Cannabis Business by Joe Caltabiano
Companies in need of capital have a wealth of options in how they can raise it. From traditional bank loans to venture funding, line-of-credit accounts to angel investors, the sourcing choices are numerous. But that doesn’t mean they’re all equally available in all markets at all times. And right now, outside funding is scarce across more industries than normal.
How scarce? According to one site that tracks capital transactions in the cannabis industry, there were 11 capital raises for $185.3 million this same period in 2019. Now, though, the industry has recorded only one capital raise for $8.4 million during the same period. And according to Viridian Capital Advisors, the week of April 6 also represented the first time the organization had not reported a single debt raise by public or private cannabis companies, either.
That’s probably why one kind of creative financing idea has become more prominent in discussions about raising capital today. Leasebacks–short for ‘sale-and-leaseback’-are financial transactions that allow companies to use the value of their assets to get a relatively quick injection of cash. But even though companies are selling these assets for capital, they continue to have access to them through leasing the assets after the sale.
Put another way: A seller gets an infusion of cash and a buyer gets a long-term revenue source. It’s the kind of alternative financial plan that makes a lot of sense for some companies, especially cannabis operations that typically use an array of expensive fixed assets in the growth, processing and distribution of their product.
Cash-strapped businesses of all kinds–and especially those in today’s cannabis space–would be wise to give the leaseback idea a closer look before resorting to loan debt or equity financing. Here’s why:
What it is: A leaseback sale works just as its name implies. It’s a way for companies to sell an expensive fixed asset but then immediately lease it back from the new owner. The seller gets capital in the sales transaction but also gets to lease the asset for continued long-term use. These assets can be practically anything, from real estate to factory machinery to company vehicles, including corporate jets.
What’s great about it: Whether it’s for working capital or expansion projects or anything else, the use of leaseback sales is designed for companies to get a much-needed financial boost by selling something of theirs that has substantial value. And they don’t have to give up access to that asset as long as they are willing to lease it back from the new buyer. It’s also the kind of capital plan that carries certain tax benefits, too, because of deductions allowed for lease payments.
What’s not so great about it: If the asset were to increase in value–as many real-estate assets do, for example–then the company that sold it obviously will lose out on putting that valuation on their books. And giving up ownership in assets can, in general and over time, make future attempts to raise capital that much more difficult if it lessens the valuation of a company.
Why it’s particularly useful for cannabis businesses: Think about all the land and buildings used by cannabis growers, either for indoor and outdoor crops. Think about all the farming machinery, the lighting and HVAC systems. The warehouses and cultivation buildings. The expensive, high-tech CO2 extraction equipment used by processors. And don’t forget the retail real estate. All of these are assets of great financial value, especially cumulatively. And because most of these assets are used over long periods of time, they’re perfect for leaseback plans.
Even before the COVID-19 pandemic hit the global economy, leasebacks already were being seen increasingly in the cannabis industry. During my time at Cresco Labs, the Illinois MSO I co-founded in 2013, the company used a leaseback framework with GreenAcreage Real Estate, a real estate investment trust (REIT), to complete a $50 million deal at the end of 2019. And similar real estate leaseback sales were employed by other cannabis companies last year, including Columbia Care ($35M), Green Thumb Industries ($39M) and GreenAcreage ($72M), a subsidiary of Acreage Holdings created to buy property holdings.
The reason these MSOs and others turned to leasebacks in 2019 was the same one that will drive others to consider it as an alternative plan this year: a scarcity of other options to raise capital. It’s a scarcity that is particularly severe in today’s cannabis industry, despite its current profitability and its projected growth.
With little hope of needed banking protections on the horizon, traditional loans can remain out of reach for small- to mid-size companies, and conventional wisdom sees traditional debt financing as an ongoing challenge in the cannabis industry this year and beyond. And although equity financing is another route to source capital, it’s also one that carries financial downsides, such as diluting stock prices as more shares are issued.
Leasebacks are one important and accessible tool, though, that cannabis companies can use to raise capital. And it’s one that is ideally suited to take advantage of the high-dollar value inherent in the typical assets used by many cannabis companies, especially those with plant-touching operations.