Issue link: http://winesandvines.uberflip.com/i/498427
May 2015 WINES&VINES 35 VIEWPOINT vineyard, were it to lack AVA designation. Pres- ent value is the value of future cash flows the asset will generate, discounted for the time value of money. To use the situation mentioned previously as an example, let us assume that Lake County is not well regarded enough to warrant an intangible asset allocation. We can then express the method for valuing appraisals as a formula: Actual Napa vineyard value – Hypotheti- cal identical Lake County vineyard value = Value of Napa AVA Of course, there are myriad details that go into this calculation; in particular, there are three key decisions that greatly affect the cash flow benefit of AVA valuations. First is the issue of sub-appellation pricing. The California Grape Crush Report includes only district-wide grape prices. These are different—and, in fact, lower—than the prices for well-regarded sub- appellations. An appraiser should have an ad- equate method of teasing out the prices for grapes from the applicable sub-appellation. Otherwise, since vineyard values are linked to the value of future cash flows they generate, the Anderson Valley AVA, for instance, would be appraised at the same worth as the Men- docino County AVA. Second, and equally important, is the way an appraiser projects future cash flow. Hope- fully the appraiser is not simply assuming a static value or straight-line growth for grape prices. As we know, this is a cyclical industry. Prices move in a non-linear fashion. The ap- praiser should be able to explain how he ac- counts for this. This is important as, otherwise, an appraiser will not account for the expected, continuing divergence of prices for premium AVAs' grapes from the rest of the pack. This expectation is currently driving rising prices for premium vineyard land and is clearly linked to the value of the intangible AVA asset. Cover your assets The last thing a grower wants is to spend time and money on an AVA appraisal just to see it thrown out by the Internal Revenue Service. An appraiser should do three things to make sure the valuation is defensible. First off, he should base the appraisal on solid data and facts. This should include, at the least, the state crush report and internal or public data that can be used to estimate operating expenses. Second, if the appraiser does any forward pro- jections, he should include statistical analysis of the probability that those estimates are valid. Third, he should be able to adequately answer a grower's accounting questions. The accoun- tant, for her part, should ask all the questions necessary to understand the process, but should also aggressively challenge the ap- praiser's assumptions to ensure they are sound. As an example, an appraiser should be able to explain how he will determine the basis for the present value of the hypothetical case of what the vineyard would be worth if it had no AVA-based value. The example above com- pared Napa to Lake County. This makes sense for geographic reasons and because of Lake County's status as "source of first resort" for grapes and bulk wine to blend into Napa-ap- pellated wine. On the other hand, Lake Coun- ty's per acre yields are 35%-40% higher than Napa's, according to USDA figures, which un- doubtedly affects quality. An appraiser should be able to give a clear, data-based and logical explanation of how this affects the comparison and final valuation. Just do it I readily admit that AVA ap- praisals and amortization are a complex subject and this article only scratches the sur- face. The takeaway here is to make it a priority to learn about them and get comfortable with an ap- praiser. Talk to your CPA and call a few quali- fied appraisers. For many growers there is no better, faster way to improve your vineyard's cash flow. Gabriel Froymovich specialized in the business and economics of wine while studying for his MBA at the University of California, Davis. He provides financial and strategic consulting, including AVA appraisals, to the wine industry through his firm, Vineyard Financial Associates. KEY POINTS Grapegrowers in prestigious AVAs should take advantage of a potentially big tax savings. The additional value that being in an AVA adds to a vineyard can be amortized. A financial consultant explains how to get an appraisal of AVA value and what the benefits are. An appraiser should be able to explain how he will determine the basis for the present value of the hypothetical case of what the vineyard would be worth if it had no AVA-based value. Custom made - Handcrafted Barrels