Deerfield Ranch Winery files for bankruptcy protection

Deerfield Ranch Winery in Kenwood filed for bankruptcy protection last week in an effort to prevent the award-winning winery from being auctioned off to pay its primary lender.

The winery founded by Robert and PJ Rex in 1982 filed Chapter 11 papers Friday in the hopes of staving off a fire sale of its half-finished winery to satisfy an $11 million debt to Rabobank.

The goal of the move is to reorganize the winery so all debtors and investors can be paid, not just one bank that loaned the winery money just as the Great Recession hit, said Addison Rex, operations manager of the 30,000-case operation.

“We’re trying to resolve a bad loan with our lender that was written in 2008,” said Rex, who is founder Robert Rex’s nephew.

The owners of the winery were not fully aware of the terms of the Rabobank loan, which required hefty annual balloon payments, Addison Rex said.

The bankruptcy is something of an anomaly for an industry whose fortunes have been on the rise for several years as high-end wine sales have surged and wine industry real estate has enjoyed healthy valuations given the shortage of prime vineyard land.

There have been exceptions, such as the Hill Wine Co. in Napa, which filed for Chapter 11 in April. But that case is highly unusual, involving criminal charges against Jeffrey Hill claiming he stole $65,000 worth of grapes during the 2013 harvest.

The majority of high-end wineries are experiencing solid growth. Wines in the over-$20-a-bottle category are expected to see sales growth of 14 to 18 percent this year as the economy improves, gas prices drop and demand for fine wines grows, according to Rob McMillan, founder of the Silicon Valley Bank Wine Division.

Deerfield Ranch produces 15,000 cases of wine priced from $24 to $85 per bottle. Its custom-crush operation produces another 15,000 cases of wine for other labels.

Two major issues that pushed the winery into bankruptcy involve cost overruns and delays on a Highway 12 widening project required as part of its use permit, and the loan from Rabobank, which required balloon payments winery owners neither understood nor could afford to make, Addison Rex said.

Robert Rex began making wine in 1982 in the garage of a home near the winery that the couple ran for years as a bed-and-breakfast. They created Deerfield Ranch Winery LLC in 1999, and purchased a 47-acre parcel just south of Kenwood in 2000.

The plan was to build the winery in two phases.

For the first phase, the Rexes spent $16 million, most of it borrowed from investors and lenders, to dig an elaborate network of caves, plant seven acres of grapes, and construct a crush pad and barn that was supposed to serve as bottling and wine storage. They planned to open to the public soon thereafter.

The second phase envisioned a grand winery building perched on the ridge atop the caves, designed by Robert’s brother Michael Rex, an architect in Sausalito. It was designed to resemble a National Parks lodge from the 1950s and have a gravity flow winemaking process that minimizes the pumping of wine from tank to tank.

Completing the winery building would cost an estimated additional $10 million, Addison Rex said. The permit allows for up to 45,000 cases of wine to be produced on the property.

Before the winery could get its permit to open to the public, however, Caltrans engineers required the construction of a left-hand turn lane into the winery. A project the winery expected would take six months and cost $300,000 took five years and cost $1.7 million, Robert Rex said in his declaration.

“It was an absolute nightmare,” Addison Rex said.

The delay pushed the opening of the tasting room to 2008. .

“Because of these delays, when we finally opened our doors it was directly in the middle of the recession,” Addison Rex said.

The company estimates that it lost as much as $8 million in revenue from not having a tasting room open to the public.

When the winery sought to refinance its construction loans in 2007, Rabobank initially said it qualified for an $11 million loan. But when it came time to close the loan in 2008, the bank wanted to finance $8 million with a $3 million line of credit, Robert Rex said in his declaration.

“This was in late 2008, in the early stages of the Great Recession, when the banking system was on the verge of collapse and the credit market had virtually dried up,” he said.

They signed what they thought was a fully-amortized 7-year loan, meaning all the costs were incorporated in the monthly payments.

“We did not understand there to be any annual balloon payments,” Robert Rex wrote.

But there were big ones. The couple was “flabbergasted” when in January of 2010 Rabobank demanded a $206,000 payment above and beyond the winery’s monthly payments, Addison Rex said. A series of modifications and forbearance agreements followed until 2014 when the bank filed for foreclosure.

Efforts by the Rexes to find new financing have so far failed, which Robert Rex said was due to bank action that “tainted the financial reputation” of the winery. A Sonoma County Superior Court judge appointed a receiver, John Hawkins of Realty Capital Solutions, in December to manage the winery’s finances.

An agreement allowed Rabobank to foreclose on the winery if a $252,000 payment wasn’t made by the end of January. The bankruptcy was filed on Feb. 13.

A local winemaker who produced a small amount of wine at Deerfield Ranch said the winery always had a half-finished feel to it, with many processes that normally take place indoors taking place outdoors on the crushpad.

While the tasting room in the center of a goblet-shaped series of wine caves is impressive, the winemaking side of the operation always seemed to be struggling, said the winemaker, who spoke on condition of anonymity.

“We’re all surprised it didn’t happen a long time ago,” he said.

Valuations of the winery vary widely. The Rexes claim it’s worth between $24 million and $35 million. An analysis for the bankruptcy pegged its book value at $21 million and fair market value in a distressed sale at $16.2 million.

Even those conservative numbers should demonstrate that Rabobank is in no danger of losing its investment, Addison Rex said.

Creditors are owed between $10 million and $50 million, according to the filing. Other than the bank, the largest creditor is Sonoma County for back property taxes of $780,000, Addison Rex said. Others are mostly grape growers, the largest being Morrison Vineyard, which is owed $21,521, and Peterson Vineyard, owed $21,218.

How investors in the winery will fare remains to be seen. There are 87 of them who have collectively plowed $15 million into the winery. They are not listed as creditors in the bankruptcy because they are equity partners in the winery, Addison Rex said.

If the bankruptcy court gives the winery more time to find new lenders, equity partners or a buyer, there is enough value in the winery to make all the creditors and investors whole, Addison Rex said.

“We fully intend to repay all of our creditors in full, and operations will continue uninterrupted during this process,” Robert Rex said in a statement. “Our future looks bright, and we look forward to strengthening our winery.”

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.