When it comes to cannabis lending, investors and lenders are beginning to see some changes as laws across the country begin to change. Currently, cannabis is still illegal federally, despite the increased state legalization. For this reason, cannabis lending as a whole can be somewhat complicated.
“Most conventional bank lenders will not lend on a building that has a cannabis tenant in place,” said Brian Hwang, former Director of Lender Relationships at Lev. “The reason for this being that banks are federally regulated, so the tenant’s business underlying the credit of the CRE investor’s loan is technically illegal at the federal level, even though it may be legal at the state level.”
These days, demand for cannabis lending is high, but “there’s a lot of demand and not a lot of supply,” said Business Banking Officer Ryan Carlisle, who has been serving the cannabis industry for 7 years.
“Most cannabis entities would love to have non-hard money rates and fees,” Carlisle continued. Although those services are uncommon, they do exist. Carlisle’s former company, Salal Credit Union, is one of the traditional lenders with traditional rates in the cannabis space.
As laws begin to change and cannabis becomes legalized at the state level, more lending options are opening up for cannabis real estate investors. For instance, with laws like the SAFE Banking Act possibly passing, banks would be protected when providing services to the cannabis industry, regardless of any federal laws. With these new laws on the horizon, more opportunities in cannabis lending are coming to light.
“In the past six months, we’ve started to see a change,” said Bryan McLaren, Chairman & Chief Executive Officer at Zoned Properties, Inc.
According to McLaren, at the start of 2021 it was very difficult to get cannabis real estate funding. Outside of private money, McLaren said, there were only a few REITs created specifically to fund cannabis real estate.
In the past six months, that situation has started to change. A few state banks have become amenable to the idea of cannabis real estate lending.
“I think there’s definitely going to remain to be this line in the sand, where a majority of traditional access to capital for cannabis companies in real estate is standing on the sidelines until federal reform,” McLaren said. Nonetheless, there’s now a “middle, gray area,” in which banks and lenders are becoming more open to the idea of cannabis lending, McLaren added.
One reason for this change, McLaren said, is the growing momentum and approval from the public.
“Polling generally shows 80% of the American electorate supporting legalization,” McLaren noted. “That’s changed pretty drastically over the past decade, where now a majority of states have legalized and implemented cannabis medical and adult use programs. I think that general critical mass and momentum-building has given the confidence to some of these middle ground banks and lending institutions to start to open programs up.”
One to two years ago, McLaren said, “if you could convince a funding source — a local bank or one of these REITs — to lend to you, if you could get a term sheet, it was probably in the high teen percentage rate — so 16 to 20% cost of capital.”
However, McLaren predicted that by the end of 2022, the rate will fall to around 5% to 7% cost of capital for cannabis real estate lending.
“I have seen directly at our company and with our clients term sheets in the 5% range, specifically for cannabis real estate projects,” McLaren said.
In recent months, more and more cannabis REITs of a “significant size” are popping up, he added.
“My bet is, if not by the end of 2022, I’m very confident that in 2023 we will see non-cannabis REITs start to build cannabis-related portfolios because the REITs have been the biggest source of capital for cannabis real estate up to this point,” said McLaren.
In addition, more and more brokerage companies these days are making sure they have at least one broker who works in cannabis, McLaren said. Other changes, too, are being seen in the cannabis real estate market.
“The buyer pool has really changed in the last 12 months,” said Barry Wolfe, Senior Managing Director of Investments at Marcus & Millichap. “It’s become very standard with other single-tenant deals. There are a lot of 1031 capital buyers just looking for good locations, good real estate, good tenancy.”
However, in terms of lending, Wolfe said he’s still not seeing much of it in the specific deals his company has worked on, with buyers paying for real estate in cash.
“We’ve closed 17 [cannabis real estate deals] in the last year,” said Wolfe. “Every single one has been all cash.”
Nonetheless, Wolfe expects to see more cannabis lending happening in the future, as he’s seen some credit unions and state banks opening up to the idea. Hwang, too, has been seeing a change in cannabis lending, adding that one, two or three years ago, it would have been “unthinkable” for a cannabis deal to go through a national lender. Now, at Lev, that transaction is becoming more common.
“I think that as more and more banks get comfortable, and it gets more conventional, that will definitely lower the cost of debt and open up the arena of people that not only can close all cash, but can line up financing, too,” Hwang said.
Lease terms are also beginning to change in the cannabis real estate space, with longer term leases than in the past, Wolfe said. Many cannabis leases are now 10, 12 or even 15-year leases.
Rental rates are beginning to normalize. Although rent is still above market for cannabis real estate, just a few years ago, it would have been double, according to Wolfe.
“So I would say there’s still a bit of a premium for cannabis rentals, but not where it was a few years ago,” Wolfe argued.
Securing a Cannabis Loan: Tips & Challenges
When it comes to finding a cannabis lender, though, there are a few things borrowers can do to increase their chances of getting a loan. For a landlord-tenant cannabis property, lenders will be looking at “the cash flow of the property itself,” Carlisle said, “so market rents, leases or rent roll. Those common items would be critical.” With an owner-occupied cannabis property, “then the financial statements of the operating entity would be heavily weighted,” Carlisle explained.
The biggest challenge in the cannabis lending industry, though, is asset type, Carlisle added.
“A lot of the assets a cannabis producer has may be agricultural land, greenhouses, converted barns or other structures, which may not be the type of property a lender is looking for as far as collateral. But there is a lot of need for that type of lending,” Carlisle said.
And when it comes to traditional bank lending, it’s more difficult to get a high loan-to-value, “which means [borrowers] may need to go hard money so that they can have a larger loan amount,” Carlisle continued.
For investors who are new to the cannabis industry and looking to get into the business, Carlisle recommended being open-minded and asking a lot of questions, with a willingness to accept the answers.
“What you’re used to from your private client bank that you’ve been at for 50 years will probably not be the case with a cannabis loan,” although that may change in one to five years, Carlisle said. “But trying to demand what you think should occur on a loan that’s hard to come by isn’t going to make for a good experience.”
Nonetheless, Carlisle has been offering traditional lending terms for the cannabis space for the past seven years. Securing a cannabis loan is certainly possible as long as you come into the deal with an open mind, Carlisle said.
And part of the process of getting into the cannabis market is also conducting enough research and completing your due diligence before making any major decisions.
“Just like any business, really assess your market, put your business plan together, make sure you have all those critical elements of the puzzle, of which real estate and capital are the two pieces, along with obviously cannabis expertise” McLaren advised.
For the time being, cannabis real estate is continuing to expand, with new markets and dispensaries opening up everyday.
“I think there’s a lot of expansion still to come before it gets to the point of being saturated,” Wolfe predicted.