From Mainstream to Cannabis is an ongoing series that asks cannabis executives to talk about their personal and professional journey to the industry.

Before co-founding Illinois-based Cresco Labs in 2013, and before moving on to become chief executive of Choice Consolidation Corp., a cannabis special purpose acquisition company (SPAC) created in January 2021, Joe Caltabiano was Senior Vice President of Mortgage Banking for Guaranteed Rate, one of the largest mortgage providers in the country. One might assume the journey from mortgages to weed would be like moving from earth to an alien planet in one fell swoop, but as Caltabiano recently explained to CBE, it was more of a seamless skip between two nearly identical worlds.

“First, we were blamed for the global collapse of the economy, and we had this terrible stigma associated with the mortgage business,” he half-joked of the not-so-advantageous similarities between the two industries. “So, we had to reeducate customers on that exact topic. Mortgages aren’t bad. Taking an ARM (Adjustable Rate Mortgage) isn’t necessarily this weapon of mass destruction, if you understand what you’re getting, and you get educated and use it appropriately. There’s a time and a place for a fixed-rate, a time and a place for an ARM, and a time and a place for an interest-only loan, just like there’s a time and a place for cannabis. So, educating consumers draws a lot of parallels to the mortgage industry.

“Then you had an industry – the mortgage business – that went from unregulated to hyper-regulated, and everybody had an opinion on how to run it,” he added. “You had new divisions within states or the federal government, like the Consumer Finance Protection Bureau (CFPB), which was a division that came out of the mortgage industry causing the collapse of the global economy. It’s the same thing with cannabis. New regulators coming into the space, and every state has a regulator that’s going to govern cannabis. Again, very similar parallels. Lastly, we dealt on a state-by-state licensing basis, so getting a license in Illinois was different than getting a license in California, much like cannabis. Every state has their own rules, their own nuances, their own licensing requirements, education requirements, disclosure requirements to the consumers, as well as the marketing arm and how you can generate business, how you get customers, all of those things – it wasn’t a straight line.

“So, we had all of these unique parallels to draw on from the mortgage banking space, and I think, really, I was prepared for this,” he summarized. “My lessons in the mortgage business – from being one of the top loan originators prior to the collapse to one of the top loan originators post-collapse and helping scale a company during that time – put me in a position to ultimately be successful in the cannabis space, because I had dealt with an industry with constantly evolving rules, with new regulators sitting on top of it, that was run state by state.”

But the perks of Caltabiano’s previous experience did not end there. “I also had a lot of banking connections – and the one thing cannabis needs is capital – so I was able to secure low-cost debt before anybody else in the space,” he recalled. “I was able to get traditional mortgages on our buildings early on. I got a loan on one of our buildings for five-and-a-half percent. That was unheard of that there was a mortgage on a cannabis building from a small state-chartered bank, which ended up being one of the banks that ultimately participated in the cannabis space. We were able to talk to them on a banking level, and really what it comes down to is a lot of the BSA (Banking Secrecy Act) and SARS (Suspicious Activity Reports) stuff, which we dealt with on a regular basis. Post-9/11, it was all about ‘know your customer.’ That’s where a lot of those regulations came from and what the cannabis industry draws on; follow the money, understand where it came from, and if you can, talk to a bank about that and have the right checks and balances in place. We were one of the earlier companies that moved to the banking side with ’normal banks’ – not Chase and Bank of America but billion-dollar state chartered banks that were different from the pop-up pot shop banks that other people were using. We used real banks with ACH services and all the normal banking. We paid a big premium for those services, but we were able to do that because we understood that when you can talk to a regulator on their level, that’s where [the regulations] come from.”

