Issue link: http://winesandvines.uberflip.com/i/80303
CO VER S T OR Y One tactic for a smaller borrower is to target the local branch of a big bank. "In some larger banks, a branch manager can bank smaller deals (than the national guidelines)," says Quinton Jay, managing director of Bacchus Capital, a private eq- uity fund specializing in second-lien loans, mezzanine lending and equity investment. "A branch guy may have authority up to $5 million, versus the top business guys who are at $20 million." You still need to know not just who to work with locally, but who is making the decisions on your loan over time: who is "servicing" your loan. Your local contact may influence their decision, but the ultimate answer to changes in your loan will come from a team explicitly tasked with servicing the loan, and their knowledge of the wine industry can vary. So ask. The Farm Credit System: Co-ops of the Farm Credit System are unique lenders to the wine industry that are not available to businesses outside of agriculture. Con- gress established the Farm Credit System in 1916 to ensure farmers' ready access to credit. Their mandate is to loan to agricul- ture. While vineyards are a clear fit, they may find ways to allow a percentage of their loans to be used for winery equip- ment or related activities, which can be a source of consternation to the specialty banks competing for the same business. Some believe the Farm Credit Systems have an unfair advantage and are compet- ing for business outside of their mandate. As the Farm Credit System has the implied (but not absolute) support of the U.S. government, its members are able to raise capital via bond offerings at rates below commercial competitors. This results in lower rates to borrowers who qualify. Additionally, since farm credit organizations run as co-ops, a portion of interest payments can be rebated at year end to the "members," who are the borrowers, thereby further lowering bor- rowing costs. "We pay what we call patronage refund at the end of each year," says Er- nest Hodges, executive vice president of Farm Credit West. "For the past seven or eight years, it's equated to a 50 basis point reduction in costs. It's not guaran- teed. Every year, the decision is made by the board for each association." Farm Credit co-ops are delineated by regional borders, with multiple organizations spread across the U.S. and several in California alone. 32 WINES & VINES SEPTEMBER 2012 Financing scenarios Example 1: A fine-wine producer seeks bank financing to buy grapes Banks generally don't loan money to finance the purchase of grapes, that is the role of trade credit from the grapegrower. Banks do offer financing to help pay off the grower under a line of credit once the grapes are crushed. A typical scenario could be: 1. A winery contracts with a grower for a ton of Cabernet for $5,000 on credit terms: half of the value to be paid in the vintage year, and half the year following. On receipt of the grapes, the winery has a payable due of $5,000. 2. Once the grapes have been crushed, the winery can draw 55% of the value of the pressed juice as determined by representative sales in the open bulk market. Assuming bulk Cabernet has a then-current value of $31 per gallon, and the ton of grapes produced 150 gallons of juice, the available credit to the winery would be 55% of the $4,650 bulk value, or $2,557. The balance would need to be paid from the winery's own capital, and the loan would be paid over time. Example 2: Winery or tasting room Once plans and permits are secured, these are submitted to an appraiser who will evaluate costs and comparable value of similar properties (comps) to determine a value. A 65% loan-to-value (LTV) ratio will typically apply to the term loan that a bor- rower can get. But once the value is established, it is rare to receive a change in loan amount, so there is "completion risk" if over-runs or change orders increase the cost beyond original projections. – August Sebastiani, President, The Other Guys "They know my business as well as I do." For more information, please contact: Matthew Bartlett, VP, Commercial Loan Officer – Wine Business (707) 508-3376 matthewbartlett@bankofmarin.com Marin | Sonoma | Napa | San Francisco bankofmarin.com | Member FDIC WINE INDUS TR Y FINANCE