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E CONOMICS Due Diligence for Winery Buyers Seminar stresses best practices and permit requirements By Paul Franson for those who want to buy, sell or own a winery—or to serve the wine business. The fifth annual, two-day event offered current credit to lawyers and practical information com- prehensible to laypeople. Organized by The Seminar Group, the sessions covered a wide range of B subjects from due diligence when buying a winery through water and energy issues, marketing, trademarks, contract wine- making and recent legislation and court cases that impact the industry. When buying property The first panel addressed due diligence and the permit issues that affect every wine business. Although he opened with a disclaimer: "There hasn't been much acquisition of vineyards of late," Richard "Brock" Brockmeyer of Wine Industry In- vestment Consulting shone some perspec- tive on the current market for vineyard property and suggestions for those who are looking to buy or sell. Brockmeyer advises Premier Pacific Properties on its purchases. The fund owns 27 properties in seven counties in California, Oregon and Washington, encompassing some 30,000 acres. Brockmeyer reminded attendees of the roughly 10-year cycle for production in the wine business as wineries run out of grapes, then growers begin to overplant. It's three or four years of increasing prices, then four to five years of slowing down. "We're just about to come out of the downturn," he said. Obviously, grape prices have a direct impact on vineyard property, too. Brock- meyer cited one Chardonnay vineyard in Sonoma County, Calif.: Originally 38 Wines & Vines sePTeMBeR 201 1 Highlights • Experts explain the key legal issues in buying or operating West Coast wineries. • Learn typical prices for vineyard acreage, typical values of winery permits, etc. • Though permits and other legal restric- tions are challenging, they also form a foundation for extracting value from wine properties. listed at $4.7 million at the market's peak (2001), it was reduced to $3.2 million a year later. He bought it last year for $2.35 million—half the original price. Current low prices for grapes make this a good time for wineries to sign long-term contracts for supply, and a good time for growers to undertake nec- essary replanting. When advising his clients, Brockmey- er uses a 38-point list for due diligence. Understanding the slope, soil makeup, groundwater availability and other com- ponents of a vineyard property are key to determining its real value. est Practices for Owning and Operating a Winery, a seminar held earlier this year in Santa Rosa, Calif., aimed to provide current information He works with multiple consultants from lawyers, geologists and viticulturists to environmental specialists, biologists and archeologists. He noted that, ironically, his team looks for poor soil by typical agricultural stan- dards, mostly on hillsides, as well as suitable climate. The easiest way is to look at the neighbors in planted areas; the process is more challeng- ing in undeveloped regions, where he may place weather stations for monitoring. The first place to look for problems when buying land is the preliminary title report, Brockmeyer said. The property may not have clear access even with an apparently legal road. Access to the property may be granted to others for mineral rights, power lines, roads or other uses across the land. This could disrupt growing vines. Aerial photos (Google Earth) and USGS topographic maps are useful, too. Brockmeyer normally uses a surveyor's report for verification, but he may dig deeper if the land is valuable. He quoted typical current prices in Napa Valley at $200,000 per acre and said it's $50,000 in Sonoma County and $10,000 in Washington state. If the plan is eventually to sell the property, the ability to divide the land into parcels may be important. Water and trees are protected In addition, water rights are almost always an issue, and now water is more and more regulated. Riparian rights from rivers and creeks can only be used in the watershed and can't be stored more than 30 days. Ap- propriative rights come by permit, allow- ing water collection and storage. In general, ground or subsurface water is not licensed in California, but that is likely to change. Another form of water is sheet flow from the vineyard, before it enters a stream.