I asked Caltabiano if he was aware of these similarities before deciding to move into cannabis. “Yeah, if you can’t tell, I’ve told this story probably 10,000 times,” he replied. “In fact, it was our pitch when we started Cresco. That was my international roadshow. It was how we talked to investors, and it is strange to sit across from somebody and explain to them that the mortgage business I was in and the cannabis business have a lot of parallels. But I would argue that maybe gaming has a similar story, but outside of people coming from gaming, nobody has the same parallels to draw from than the mortgage people did, especially at the level I was at in the mortgage world.”

Despite the similarities, Caltabiano said the cannabis industry still has to face the inevitability of Big CPG entering the space, especially on the marketing side. “Have you ever been to the Hall of Flowers event,” he asked. “What you notice in cannabis today is that the brand with the biggest display and the biggest hoopla this year typically isn’t the brand with the same thing the next year, and that’s very unlike Big Beverage, for instance.

“If you go to a beverage event that Budweiser is at, Budweiser is always the biggest,” he elaborated. “If they are there, the Clydesdales are there, there’s a blimp, there’s an 18-wheeler. They have unlimited capital to spend on the marketing side. The problem in cannabis is that there’s a finite amount of capital, so these companies go out and do this big display, and then the next year they can’t recreate it because they don’t have enough capital, or maybe they do it a second year, but that’s it. And in cannabis, those dollars spent on the SG&A (Selling, General and Administrative Expense) or marketing side, are also not tax deductible. So, when Budweiser makes a billion or 10 billion or 100 billion and spends 20 percent on [marketing], they only pay taxes on the remaining [80 percent].

“In cannabis,” he continued, “if you make $100 million and spend $10 million on marketing, you don’t get to write that off. That’s an SG&A expense, it’s not a cost of goods sold, so it’s not a write-off. That means every marketing dollar you spend in cannabis really cost you $2. Again, really difficult to navigate, and when you bring in Big CPG people who are accustomed to these big displays and big budgets and big teams, you’ll have to rein that in. So now, as you look at the expenses for some of these companies, it gets very punitive when you look at the SG&A and then the tax expense that they’re paying. You really have to justify those dollars in a material way, and that’s hard, because, again, not to knock on the marketing people, but they are very good at spending money. I’ve never met a division of a company that’s better at spending money than the marketing side of a company. It’s great when it works, but as you’re building things and you’re running a company and you’re looking at the entire company, that marketing side is a painful pill to swallow when you’re not producing something, or the results are long-term. And you can’t do it in such a way that you typically could with paid social media ads, or all of the targeted marketing that you typically can do, because it doesn’t exist in our space.”

I mentioned that I knew of some very successful cannabis brands that were proud of the fact that they basically spend nothing on marketing. “That is amazing,” said Caltabiano, “and I would reference that a lot. It goes back to my initial thesis on Choice, that essentially the best operators are the single state operators, because they care. When they walk into their store, they want to be known as the person who put out that brand and cares about their community. They have truly good intentions, and they know their customers because they’re from the same communities. They also know their employees by first name because they hired them and interviewed them, and they know the regulators because they had to win those licenses, so they know so much more than some MSO who bought them, or acquired them through a different transaction. It was just like when, in my early days, I knew the Illinois marketplace better than anywhere else. That was just human nature, because I won that license.”

Making a Choice

The “original thesis” mentioned by Caltabiano regarded the type of company Choice is considering for its first SPAC deal in a difficult environment for cannabis companies. “Nobody is doing well right now,” he said. “There are going to be bumps in the road, but everyone thought we’d have some federal breaks that would make life easier, and we don’t. The ebbs and flows of business, that’s what makes a great company, and I give a lot of respect to GTI (Green Thumb Industries) for staying the course, and hitting numbers, because it’s hard. Margins are compressing, people are making irrational decisions to sell product and hit numbers, because as a public company there’s always pressure from the Street.

