Wine Business Monthly Sept. 2002 Katie Sample Changing Real Estate Trends of Napa Valley Wineries and Vineyards It used to be that a person with some cash or good credit could build a winery and plant a vineyard in the Napa Valley. That was before the mostly level valley floor maxed out and wine business investors headed for the picturesque hillsides. It was before Sierra Club lawsuits, tighter restrictions on erosion control measures, a hillside ordinance, stringent timber conversion requirements, fair share water meters, before blue line stream setbacks, a view-shed ordinance, tri-phase water studies and the WDO (Winery Definition Ordinance). How things have changed. As a real estate agent specializing in wineries and vineyards I often see the phrase 'winery/vineyard potential'. This ad hook is effective in generating inquiries from hopeful winery and vineyard buyers both local and abroad. They call with expectations of building a small winery, planting a vineyard and starting a wine label. But what most of these buyers don't know is that the Napa Valley winery construction and vineyard planting train has all but pulled away from the station. In Napa's current political and environmental atmosphere, you can build a new winery or plant a vineyard IF you can find a parcel with the minimum acreage requirement (typically ten acres with an increase of up to twenty in the works), and IF that property has less than a 30 percent slope for planting vineyards, and IF a strong water source can be located and permitted (no more than one acre foot per acre per year in some areas), and IF you can get a timber conversion permit, and IF you have enough space to build your winery based on the required 600 feet setback from a major artery like Highway 29 or the Silverado Trail, and IF...the list goes on. The number of Napa Valley wineries and vineyards with actual planting potential is becoming a finite statistic, an oxymoron if you will, creating a domino principal of increased values on existing properties with wineries and producing vineyards already in place. The imbalance is also helping boost the popularity of offshoot winery regions like the Sierra Foothills, Central Coast, Anderson Valley, Paso Robles and the Washington and Oregon coasts, to name just a few. The shortage of parcels large enough to develop and the increasing limitations to develop it is putting an unprecedented premium on current land values that already have a permit in place for development. It is widely held from a pricing standpoint that if a Napa County landowner has an approved permit to build a winery, that permit could bring a market premium of up to a million dollars on top of the price for the land. Land that truly does have the potential for vineyard development, i.e., 'ripped and ready', makes the price per acre skyrocket from about $50,000 to $100,000 or more for prime hillside parcels where Cabernet has proven to produce its best fruit. A similar supply and demand bonus is applied to public tasting permits, which were no longer issued after 1990. Depending on the perception and intentions of the buyer, a winery with a public tasting permit is worth a good deal more than an identical winery with a tasting-by-appointment-only permit. The process of getting a winery or vineyard permit is so arduous, time consuming, costly and infinitely speculative, that want to-be winery owners, who just a few years ago rejected prices of existing wineries and vineyards, are coming back full circle and are once again considering purchasing producing vineyards and established wineries as an alternative. Nevertheless, if a winery/vineyard buyer is dead set on starting from scratch they're in for a very long haul. The process begins with a fifteen-page winery use permit application, which may require any of the following, and more: a site location map, a $2,240 application fee, a soil evaluation, an approved engineered septic and water disposal system, a Phase 1 water study, a detailed landscape plan, a Water Service Availability Letter, a Botanical Survey, a traffic study, an Environmental Impact Report, an archeological survey, and a complete list of all property owners within 300 feet of the proposed winery site- that's just for starters. An example of the sheer tonnage of studies, permits and surveys required in the winery or vineyard permit process is on display in the office of one of my clients. The 'file' for a winery use permit, which began in 1999, is stacked in a vertical tower level with my hip and is still climbing. He calls it the leaning tower of #'*&%#$&! Here are some brief overviews on the influential ordinances and restrictions that can affect a winery and/or vineyard permit approval in Napa County: Ordinance No. 947 Winery Definition ordinance One of the most poignant points in the ordinance is found in the Findings of Fact section. It states, "Napa County is one of the smallest counties in California and, within the County, areas suitable for quality vineyards are limited and irreplaceable:' It goes on to say that "the cumulative effect of such (vineyard) projects is far greater than the sum of individual projects” A significant result of the WDO increases the minimum parcel size on all new wineries and wineries that were established after February 1990 to ten acres. The idea of increasing the minimum size to twenty acres is being tossed around by various committees and officials. The WDO also set the seventy-five percent Napa County grape ratio required for all new wineries and winery expansion permits and increased the required set back for construction of winery buildings to 600 feet from a state highway or arterial county road and 300 feet from private or public roads. Ordinance No 1199-Otherwise Known as the Urgency Ordinance This ordinance is in a proposal stage. The Napa County Board of Supervisors is expected to discuss it in early August. The ordinance would establish interim regulations that would prohibit the issuance of ANY permits authorizing conversion (timber) of land, grading or development of any kind within specified setbacks of Class I, II and III streams located in the unincorporated areas of Napa County. The Urgency Ordinance proposal is the result of the Napa River Watershed Task Force whose charge was to develop a short and long-term plan for conservation strategies related to sustainable land uses and the protection of natural resources. The plan calls for revision of Conservation Regulations which classify streams in accordance with the