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E CONOMICS barrels under normal depreciation rules for California tax purposes. "A capital lease is equivalent to a pur- chase; the asset is carried on the balance sheet, and a corresponding lease obliga- tion liability is also recorded. As the lease payments are made, the lease obligation is reduced and a portion of the lease pay- ment is treated as interest expense. The asset is depreciated, just as if it had been purchased, so the bonus depreciation and Section 179 expensing provisions apply for income tax purposes." For this reason, the current tax rules are more favorable toward a purchase or capital lease. Traditional bank Silicon Valley Bank's annual wine industry report recently concluded that the wine industry is expected to grow by 11%- 15% this year over the previous year. Authored by Rob McMillan, founder of Silicon Valley Bank's wine division, the report was based on Silicon Valley Bank's in-depth survey of nearly 600 wine industry experts and insiders, third-party research and the bank's perspective as a long-time observer of the wine industry. When discussing the option of leasing barrel inventories with McMillan, he said, QualityStainless_Apr05 3/9/05 11:12 AM "Barrels are an ingredient rather than a capi- tal expenditure. It's almost like buying grapes every year. There are a couple of leasing companies that have come into the business that will do operating leases for barrels." "The practical reality is: You finance your barrels as an operating line with a bank or finance out as cash. Many winer- ies have a formula line that includes an advance rate on their bottling line, case inventory and barrels," McMillan said. However, to exercise this option, the win- ery must not have any operating debt. GE Capital, a general mid-market financ- ing company based in Norwalk, Conn., lends to a wide range of industries. Ac- cording to Lisa Tibbits of GE Capital, the 75,000-case Duckhorn Vineyards, St. Hel- ena, Calif., took an asset-based loan, from which the borrowers can take the proceeds and use them for working capital needs. "Cash flow loans are not collateralized the way asset-based loans are. They're based on your businesses cash flow, how much your business is making after expenses," she said. As insurance against unfavorable exchange rates, Silicon Valley Bank also provides forward currency hedges to lock in euro rates. So if you're buying bar- rels in euros, you can lock in a favorable Page 1 Quality - Value - Experience Quality Stainless Tanks • Professionally crafted • Perfomance guaranteed • Custom designs & features • Quick & competitive pricing • Repairs & modifications • Special application tanks • Stainless winery equipment • Tanks in stock for immediate shipping from 500 to 10,000 gallon capacity Quality Stainless Tanks 510 Caletti Avenue • Windsor, CA 95492 Phone: 707.837.2721 • Fax: 707.837.2733 Toll-Free: 877.598.0672 www.qualitystainless.com winetanks@aol.com 34 Wines & Vines sePTeMBeR 201 1 Fabricated Stainless Cooperage Custom Patent # 7357069 exchange rate for use at a future date. When shopping for a traditional lender, McMillan advised seeking out banks that are experts in the wine industry. "If you have to explain risk to your lender, who ends up being a partner, then you really don't know how your partner is going to respond in a negative environment," he said. Silicon Valley Bank typically services wineries with an average price point of $33 per bottle, with case production ranging from 400-15,000 cases per year. Wine industry-specific leasing Although Jim Taylor, lease manager at Hansel Leasing, Santa Rosa, Calif., said Hansel Leasing could lease barrels to win- eries of any size, many of their winery cli- ents are composed of small family-owned operations. Most of the barrel leases Taylor sees run in the $50,000-$100,000 range. "Our forte is anything $15,000 and above," he said. Since wineries have varying oak programs, typical barrel leas- ing terms range from two to four years. When discussing the benefits of bar- rel leasing, Taylor highlighted the fact that leasing barrels can preserve a line of credit. "As most can tell you, lines of credit are difficult to get and maintain. If Inspired Design Our spirals made from Premium, American or French Oak deliver 100% new barrel flavor (8 months) in as little as six weeks. Now you can boast authentic oak flavor using neutral barrels or tanks – with rapid, controllable and predictable results. www.InfusionSpiral.com (800) 201-7125 West Coast–New York–Texas Len Napolitano (805) 712-4471 len@thebarrelmill.com Four toast levels Economical Sustainable Time-saving