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The Honolulu Advertiser
Posted on: Sunday, March 14, 2010

Napa Valley vineyards feeling economy's pinch

By Dan Levy
Bloomberg News Service

Hawaii news photo - The Honolulu Advertiser

Harlan Estate's Cabernet Sauvignon-based wines are displayed at the winery.

CHIP CHIPMAN | Bloomberg News Service

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San Francisco In California's Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values and a consumer shift to cheaper brands.

As many as 10 wineries and vineyards in Napa will change hands in distressed sales or foreclosures this year and next, up from none in 2008, according to Silicon Valley Bank. In a bank survey of vintners, 7 percent called their finances "very weak" or "on life support."

"We have 250 vintner clients saying this downturn is the worst in 20 years," said Bill Stevens, manager of the bank's wine division in St. Helena, Calif. "Anybody who was late to the party won't have staying power."

Land values in Napa, home to about 400 producers, have fallen 15 percent from the 2007 peak, driven in part by slumping demand for high-end wine, said Robert Nicholson, principal at International Wine Associates, a consulting and financing firm in Healdsburg, Calif. The decline makes it harder for owners to refinance mortgages, especially if the property is worth less than the loan.

Napa winery and vineyard loan defaults rose fourfold to 18 in the year through January, according to San Diego-based research firm MDA DataQuick. In the survey by Silicon Valley Bank, whose clients are mostly high-end West Coast wineries, 71 percent of respondents said credit is harder to get.

The recession has set in motion a "secular change," with budget-conscious consumers trading down to less expensive wines, said Peter Kaufman, managing partner at Pleasanton, Calif.-based Bacchus Capital Management LLC, a private-equity fund that provides mezzanine financing to wineries.

The dollar value of U.S. wine sales dropped 3.3 percent to $29 billion in 2009 after rising every year and almost tripling from 1991 through 2008, according to Gomberg, Fredrikson & Associates in Woodside, Calif.

Sales of super-premium bottles priced more than $15 declined 10 percent last year, and those over $30, defined as ultra-premium, fell at least 15 percent, according to Rabobank Nederland NV, the Utrecht, Netherlands-based bank that finances agriculture businesses. Napa and neighboring Sonoma are the top U.S. producers of premium wine, the bank said.

"No more is it about stocking wine cellars with 5,000 bottles of Screaming Eagle," said Bacchus Capital's Kaufman, referring to a Napa "cult cabernet" that can sell for $750 or more a bottle.

Super-premium wineries are likely to bear the brunt of changing consumer habits, and lenders will pressure clients who can't cover costs to "seek solutions before the loan goes into default," Rabobank said in a January report.

Cheaper imports from countries such as Chile, Argentina and Australia are cutting U.S. winery margins, according to Stephen Rannekleiv, lead analyst on the Rabobank report.

"Consumers are looking at price point and saying that Napa is not the price they want to be buying at," New York-based Rannekleiv said. "Wine prices drive grape prices drive land prices."

Bill Harlan, maker of Napa's Harlan Estate Proprietary Red that counts four perfect ratings from widely followed critic Robert Parker, said he expects to see foreclosures mount.

"No area is going to be unaffected by this financial meltdown," he said by phone.

Harlan, whose Oakville, Calif., winery is 60 miles north of San Francisco, has seen the distress up close. In December, he acquired 21 acres next door known as Diamond Oaks Winery from businessman Dinesh Maniar, owner of two separate Napa parcels that are facing foreclosure, according to county land records and documents in U.S. Bankruptcy Court in Santa Rosa, Calif.

David Chandler, an attorney for Maniar, didn't return calls seeking comment. Diamond Oaks lists a $35 bottle of pinot noir and a $30 cabernet sauvignon as "new products for March" on its Web site.

More than 30 wineries are for sale in California, Oregon and Washington, the most ever, according to Rob McMillan, executive vice president and founder of the wine division of Silicon Valley Bank, a unit of SVB Financial Group in Santa Clara, California. The properties have too much debt, were new arrivals to the wine market or have owners who are looking to retire as competition rises and profit margins fall, he said.

Some Napa land deals that were never publicly disclosed or confidentially recorded at the county assessor will unravel this year and in 2011, according to Vic Motto, chief executive officer of Global Wine Partners LLC, an investment bank and advisory firm in St. Helena that brokers property sales.

Napa land values, the highest among U.S. wine regions, are based on wine appellation, or a property's geographical boundary, and soil quality, according to Correia, the appraiser.

Average prices are $150,000 to $200,000 an acre for a vineyard planted with red varietals such as cabernet sauvignon and $115,000 an acre for white grapes such as chardonnay, said Sean Maher, president of Maher Advisors Inc., a brokerage in St. Helena. The most desirable sites in Rutherford and Oakville can fetch $250,000 an acre, he said.

California produces 90 percent of all U.S. wine, according to the U.S. Tax and Trade Bureau in Washington.

Mortgage defaults will also hit Napa residential parcels owned by hobbyists, or those who intend to produce 100 to 300 cases a year, said Deborah Steinthal, principal of Scion Advisors.