Suppose that, just at the moment when you need expensive equipment for
the vineyard or winery, someone buys the exact brand and model you need and
agrees to let you use it for the next few years. All you have to do to use the
equipment is pay a monthly fee no down payment. And what if, after the
agreed upon time expires, you can buy the equipment for the remaining value,
return it, or continue to use it under new (less expensive) terms? Is this a
deal you would go for?
Increasingly, vineyard and winery owners and managers are choosing to lease
new or used equipment over purchasing barrels, tractors, presses,
bottling lines, and much more in order to enjoy just these benefits. PWV
discussed the ins and outs of leasing with several experts in wine industry
leasing to provide the information you need to shop effectively for a lease.
What is a lease?
"A lease is nothing more than a long-term rental," says Mari
Featherstone, partner in LeaseMark, Santa Rosa, CA. An independent lessor,
LeaseMark handles the leasing portfolio for National Bank of the Redwoods, a
Sonoma County-based regional bank. "The difference is that rentals are
usually month to month and leases are for a minimum of 12 months."
"With a lease," adds Linda Comet Koretz, vice president and
leasing specialist for BankAmerica Leasing and Capital Group in San Francisco,
"the lessee trades off the benefits of ownership to the lessor for a lower
cost over the term of the lease."
Typically a lease runs for 12 months to five years, though "winery
equipment lends itself to longer-term financing," explains Koretz, because
of its long life.
Leases have several variables, but the three basic variables are the term or
length of the lease, the payment, and the buyout. The buyout (or purchase
option) amounts to how much of the value of the equipment remains at the end of
the lease. Thats the amount you will have to pay if you want to buy the
equipment, though you always have the option of returning it rather than buying
There are essentially two types of leases: the operating lease (also called
a true lease or tax lease) and the capital lease (also called a finance lease),
which is really a conditional sales agreement.
In an operating lease, explains Featherstone, "you agree to a specific
payment for a specific time, and the buyout will either be fair market value or
10% based on the original cost of the equipment. Fair market value (FMV) is
sometimes set at 15% or is truly the fair market value." How the lessor
and lessee determine what the FMV is at the end of the lease is one of the
In a capital lease, she says, "you agree to a specific payment for a
specific time and agree to purchase the equipment at the end. Under the terms
of a capital lease, you will pay essentially the full value of the equipment
over the lease period, and youre given the option of buying the equipment
for $1 at the end of the lease. This is called a dollar buyout option. A
capital lease is a conditional sales agreement and really more like a
"The federal government sees a capital lease as financing for tax
purposes and not as a true lease," adds Bill Volpa, vineyard and winery
specialist with Comlease USA in Fresno, CA.
What are the benefits of leasing?
Leasing offers several benefits. One of the most important for many lessors
is 100% financing, requiring no capital investment. "Often producers who
need to add equipment would rather spend available capital for more profitable
purposes," points out Paul Lamothe, regional sales manager for Farm Credit
Leasing in Sacramento. His company is the leasing division of the Farm Credit
System. Leasing requires a much lower initial cash outlay than purchasing with
a loan, which may demand a down payment of 20% or more.
"Leasing is a way to manage your cash," says Jim Taylor, leasing
agent with Hansel Leasing in Santa Rosa, CA. "Payments can be timed to
coincide with your cash availability, and they may be monthly, quarterly,
semi-annually, or at customized intervals," adds Lamothe.
Leasing also offers tax benefits, but the leasing experts are quick to
insist that before you lease, you should check with your accountant. An
accountant will help you determine which type of lease will give you the best
tax advantage and whether leasing would give you any advantage at all.
In general, says Lamothe, "True lease payments may be 100% tax
deductible. Therefore producers who have a tax liability can use leasing to
obtain larger deductions each year of the lease." Though payments for
capital leases are not tax deductible, with these leases you still get the same
depreciation and interest-expense deductions on your taxes that you would have
gotten if you had obtained a loan on the equipment, meanwhile, youre
enjoying the benefit of 100% financing. In addition, if you decide to buy the
equipment at the end of the lease, you then get to depreciate it again as
purchased used equipment.
Lease payments are generally lower than loan payments for purchased
equipment. "Lease payments cover only the depleted value of the equipment,
not the full acquisition cost," explains Lamothe. "And the future
purchase value is guaranteed, because it must be stated in the lease,"
adds Taylor. Since the buyout price is set in advance, the lessee benefits
because the price does not reflect the economic inflation that occurs during
the life of the lease.
"Leasing doesnt tie up your credit lines," says
Featherstone. Taking out a loan to buy equipment eats into your available
Will you qualify?
Leasing particularly appeals to start-up businesses that dont have the
cash for a down payment and may have already borrowed up to the limit. Such
wineries or vineyard companies may well still qualify to lease, however, they
will be likely to pay more for it. As in all lending transactions, credit
worthiness is the surest way to qualify for a lease, and companies that can
demonstrate a good credit history and profitability may save as much as two to
three percentage points on their lease.
