Foreclosure looms for Kluge Estate

A collision between efforts to quickly build a world-class wine, vineyard and distribution network and the deepest recession since the Great Depression has left lenders preparing to foreclose on the Kluge Estate Winery and Vineyards and sell pieces of the business at auction.

Wine industry officials said as many as a dozen Virginia wineries may face economic problems because of the long recession, but noted that consumption and sales of Virginia wine was up by 13 percent last year.

Kluge Estate, owned by Albemarle County residents Patricia Kluge and William Moses, owes an estimated $34.8 million to Farm Credit Bank for a loan made in April 2007 when Kluge and Moses decided to expand the winery from a regional concern to a national product. Two additional loans — additions to the Farm Credit-provided winery line of credit — were added, one in July 2007 and another in May 2009.

The bank called the note in September and efforts to renegotiate with the bank, or to secure other financing, have been unsuccessful, Moses said. He said the lender took over the winery’s operations last month, has dismissed employees and slowly shut down the operation.

“Apparently they are going to dismantle the business and sell its pieces, its equipment and real estate separately,” Moses said. “They are not interested in selling the business itself, just the equipment and property, and that’s completely contrary to what we were trying to do.”

According to foreclosure documents, up for sale are Kluge Estate’s 164 acres of vineyard, the farm shop and tasting room, a 10,000-square-foot office building, production buildings, an “enormous barrel storage cave,” the 34,000-square-foot former carriage museum and “six very nice houses for employees.”

The sale is scheduled for Dec. 8 at the winery.

Virginia wine industry officials say that while some wineries face financing and business challenges, the industry remains healthy and viable.

“Just like the rest of the economy, there are ups and downs in the wine industry,” said Annette Boyd, director of the Virginia Wine Board marketing office. “Kluge tried to grow very quickly and fast and then the economy bottomed out. It happened to other wineries and other companies in other industries.”

Kluge Estate is the second local winery facing foreclosure. Sweely Estates Winery in Madison County faces a Nov. 18 auction of its properties. Officials there could not be reached for comment prior to deadline.

Boyd said many of Virginia’s wineries are smaller, producing between 5,000 and 10,000 cases of wine each year. She said business needs, including staffing and the hiring of experts in winemaking, marketing and sales, increase as the winery grows toward and past 10,000 cases.

“What’s a family-run business at 7,000 cases becomes a [big] business at 8,000 cases,” she said.

Boyd noted that local leaders Barboursville Vineyards and Horton Vineyards grew at slower paces. Barboursville sells more than 36,000 cases of wine each year, but the vineyard began in 1976. Horton, which sells about 30,000 cases, began in 1989.

“A lot of the local wineries have a strong market and we had our biggest year ever last year,” said Michael Heny, Horton’s winemaker. “We’ve tried to maintain a steady, sustain-able growth of about 5 percent a year and build the business over time.”

The winery has long been a dream of the Kluge-Moses family and the threatened foreclosure is the latest in a series of events the family has weathered in the past 12 months.

Shortly after celebrating the winery’s 10th anniversary in October 2009, the family put their 24,000-square-foot Albemarle House mansion and grounds on the market for $100 million. They dropped the price in February to $48 million, reflecting the depressed real estate mar-ket. It has not sold.

In May, Sotheby’s auctioned off hundreds of Kluge’s possessions that had decorated and adorned Albemarle House. In September, they saw the opening of the Piedmont Virginia Community College’s Kluge-Moses Sciences Building to which the couple donated more than $1 million.

At the end of September, a few days before the winery’s 11th anniversary, the foreclosure proceedings started.

Kluge Estate’s troubles began shortly after the company made a decision to grow quickly and take its product nationwide. Company officials re-negotiated lines of credit, leaving local banks to take a credit line with Farm Credit, just before the national economy decided to slow down.

“Near the end of 2007 we realized that we would miss the sales targets that were required in the line of credit,” Moses said. “We thought we had obtained a waiver from the lender and it wasn’t until sometime in May 2008 that the bank told us it had never signed the waiver and decided to call the loan because we were not making the sales figures.”

Moses said winery officials worked to find equity investors and lenders to pay off the line of credit, but that the called loan made it impossible to arrange alternative funding. He said the winery continued to make interest-only payments on the notes.

The bank’s legal action comes at the end of a frustrating two-year effort to put the winery back on track with the bank after the world economy tanked in September 2008, Moses said. When the crash hit, Kluge Estate officials were negotiating with French and Argentinean interests for financing and business deals. They were in recent negotiations with a Chinese banking concern.

“Our goal was to create a national winery and you do that by doing several things, not the least of which is to plant more grapes,” Moses said. “When you expand production to 40,000 to 50,000 cases a year, you change your winery from a small business to a different kind of business and we also invested in distribution and a sales force.”

Moses said there are efforts afoot to repay the loans and buy back the winery. Whether those attempts will prove fruitful, he cannot say.

“Right now I think we’re all in negotiations fatigue after the past two years,” he said. “It’s been exhausting personally and financially as well, but we believe in the company and the product we wanted to create. We think the opera-tion is worth more as an ongoing business and we hope to work out an agreement. We love this vineyard and are proud of our wines. We have a world-class product and we’ve dedicated a lot of time to do it. We won’t give up without trying.”