Wineries: SBA 504 financing for facilities and equipment

Originally published in Wines & Vines.

Finding the capital for expansion can be tough for smaller wineries, vineyards and wine-related businesses. Despite the wine industry’s recovery back to pre-recession profitability, many banks shy away from complex, cyclical, commodity-driven businesses like wine.

“Unless they have wine industry expertise and play regularly in that niche, banks tend to be wary of the risk and are either unwilling to loan or require a hefty down payment,” explained Rich Grant, executive vice president at TMC Financing, a mission-based lender specializing in U.S. Small Business Administration 504 loans.

“The real benefit of the SBA 504 program is the low down payment,” Grant said. “For wineries and vineyards, the SBA requires 15 percent down; for other facilities like a tasting room or kitchen or wine-related businesses the minimum down payment can be as low as 10 percent. Versus the 35 or even 50 percent down required for conventional financing, on a multi-million dollar loan, that can be a big difference in capital available for other things, like staff salaries or marketing.”

Greg Ahn, founder of Alcohol by Volume, a portfolio wine company ranked as No. 251 on the Inc. 5000 list of the fastest-growing private U.S. companies, leveraged the SBA 504 program to acquire a vineyard, winery, bottling plant, residences, land and equipment in Carmel Valley, California.

SBA 504 winery financing Folktale

Folktale Winery & Vineyard used an SBA 504 loan to grow their business.

“It was a natural extension of our existing wine business,” Ahn said. “Having the winery, vineyard, event venue and tasting room is a key piece of our business growth strategy. Direct-to-consumer is the fastest-growing channel in the industry. We’ll get to educate and interact with our customers in a way we don’t get to now.”

The winery will be the new home for the Le Mistral label, founded by Joseph Phelps, and will launch its namesake Folktale label with the 2013 vintage of Monterey Chardonnay and Monterey Pinot Noir. A Talking Animals sub-brand launch is planned for next spring. “Folktale is inspired by the idea that the story is what sells wine,” Ahn said. “Getting to tell that story will change the way we do business.”

“We see growers who have traditionally produced grapes to fill bulk contracts seek to add value to their business by creating a winery component,” Grant said. “Direct-to-consumer is a way to control their own destiny and owning their facilities and equipment controls occupancy costs.”

An SBA 504 loan can be used to buy, build or improve owner-occupied commercial real estate or other fixed assets, such as equipment. Interest is at below-market rates, fixed and fully amortized over the 20-year loan term. SBA 504 loans typically have three participants: a bank provides a first mortgage for 50 percent of the total project cost, the small business owner contributes as low as 10 percent and a certified development company, like TMC, provides the SBA loan for the remainder, up to 40 percent of the total project cost. The SBA portion of the loan can be up to $5 million ($5.5 million for manufacturing or energy-efficient projects), but there is no maximum on the total project cost.

The owners of Jessup Cellars in Yountville, California, financed their Napa winery in 2007, then a separate Yountville tasting room in 2010, with the SBA 504 program. “We were one of the first stand-alone tasting rooms in Napa,” Jessup Cellars Partner Roy Eisiminger said. “Conventional wisdom had it that you had to have an on-site winery, but we proved that wrong.”

Eisiminger said owning, rather than leasing, the property made good business sense. “With property in the [Napa] Valley at a premium, we’re building equity fast,” he said.

SBA 504 winery financing LealFrank Léal of Léal Vineyards used SBA 504 loans to diversify his wine country property portfolio in Hollister, California. In 2013, he added The Grove Restaurant, specializing in farm-to-table Central Coast cuisine, which has become a culinary destination in its own right. “Because I only had to come up with 10 percent down, I was able to afford to bring in a heavy-hitter chef” who helped the restaurant take off. “Every year, I grow financially,” Léal said. In 2014, he added a bed & breakfast.

“The 504 program makes sense for wineries and vineyards because they can be hard to finance conventionally,” Grant said. “But for any business, wine-related or not, that is interested in owning its building and equipment, this is an attractive way to go. Being able to control your occupancy costs, which for most businesses is the second largest expense after labor, can make a big difference in your cash flow. For cyclical, luxury businesses that can mean survival when boom turns to bust.”