BankAmerica "needs to see that we have a credit-worthy borrower,"
says Koretz. The minimum lease her department will handle is $50,000; there is
no maximum. To qualify for a lease of any amount, the lessee will have to
provide three years of operating statements, sometimes backed up by tax
returns. "Typically, we dont lend to a start up without additional
At Comlease USA, Volpa says, "For a small transaction $2,000 to
$75,000, we only need an application, including the winerys bonded status
and credit history. But for larger transactions we need a full financial
package. Everything boils down to credit worthiness and the ability to pay back
Reading the fine print
When youre negotiating a lease, there are several issues to be sure
you understand and accept before you sign. "Sometimes people are surprised
at the end of the lease because they didnt understand what the terms
meant," cautions Featherstone. Take the usual care when signing any
contract to insure that all the terms are spelled out as you agreed to them.
Costs: "Up-front costs usually include document processing fees,
which are typically $100 to $500 depending on the cost of the equipment and the
amount of paperwork," explains Featherstone. These costs include
processing fees, title search, the cost of filing a lien against the equipment,
and sometimes an application fee. In addition, most leases require an initial
outlay of first and last months payment or first month and a deposit
(which is equivalent to one months payment).
"Make sure that what youre signing is the actual cost of the
equipment. Youve negotiated the price, and you need to be sure its
reflected in the lease," Volpa suggests.
Disposition and purchase option fees: "Vehicle leases have
purchase option fees an additional fee to exercise the option to buy at
the end of the lease. These vary from lease to lease," advises Taylor.
"Most lease companies have a disposition fee at the end of the lease,
which they charge to dispose of the vehicle if you dont buy it."
Fair market value buyouts: Many leases place the cost of the buyout
(purchase price at the end of the lease) at fair market value (FMV), but how
that value is determined can vary markedly from lease to lease. "FMV is
the equivalent of a retail price between a willing buyer and a willing
seller," explains Koretz. It can be determined by consulting printed
valuation guides, by an appraiser, or by consulting used equipment dealers, for
example. Some leases allow lessees to bring in their own appraisals. Most
leases set either a cap or floor on the purchase amount.
"I like to cap the FMV at not to exceed 20%," says Volpa.
"Some equipment, such as tanks, will still be worth a significant
percentage of what they were bought for at the end of the lease. Without a cap,
the lessee would have to pay what theyre worth, which may still be 50% of
the purchase price. Except for barrels and hoses, winery equipment lasts for
many years, so I try to make sure my customers know exactly whats going
to happen at the end, and I write my leases to protect them."
Insurance, maintenance, and mileage: As the holder of the equipment,
youll be expected to protect the value of the lessors property with
insurance and appropriate maintenance. The lease will provide for what
penalties youll pay if you do not. Be sure you understand what returned
condition is expected on the equipment. "On a vehicle lease, be sure you
know what the excess mileage charge will be if you go over the agreed
mileage," recommends Taylor.
Prepayment penalties: "Lessors have costs that have to be
recovered," points out Koretz, so there will be a cost if you terminate
the lease early. In some cases, prepayment may not even be an option.
Youll also want to understand how the residual value would be factored
into any prepayment calculation.
Residual or buyout options: "Have a good understanding of how
the residual is handled at the end of the lease," urges Lamothe. "We
have a terminal rental adjustment clause, commonly used with leasing vehicles.
When the payments have all been made, and the vehicle is returned, if we sell
the equipment for less than the agreed-upon residual, the customer has to pay
the difference. Of course, if the equipment sells for more than the residual,
the customer gets the difference."
Restrictions on use: Be aware that there will be limits on what you
can do with the equipment once you have it. You cant cannibalize it for
parts, for example, and the lessor may not let you move it. "For a true
tax lease, the lessee cant move the equipment out of the country without
affecting the lessors tax benefits," says Koretz. In addition, the
lessor wants to know where the equipment is at all times for property (tax)
Tax indemnification: "The lessee could be responsible for
indemnifying the lessor against legislated changes that affect the
lessors tax benefits," notes Koretz. That means changes in the tax
code (such as the tax rate or amount of deduction possible) may affect your
Term: Be sure that the term on the lease agrees with what you think
youre buying, and be aware that some lessors require you to contact them
to renegotiate the lease when the term is up. If you keep paying beyond the
lease term, you may automatically re-up for another year at the same rate.
Flexible payment schedules
Though most lessees opt to make their lease payments on the traditional
monthly basis, the wine industry is such a cyclical business that the potential
flexibility of lease payment schedules can be particularly appealing. Not all
lessors offer all options, but lessees can elect to have step leases, where,
for example, the payment on a four-year lease is at one level for the first two
years and then goes up or down for the next two years.
"If you have more cash in summer and less in winter," suggests
Featherstone, "you might have a payment that is half in winter and doubles
in summer." Some lessees pay in advance once, twice, or four times a year.
"There is extra work involved in billing differently," she admits,
"so these leases may cost a little more."
What kind of equipment can be leased?
"Farm Credit Leasing will lease virtually any type of equipment used in
agriculture with the exception of airplanes and hazardous waste
containers," declares Lamothe. The other experts agree that nearly any
kind of equipment can be leased (including airplanes). In the wine industry,
people most often lease trucks, tractors, gondolas, office equipment, tanks,
bottling lines, and barrels. Farm Credit reports that its leases break down
into the following categories: 7% transportation; 36% plant/ processing
equipment; and 57% field equipment.
