Cannabis Finance Part 1

Cannabis Finance Part 1

EN Capital has arguably one of the longest lists of cannabis-friendly real estate capital lenders in the nation. We’ve been working in the cannabis finance space for several years now and have successfully financed multiple cannabis deals.

Which is why we want to teach you a little bit about how capital sources look at cannabis finance and how they decide whether or not they’ll lend on a particular piece of property.

Section 1: Understanding Value

The legality of cannabis as of this writing is this: several states have legalized recreational use, however, it is still federally illegal. Why is this important?

To understand cannabis value, you have to understand how capital sources are looking at deals. The first, last, and only consideration that any lender has is to make sure their capital and investors are protected and that they don’t lose money.

That’s it.

All decisions made are filtered through this metric. Your cannabis deal might be the best thing since sliced bread but no matter how good it is every capital source will see it through this lens. Most capital sources are risk-averse and with cannabis still being federally illegal they’re taking a huge risk. This is why most traditional banks won’t touch cannabis deals, there’s too much federal property forfeiture risk.

Will this change? Most certainly. But, not right now.

So, where does that leave your deal? From a lenders perspective, if they’re going to provide asset-based capital, they’re going to lend on the non-cannabis value of the property.

This gives a lot of people heartburn because the cannabis value of almost any deal is exponentially higher than the non-cannabis value. Unfortunately, we can only show you the market and this is where the market is at right now.

How does this break down on a practical level?

If you have a piece of real estate that you want to turn into (for example) a dispensary and it’s located in downtown San Francisco, then you’re sitting pretty well. You’d be located in a very “infill” location and if, worst-case scenario, the lender had to take the property back due to foreclosure or federal regulations change then they still have a piece of property with intrinsic value.

However, if you have a piece of real estate in a very “tertiary” (think middle of the desert) market then if the same thing happens and the lender is forced to take the property back the non-cannabis usage of that real estate may be nothing. Going back to a capital source’s main priority, if they were to lend on a piece of real estate located in a tertiary market, they could lose their investors’ money, and that is not a risk they’re willing to take.

Taking a look at a real-world scenario we had a potential client reach out to us who wanted to acquire a farm for $10M. Breaking down deal it looked like this:

Deal Type – Acquisition

  • Property Type – Outdoor Grow Farm
  • Location – Tertiary Market
  • Non-Cannabis Usage – Vegetables
  • Loan to Value – 50%
  • Cannabis Value – Unknown
  • Non-Cannabis Value – $5M

Looking at it through the eyes of a lender what do you see?

Non-cannabis usage is not very profitable. The property type is very specific. If you had to come in and turn around the property into cash flowing usage what could you do with it? Not much given the location. You couldn’t build a hotel on it, or even a multifamily apartment complex.

Result: Pass.

The highest debt loan size this person could get would be $2.5M, a far cry from the $10M they need to acquire it. Typically, your debt will constitute up to 70% of your capital stack, this deal would only get them 25% of the way there.

In the next article, we’re going to show you the terms that we’ve received on recent cannabis transactions so you can see where the market is pricing at.

If you have a cannabis deal that you’d like to chat about with us click here to set up an appointment and let’s start chatting today!

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