation Vineyard A 2015 $750,000 40% $300,000 N/A $8,140 15 years Vineyard B 2013 $2,000,000 60% $1,200,000 $65,120 $32,560 13 years Vineyard C 2002 $1,600,000 20% $320,000 $112,875 $8,683 2 years