“You’re going to see a lot of M&A,” he added when asked about the near-future. “You’re going to see a lot of forced marriages like you did in the early days of Colorado, though that was for more regulatory reasons. You’re going to see forced marriages because there’s not enough money to go around, and that’s where Choice comes in. Choice is designed to be a funding vehicle to give necessary capital to the cannabis industry, to businesses that are good, and there are a lot of good businesses that can’t achieve great because they don’t have the capital resources to be able to hire the human capital [they need] because they don’t have enough scale. So, the goal for Choice is to find good assets that need what we have to offer, which is capital and executive level talent that has navigated through choppy waters, because I’ll tell you right now, as hard as it is today, it was harder in Illinois in 2018 when we had 12,000 medical patients, and were adding 300 patients a month. That’s hard. This is margin compression competition, so that’s the expertise we can lend to these companies to turbocharge them to continue to grow.”

How is the search going? “It’s going well,” said Caltabiano. “The biggest hurdle for Choice is we are looking for deals. Nobody wants to pay a premium in a marketplace, but as everyone’s comps have lowered, meaning their 2022 EBITDA multiple has come down, in some cases 50 percent, that has made deals harder to find. By deals, I mean a discount to the multiples that are out there.

“So, we’re looking for good companies that aren’t distressed, but haven’t achieved their full potential, and it’s hard,” he added. “We look at a lot of deals, we turn away a lot of deals, and we want to find the right deals that create the maximum amount of shareholder value, and with me being not only an operator but a shareholder within Choice, I want to make sure we find deals that maximize value. I also would say one of my flaws is that I overthink deals and try to think too far ahead – and sometimes I take a little more pessimistic view in the space, because that’s what I’ve learned from getting knocked around in this industry over and over, that you need to look at things from 15 different angles – so that slows down the process. I’m less running and gunning and a lot more aim and shoot than I used to be, which was shoot and then aim.”

As a result, Choice has smaller targets in mind rather than multiple state operators. “Ideally, it’s single state operators that are vertical in limited-license markets,” he said of his ideal prey. “Like Illinois, Pennsylvania, Ohio, Nevada. Massachusetts, Maryland, all the limited-license markets that I’m sure you’ve heard 100 times before. Not Oregon, not Washington, not California, and not Colorado. Mostly eastern seaboard states, but adding in some of the Midwest and Arizona, Nevada.”

Ancillary or plant-touching? “All plant-touching,” noted Caltabiano. “My area of expertise revolves around plant touching much more than ancillary. When you get into ancillary – and where this call kicked off, with big-business people moving in – I think they have a perceived material advantage when you’re looking at non-plant-touching, which typically doesn’t revolve around the 280E nuances and all the unique hurdles that cannabis itself brings. In fact, I don’t think there’s much difference between the ancillary world of food and beverage and the ancillary world involving cannabis or CBD.”

Regarding the eventual deal that makes sense for Choice, it will be a straight-up purchase. “These are not loans or any type of convertible feature or partnership,” explained Caltabiano. “For the first deals, and especially for the SPAC, it’s focused on 100 percent acquisition. That’s how it works. In general, it’s a full acquisition that’s comprised of some level of cash, some level of seller financing, and then equity in the new combined company.”

Any idea when Choice will be announcing something? “You’ll be the first to know.”

While I had Caltabiano on the phone, I had to ask him, as a Cresco founder and former CEO, about the just-announced acquisition of MSO Columbia Care by his former company. He declined to comment.

As a final question, I asked Caltabiano if, after all the knocks and considering where he is at right now, is he fulfilled and happy to be ensconced in the cannabis industry rather than still in the mortgage industry?

“I was a captain in the mortgage industry,” he said after a moment. ‘I loved what I did for a very long time, and I never thought I would leave it until I found the cannabis industry. For someone like me – I need a challenge, I need a problem, I need to solve things, and I need to see outside return for the effort put into it – that’s why I was always fascinated by real estate, but when I saw this space, it was fascinating because of all of those things. So, absolutely, there is no other industry. Quite frankly, I could have retired when I left Cresco, but I chose to come right back into this space, and I love it. There is nothing as fascinating as this industry.”