Investing in entitlements for wineries can increase
short- and long-term financial viability in several ways.
By Katherine Philippakis and Rachel Lenihan
With today’s emphasis on increasing the bottom line of winery businesses, winery owners often overlook a simple strategy for increasing their revenue and the value of their investment: the land use entitlements process. Wineries that increase their entitlements can both increase their annual revenue (through increased visitor spending) and increase the long-term value of their business (through increased property values).
What Are Entitlements?
Entitlements are land use permits that define an owner’s right to use or develop real property in certain specified ways. Through applications with local agencies, landowners can expand the allowable uses on their real property. Entitlements can add value to vacant land or to already existing commercial or agricultural parcels, such as wineries and vineyards.
Land uses in California generally fall into two categories: permitted uses, which are allowed by right, and conditional uses, which require review and approval by a local agency in the form of a use permit. Once a use permit has been issued and vested, the allowed uses can generally be developed at any time. And once a use permit has been developed, a property owner can file a subsequent application to modify the permit by expanding or increasing the allowable activities authorized by the use permit.
Entitlements are an overlooked tool to expand both the value of your land and your business. In the wine industry, land use entitlements can be used to increase production, expand marketing programs, create offerings for VIP experiences and special events, or even increase vineyard development.
Although the entitlements process can be slow and sometimes frustrating, the rewards can be great. Once a use is expanded, the value of the permit remains with the winery in perpetuity, as winery use permits generally do not expire. Thus, if a winery doubles its production capacity or increases its visitation rights, those expanded rights run with the property and remain an additional value even if they are not being used. In other words, a winery that increases its production capacity from 25,000 cases to 50,000 cases has greater value, even if the actual production amount is still 25,000 cases. The permit has an inherent value because it gives the permit-holder the right to greater production in the future.
Entitlements for Wineries
In California, the wine industry is a significant contributor to the state’s economy. Investing in entitlements for wineries can increase short- and long-term financial viability in several ways. Initially, obtaining a winery use permit adds value to a property, even before the winery is built. A medium-sized winery permit can add one million dollars or more in value to a property, even before the winery facility is built. Once a winery is built and operating, expanded entitlements allow for increased annual revenues in the form of increased sales, increased visitor revenues and increased revenues from special events, as well as the synergistic “buzz” generated by a thriving visitor destination. In addition, increased winery entitlements can result in higher property appraisals, which can lead to increased borrowing capacity and maximization of returns. Finally, if and when the time comes to sell the winery, a robust permit is simply worth more on the market.
Marketing Programs and Onsite Experiences
In addition to the financial benefits, entitlements can also improve the overall user experience for winery visitors. With additional amenities or improved facilities, wineries can create more immersive and expansive options for wine enthusiasts. This, in turn, can increase brand loyalty and customer retention.
Working with one’s hospitality and marketing team to determine the winery’s primary goals will help focus new or expanded entitlements. Does the winery want to offer food pairings with tastings? Will the winery focus on small groups in an intimate setting or larger groups? Offer tours that end with a tasting in the vineyards? Have a VIP tasting room for members only? Offer sunset tastings or evening events? A winery’s marketing program is one of the best ways it has to differentiate itself in the marketplace, and the entitlements process gives form to this vision. Permits are not a one-size-fits-all option, and each permit should be uniquely tailored to a winery’s needs and objectives.
With more than 800 wineries in Napa and Sonoma counties alone, and close to 4,000 wineries in California as a whole, having a well thought-out program of onsite marketing and visitation can help a winery stand out to prospective consumers. A better customer experience can lead to increased distribution, increased sales and increased wine club members, all of which can be specifically beneficial for smaller and family-owned wineries that may have fewer marketing resources and compete for retail shelf space with their larger competitors.
A Counter-Cyclical Investment
The commercial real estate market may be slowing down due to the current economic climate, but that need not affect the entitlements process. Many wineries find that slow economic times present the best opportunity to expand their entitlements, as they may have more attention to devote to the permitting process and the local agencies generally have less applications being processed. Relative to the cost of land acquisition and construction, the modification of a use permit can be a fairly modest investment that yields a high return. In addition, local agencies can sometimes be more generous with entitlements during down cycles: economic downturns create fear for the viability of local industries, and this can translate into greater political support for local businesses and their plans for expansion.
If high interest rates and economic doom and gloom have made you concerned about the future of your winery, we recommend using this time to review, revise and renew your entitlements. Add more production capacity, build a new outdoor tasting pavilion, make improvements to your caves to allow for visitor tours, add some special events that will bring in visitors both near and far. When the next up cycle begins, you will find yourself ahead of the curve and poised to capture the economic benefits of your hard work.
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Katherine Philippakis and Rachel Lenihan
Katherine Philippakis is a partner in Farella Braun + Martel’s St. Helena Office in the Napa Valley and chairs the firm’s Wine Industry Group. Rachel Lenihan is real estate practice analyst at Farella.
