The Squeeze on Napa Valley Wine

That sound you hear is not the uncorking of a cabernet—it's the popping of California's wine country bubble. Crumbling land prices and a newfound popularity of cheaper wine may turn 2010 into a vintage year for Napa Valley foreclosures. As many as 10 premium wineries and vineyards in the area—home to the nation's priciest grapes—will change hands in distressed sales or foreclosures this year and next, according to an estimate by Silicon Valley Bank (SIVB). (In 2008 there were none.) Property loan defaults in January were up fourfold from a year ago. Says Bill Stevens, manager of the bank's wine division: "We have 250 vintner clients saying this downturn is the worst in 20 years."

Suffering the most are newer arrivals, some of whom made their fortunes in real estate and finance. They piled in with visions of creating the next high-end label, buying land at the top of the market and saddling themselves with costs to match. Napa land values, which average $150,000 to $200,000 an acre for a vineyard planted with red varietals, have fallen 15% from the 2007 peak. Falling land prices, of course, make it harder to refinance mortgages.

Adding to their woes is the sudden frugality of the American wine drinker. Between 1991 and 2008 the dollar value of U.S. retail wine sales rose every year, almost tripling in that time, according to consultant Gomberg, Fredrikson & Associates in Woodside, Calif. Last year sales dropped by 3.3%, to $29 billion, as prices were driven down by wine from Chile, Argentina, Australia, and elsewhere. (Chile's recent earthquake devastated many wineries but isn't expected to affect world prices, Gomberg Fredrikson says.) Rabobank Nederland, a Utrecht-based bank that finances agriculture, says sales of bottles priced above $30 fell at least 15% last year.

"No more is it about stocking wine cellars with 5,000 bottles of Screaming Eagle," says Peter Kaufman, managing partner of Bacchus Capital Management, a private equity firm in Pleasanton, Calif., referring to a Napa cult cabernet that can sell for $750 or more a bottle. "High-rollers are discovering that there are lots of drinkable $20 to $40 bottles of wine."

Now the strongest vintners are snapping up some bargains of their own. In December, Bill Harlan, who purchased his Oakville land in 1984, bought 21 acres next door known as Diamond Oaks Winery from businessman Dinesh Maniar. He's the owner of two other Napa parcels that face foreclosure, according to county land records and bankruptcy court documents. "In the long run," says Harlan, whose 2007 vintage Harlan Estate Proprietary Red sells for $500 a bottle, "those that manage their wines better and manage their land better will be fine."

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