Real Estate Challenges for Lifestyle Wineries The term ‘lifestyle winery’ was coined, I think, by me in 2000, as a marketing tag line for the first winery I ever sold in St. Helena. It was just at the tail end of the dot.com phase and I was baiting the advertising hook for a particular kind of buyer: the add-money-and-stir-kind, who had the desire to instantly be in the wine business and live that certain lifestyle that comes with it. The phrase caught on as I began to list more and more small wineries around the state. It refers to a self-managed size winery that includes a residence, which represents a substantial portion of the whole value (close to or exceeding half). You may have heard or read the term boutique winery, and some small wineries are called cult wineries, referring to a limited production winery that pre-sells their wines at the highest end of the retail ladder to devoted clients who sometimes wait years on waiting lists just to buy the maximum allotted to any one customer. Lifestyle wineries are self explanatory: a winery and or vineyard business that has a nice, often significant home, and which offers a particular lifestyle (or perceived lifestlye) that is in high demand as a ‘dream fulfillment’ opportunity. Of course those who know what the small-winery lifestyle is really about can confirm that the dream of owning a small winery and vineyard and pouring wine for strangers who show up in the driveway expecting to meet a Walton-esque winemaking family is just that- a fantasy. The Price Challenge Many potential winery buyers began their quest to own their own winery after having one or more of these fantasy experiences while wine tasting at small, family owned wineries, and then wish to duplicate it. But there is a conundrum, a right/left brain struggle, in the minds of potential lifestyle winery buyers…. and there’s no shortage of them who: • think they want to own a winery • like to talk about looking for a winery to buy • love to brag about negotiating to buy a winery But these very same buyers cannot: • reconcile with their business investment instincts (that made them their money in the first place) when they go to value a small winery operation • often refuse to separate the residential value from the entire ROI expectation (return on investment) • agree with the price expectations of a winery seller Buyers want the lifestyle but they want the business to support the entire investment, including the two million dollar farmhouse with the wrap around deck they’ve always wanted. Both winery buyers and winery sellers want it both ways. Winery sellers become influenced over the years by the large number of potential buyers who are really just ‘talkers’ who claim they would like to own their winery someday, so that when it comes time to sell they want a supply/demand premium for their winery. Secondly,  a good number of lifestyle winery sellers will price their winery based on their financial needs or expectations, rather than on real estate comparables and commonly accepted business valuation methods. And who could blame them? After all, building a winery/vineyard estate from scratch, often donating gallons and gallons of blood, sweat and tears to the cause has to have value, right, with interest? So what we have as a result is a marketplace divided, where both buyer’s and seller’s expectations are unrealistic. Since there is little hard data tracking winery sales no one knows for sure just how long it takes to sell a lifestyle winery on average, or, when they finally do sell, what percentage of asking price they sell for. I can tell you that based on my experience marketing wineries and representing buyer’s interests in wineries in the last four years there are two truths I have observed: 1)     The average time to sell a lifestyle winery is well over one year, often two to three years. 2)     Lifestyle wineries and wineries in general, often sell for significantly less than what they start out asking for- or never at all. The Financing Challenge Once an acceptable price is negotiated, which is the most difficult hurdle to overcome, the struggle of obtaining financing becomes an issue for both buyers and sellers. Lifestyle wineries are hybrids for lenders. Is it a house with a winery? Is it a winery business with a house? Because financing terms are more generous on single family residential loans buyers prefer to finance lifestyle winery acquisitions as a residential purchase with a small business on site. However, many lenders won’t allow it, and insist that the winery’s financials be taken into account, assuming that income from the winery business will provide cash flow for re-payment on the note, or worse, that lack of cash flow from the winery operation may prevent the borrower from paying their loan obligations. And where there’s a lender, there’s an appraisal. Most appraisers don’t know how to appraise a small winery and vineyard operation, and they tend to use local commercial sales as comps, if even that. But the hard truth is, if the winery isn’t “finance-able”- either through a traditional or specialized lender- if it won’t appraise for the selling price, it isn’t sell-able unless the sellers are willing to carry a very large note. All-cash buyers on lifestyle wineries are an anomaly. Having worked with literally hundreds of buyers over the past four years I haven’t come across one yet willing to shell out several million dollars cash for a lifestyle winery. Those buyers are so few and far between that a seller who banks on attracting an all cash buyer for their winery may be waiting a very long time. Very, very few lifestyle wineries have actually sold since I first started specializing in this niche in 2000.  That’s because even though global, national and regional economics and wine industry trends have fluxuated, the challenge of bridging price expectation gaps and obtaining financing on lifestyle wineries remain obstacles. Here is a checklist for lifestyle winery owners who may be planning for their exit strategy: • Make the winery and or business portion show a profit for a few years if possible, or least pay for itself • Have the property appraised by an experienced winery/ag appraiser- if the value comes under expectations you have time to discover why and challenge the appraisal, and to write your own analogy on where the appraiser was wrong- keep in mind though that banks will only consider opinions of appraisers. • Talk to an experienced real estate broker about price before setting your expectations or price too high • Create a fantasy fulfillment ambience around the property (think picture postcard winery setting) but make sure your books reflect reality • Work with an experienced agent to prepare a thorough Offering Memorandum on every aspect of the real estate and business • Keep in mind that you are selling a business, and business buyers approach value from the perspective of return on investment, not supply/demand, or “This is the house of my dreams”. Buyers initially come to your doorstep looking to fulfill a fantasy, but they won’t write a check based on a fantasy approach to value. • If at all possible, separate that portion of your property that houses the winery and vineyard from the residence. This will give you more pricing and financing flexibility. • Lookers are plenty: legitimate offers very rare Here is checklist for potential lifestyle winery buyers: • Be prepared to pay a certain percentage for the residential portion of the acquisition that WILL NOT be supported as a return on your investment from the winery operation • Expect to lose a good amount of your privacy and family time to the operation of the winery • Be nice during negotiations: after negotiations you need to have a supportive relationship with the previous owners who will show you the ropes. Often times, their experience translates to savings well beyond that last pound of flesh you wanted them to give up. • Don’t expect ‘typical’ ROI or NOI returns on a winery/vineyard operation. Research industry norms before you establish your expectations. For more information on buying or selling California wineries, please contact WineryX Real Estate at (707) 968-9100