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The Evolution of Cannabis Real Estate Finance

One unifying frustration across the breadth of legal cannabis operators in the United States is how expensive it is to open a new location. Licensing application fees, real estate costs and costly consulting fees on top of traditional start-up costs create a not insignificant pile of capital.

For conventional businesses, a typical solution to funding challenges has always been to go to your friendly neighborhood financial institution and get a business or commercial mortgage loan, or maybe refinance existing debt to fuel an expansion. However, if you are reading this, you’re likely aware that the federal stance on legalization has prevented most financial institutions from lending to cannabis operators. The few individuals and organizations willing to lend in this dearth of financing options may charge double or triple the market interest rate or take a healthy chunk of equity, depending on the scenario.

Real estate lending continues to evolve, however, and may soon bring better options. But before we speculate on the future of cannabis real estate lending, it will help to consider how things looked in 2016, and what led to the solutions available to operators today.

Supply issues from the start

The biggest obstacle to getting a market rate loan in the cannabis industry has always been the constraint on the total debt pool available to borrowers. No federally backed financial institution can knowingly lend to a business that profits from the sale of a federally illegal substance.

As such, borrowers were forced to look to private mortgage lenders, credit unions, and private capital groups who knew they had an opportunity to demand higher returns. Not that long ago, few but the most qualified borrowers on cannabis properties could hope to see interest rates less than 12% or more than a 50% loan to value ratio.

This issue was worsened because purchase prices were grossly inflated for cannabis-compliant properties in the early days., That meant financing with a loan-to-value ratio of 40%-50% may have only amounted to 20%-30% of the purchase price.

Finally, because of the perceived industry risk, lenders looked to get repaid as fast as possible using short amortization schedules and large balloon payments. It was expensive money, but for those who were able to get licensed and operational, it was enough to get the job done at the time. For those who ran into hurdles getting the lights turned on, not so much.

Signs of improvement

The commercial mortgage lending environment has gotten slightly less opportunistic in the years since Colorado first went legal. In the words of Brad Kraus, Head of Capital Markets at James Capital Advisors: “More traditional lenders continue to enter the cannabis space on a state-by-state basis. While federally regulated banks are still the exception, there is a plethora of state-chartered lenders and private money available. Dependent on asset class (retail dispensary, industrial grow and distribution), leverage is reaching up toward 70%-75% loan to cost or purchase. As in the past, rents will be marked to market for underwriting purposes.“

Today’s mortgage rates look closer to those available for other commercial properties, averaging 8.75% for dispensary assets and 9.25% for industrial property. That may still look high to somebody who just refinanced their home for under 4%, but for those of us in the cannabis space, it’s light years away from just a short while ago.

Furthermore, cannabis operators have stopped putting up with inflated real estate valuations, so you’re seeing more sensible deals getting done on terms that are less like an albatross around the neck. Believe it or not, you will find amortization schedules north of 25 years these days (but the note will still be due in 5).

Good things to come

The future of cannabis lending is, without a doubt, brighter than its past. The SAFE Banking Act’s passing appears to be only a matter of time, and most people in the industry expect/hope that to see full federal legalization in the next few years.

But you won’t find many people who believe that Wells Fargo and Citibank will leap right into the mix and start throwing cannabis debt around. After all, it is still a young and unproven industry with much maturation to go through.

“The expectation is that the major banks are likely to keep their exposure minimal initially, with their first real conversations happening six months or so after the government makes it legal, however they do that,” says Nathan Whigham, Founder and President of EN Capital, which has been brokering cannabis debt for several years.

“But the group more likely to get aggressive early on, especially on larger deals, are the CMBS (commercial mortgage-backed securities) lenders, who have much more flexibility in how they lend,” Whigham said. “They’ll still be disciplined in sticking to non-cannabis values, but they have fewer hoops to jump through to get deals done. This, combined with private, non-bank lenders bringing their rates down, should give people many more options than they have today.”

This is exciting news, particularly ahead of what many expect will be a wave of acquisition and consolidation in the industry as regulations go down and markets open up within and across state borders. With significantly more capital available to borrowers for property transactions, we could see a surge of product innovation, brand expansion, and investor profitability as cannabis operators are able to re-invest their cash into operations and revenue sharing.


Peter PaddenPeter Padden

Peter Padden

Since 2017 and the broad legalization of cannabis in the State of California, Peter Padden has dedicated his practice of real estate to providing an institutional level of professionalism, tools, and services to the legal marijuana and hemp industries. This higher level of insight and partnership has benefitted large and small cannabis businesses and landlords across nine states, as Peter’s commitment to excellence on behalf of his clients has been hard to replicate in today’s brokerage marketplace.

A graduate of the Villanova School of Business with a degree in Finance, Peter’s analytical approach to the unique mechanics of transacting cannabis real estate enables both veterans and novices in the industry to benefit from his years of complex deal making in an ever evolving industry. His move to James Capital Advisors to help co-found the Cannabis Corporate Real Estate team with excellent new tools and partners should further the depth and breadth of advisory that he seeks to provide capable operators. He can be reached at [email protected].

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