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The term "lifestyle winery" was coined, I think, by me in 2000, as a marketing tagline 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 the special 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 representing a substantial portion of the whole value (close to or exceeding half).

You have probably heard the term "boutique winery," which refers to a high-end, small production winery. There are also "cult wineries," which are limited production wineries that pre-sell their wines at high prices to devoted clients, who sometimes spend years on waiting lists just to buy the maximum number of bottles allotted to each customer.

The meaning of the term "lifestyle winery" is somewhat different: It refers to a winery and/or vineyard business that has a nice, often significant home, and which offers a particular lifestyle (or perceived lifestyle) 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 a winery after having one or more of these fantasy experiences while tasting wine at small, family-owned wineries, and then wishing to duplicate them. But there is a conundrum, a right/left brain struggle, in the minds of potential lifestyle winery buyers 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--which 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 (return on investment) expectation.

* 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 $2 million dollar farmhouse with 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 the winery someday. 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 wineries 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 add some value, right? With interest? So what we have as a result is a marketplace divided, where both buyers' and sellers' expectations are unrealistic. Since there is little hard data tracking sales of wineries, no one knows for sure just how long it takes to sell a lifestyle winery on average, or, when it finally does sell, what percentage of asking price it sells for. I can tell you that, based on my experience marketing wineries and representing buyers' interests in wineries in the last four years, I have observed two truths:

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 their original asking prices--if ever.

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 buyer and seller. 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 for single family residential loans, buyers prefer to finance a lifestyle winery acquisition 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 repayment on the note, or worse, that lack of cash flow from the winery operation may prevent the borrower from paying his 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 "financeable"--either through a traditional or specialized lender--if it won't appraise for the selling price, it isn't saleable unless the sellers are willing to carry a very large note.

All-cash buyers of lifestyle wineries are an anomaly. Having worked with literally hundreds of buyers over the past four years, I haven't come across one yet who was 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 his winery may be waiting a very long time.

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 fluctuated, the challenges 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 break even.

* Have the property appraised by an experienced winery/agricultural appraiser--if the value comes in 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 pricing 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 the 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 a 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, 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.

(Katie Somple is the founder and broker of WineryX Real Estate and LifeStyle Properties, a real estate firm based in Napa Valley that specializes in the sale and acquisition of California wineries and wine country lifestyle properties. For details, visit wineryxrealestate.com.)

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