Leasing companies are also quite open to leasing used and custom-built
equipment. Taylor says Hansel requires a third party appraisal on used
equipment, so his company and the lessee can be assured that the value of the
equipment is sound.
Even if a winery or vineyard owner has already bought a piece of equipment
and is regretting not having leased it, it can be leased. Lessors will often
buy equipment from you and then lease it back to you.
Lessors do have some special concerns with leases on custom-built equipment.
They have to consider whether the equipment will have any value to other buyers
at the end of the lease, and if the equipment was built into the facility to
the extent that it couldnt be moved if it had to be repossessed. In
either case, strong credit-worthiness on the part of the lessee can usually
overcome these concerns.
Though nearly anything can be leased, the lease terms available will vary
widely with the type of equipment and how long it retains its value. Barrels,
for example, have a short life span for ageing purposes. "Wineries use
barrels differently, so how the winery uses the barrels and how they rotate
them will affect the term and residual," explains Taylor. "Typically,
we lease barrels for three years with a $1 residual. But some wineries use
barrels for storage, for example, and that may affect what type of lease
were willing to do. We can tailor the lease to how they do
Even more than barrels, computer equipment quickly becomes obsolete. As a
result, lessors generally configure their leases to get the value of the
equipment during the term of the lease. "A key component of our pricing is
the expected value of the asset at the end of the lease," explains Koretz,
"if there isnt likely to be much residual value, then the running
rate of the lease will be higher to the lessee than the running rate for assets
that retain value over the lease term."
What about other costs?
Loans for purchase often include associated costs (called soft costs), such
as installation, shipping, taxes, and computer software, for example. A few
companies say they rarely will include these costs in a lease, but Koretz
believes that its part of the cost of doing business. "We include
soft costs, typically up to 20% of the total equipment line. It doesnt
enhance the residual, but customers want these costs covered, and we tend to
finance them." Other companies cover soft costs up to 10% or 15% of the
Lease lines of credit
Not all companies do lease lines of credit, but they can be of great
advantage to the lessee. "A lessee can pre-qualify for a certain
amount," explains Volpa, "and they draw down against that credit as
their equipment is delivered. These are usually good for about a year, though
we may need to recheck financials at six months." The advantage is that
you know the rate and dont have to make several applications.
Lamothe cites a mobile bottling line that Farm Credit is funding as an
example. "Several vendors are working with the winery to supply the
equipment to be used. We provide interim funding as the deliveries are being
made, and the customer has agreed to pay interest on the advances. We make
payments to the various vendors when our customer gives us a written OK with
the invoice attached. Its essentially a construction loan with interest
accruing until the unit is done. When its done, we will bill the customer
for the interest, and the first lease payment is due."
BankAmerica does equipment lines often. Koretz points out that specifics of
financing packages are approved for up to a year with pricing adjusted via an
index method for multiple delivery dates.
Is leasing for you? Ask your
Experts agree unanimously that you must see how leasing fits in your
companys financial picture before you will know whether it is a good
choice for your winery or vineyard operation. "If youre considering
leasing, talk with your accountant to determine if its right for
you," urges Taylor.
"Frequently vineyard and winery owners bring their accountants with
them to discuss the lease," says Koretz, "and if not we sometimes ask
if they want us to talk to their accountant."
The big picture
Leasing is increasing in the wine industry, though the experts agree that
theres an ebb in leasing when cash is abundant and a flow when cash is
tight. Still, the USDA reports that only about 20% of all agricultural
producers in the U.S. lease, though about 40% of larger agribusinesses and
cooperatives lease. Farm Credit Leasing reports that it has seen a 750%
increase in lease placements in four years, in part due to the companys
increased interest in providing leases.
"While leasing is growing dramatically in popularity with the more
sophisticated producer," says Lamothe, "I still find that often
vineyard and winery owners are not familiar with or understanding the lease
product. Their acceptance of leasing changes once they become more informed
about this alternative financing tool."
Featherstone agrees: "People in general are not taking advantage of
leasing because of a lack of understanding and a sense of mistrust. Oftentimes,
people have had poor experiences and dont want to try again." In the
past, experts say, when the leasing industry was relatively new, some lessors
pushed too hard to sell leases and not hard enough to educate consumers. As
leasing has matured, lessors have recognized that they benefit most by helping
customers find the financing vehicle that works best for them.
Leasing has also been affected by wine industry trends. "During the
past five to seven years," Koretz recalls, "there has been a strong
interest in developing new vineyards, and wine industry capital has been going
in that direction. As those vineyards mature, there is a greater focus on
providing the financing for the new winery production equipment that is
required to handle the increased grape production."
Ray Garassino, treasurer at Robert Mondavi, Oakville, CA, says the company
uses leasing as one of its financial tools. "Look to lease financing as
one of the alternatives of meeting your businesss financial needs. And
understand the terms of a lease before you enter into it. It could be a great
deal or a lousy deal."