California Department of Fish and Game. In a nutshell, the ordinance, among other things, substantially increases the minimum setback requirements for any development near streams from the current fifty-five feet to one hundred fifty feet from the top increases of the high bank of all Class I and II streams. The Napa River is considered a Class I stream. Putah Creek is also considered a Class I stream. This ordinance will significantly change computations of net acres plantable for property owners who wish to develop parcels near streams and watercourses. Zoning Ordinance 18.108.020-Erosion Control or Hillside Ordinance An erosion control plan is required prior to grading or removing vegetation on slopes over 5 percent. If a project involves slopes greater than 30 percent a use permit is required before development and if a slope is 50 percent or greater a land owner must apply for a variance, which, according to county sources, has a snowballs chance of getting approved in to day's charged environment. Erosion control plans must be prepared by an approved list of professionals such as civil engineers, landscape architects and registered professional foresters (RPF). An erosion control plan must include a narrative section with a comprehensive description of the proposed development, a description of existing site conditions, the location and source of water, a soil analysis, proposed erosion control methods (walls, cribbing, vegetative and drainage systems), storm stabilization measures, verified slope determinations and much more. Ordinance No 18.106-Viewshed Ordinance This ordinance limits the development of parcels with a IS percent or greater slope located on major and minor ridge lines throughout Napa County including Mt. St. Helena, Stag's Leap, Palisades, Round Hill, Mt. George and Mt. John. The ordinance requires applicants to go through stringent architectural and landscape design review. It limits the height of structures to 24 feet from grade, as viewed from public roads. It allows for a maximum floor area of 4,000 square feet on a primary structure and 500 feet on accessory structures. If removal of trees with a six-inch diameter (or greater) is proposed, a detailed landscaping plan must also be submitted showing replacement plantings for screening the project from view. In addition to the restrictive ordinances, the toughest hurdles for winery and vineyard developers are created by opposing neighbors and environmental groups such as the Sierra Club, who recently sued the county for their alleged lacks in awarding winery permits without requiring applicants to go through the CEQUA process. Neighbors who oppose the construction of a winery or the planting of a vineyard seem to have two primary concerns: traffic and water use. Opposing neighbors could cause delays of months and even years in the permit process. The way wineries are being bought and sold in the Napa Valley is changing as well, partially due to the constricting procedures of building new ones. It used to be that a winery buyer would contact a veteran real estate broker who specialized in farms and ranches. It was a good old boy network and the circle was small. In recent years several of these specialists have retired, moved away or simply moved on to new, less developed geographic areas that still pencil out. Nowadays a serious winery buyer approaches the market directly or uses several agents who are in the know of confidential winery offerings. One recent buyer asked me to inquire about a specific winery he was interested in buying, even though it wasn't officially offered for sale. A general inquiry resulted in a definite "no", though a large deposit check and a written offer inspired an entirely different response weeks later. Winery sellers have changed too. Most still require absolute confidentiality and prefer that the transfer of ownership take place under a veil of secrecy. In today's real estate market fewer are hiring brokers to secure a buyer because experienced winery brokers are scarce and buyers are so much more aggressive. Winery owners get approached regularly by buyers who have offers or letters of intent in hand. Many winery buyers assume that just about any Napa Valley winery can be purchased for the right price and occasionally they're right. Many winery buyers from a few years ago lost hope of finding a good deal on a winery. Those who decided to buy land and build are back looking at existing properties because they experienced the realities of how hard it has become to start a new winery or vineyard here. It could take years and an unpredictable budget before a permit is issued to even start construction and planting. Buying an existing winery with producing vineyards puts a want to-be winery or vineyard owner in business much faster and the costs can be more accurately projected and controlled. Winery buyers who bring calculators and ROI formulas to the offering table will likely never own a winery in the Napa Valley. According to one veteran winery broker who has been brokering vineyards and wineries for several decades Napa Valley wineries have never penciled out initially. He says the valley is full of stories of 'wise investors' who never overpaid for a winery and also never owned one. Small to medium size winery owners are selling today for a variety of reasons: some are getting up in years and second-generation heirs don't have the desire to get involved. For others the market has changed so much through consolidations and unpredictable distributor relationships. Smaller, independent wineries don't have the resources to keep pace. They find themselves rich in equity but short on cash to take their winery to the next level. Therefore the temptation of an irresistible offer carries a great deal of weight though if you ask any of them their winery is not 'for sale'. So what is a small to medium sized Napa Valley winery worth? Recent winery sales of small to medium size wineries range from $3.8 to $15 million. There are several substantial facilities unofficially on the market in the $12 million range and a few jewels for under $5 million. If the current trends continue, wineries under $5 million dollars will likely become extinct as the factors mentioned above become more restrictive and the realization that the number of Napa Valley winery permits and vineyard potential parcels are fast becoming a mirage on the horizon. wbm Katie Somple is a freelance writer and Napa Valley real estate broker specializing in wineries and vineyards.