For the past decade or so, cannabis-related commercial real estate has been on the rise. Thus, so has the interest in financing the industry, specifically with cannabis real estate loans.
Since 2012 when Colorado and Washington first made cannabis a recreational substance, states have been loosening restrictions. Currently, marijuana is fully legal in 18 states and only completely illegal in five, with the Northeast seeing quite the cannabis real estate boom.
You don’t have to be directly involved in the cannabis business to know that it’s now a big-money industry. Now that state regulations have loosened, cannabis growers and retailers are looking to invest in commercial real estate.
The State of Cannabis Real Estate Financing
However, getting started in the cannabis industry requires getting approved by banks for real estate loans.
Cannabis real estate can be hard to buy, but the ability for businesses to get a cannabis real estate loan is much easier now than it was just a couple of years ago. Nevertheless, depending on your state’s stance on marijuana, finding financing still may be no easy feat.
Regardless of how accepted the cannabis industry is by the general public, it’s still more highly scrutinized than most industries. Like any business, you have to provide a detailed business plan and proforma models. You need to prove to the lender that their investment is safe.
Here we’ll go into what exactly cannabis real estate loans are. This will include the different commercial property types and some insights you should know before buying. We reached out to financing and cannabis real estate expert, Akiva Gottlieb from Lev, to help provide insight on cannabis real estate loans.
What Are Cannabis Real Estate Loans?
Cannabis real estate loans are essentially the same as any other commercial real estate loan. The main factor in determining if a bank will provide a cannabis real estate loan depends on the state’s laws.
Nowadays, in a state where marijuana is entirely legal, if you have a solid product and business plan, the likelihood of securing a cannabis real estate loan is high. Banks now understand that cannabis is an industry they need to be investing in because of its tremendous growth rate. In these states, cannabis real estate loans will look like any other conventional real estate loan. They’ll have sub 5% interest rates at a standard 30-year amortization schedule.
In states where cannabis is decriminalized, mixed-use or medical use only, it could be a different story.
“Banks want a tenant that has a multitude of ways of making money,” Gottlieb said. “If limited to medical, the borrower needs to be highly advanced, have high production, and be a top-tier chain for a bank to become comfortable lending to the business. The high levels of regulation in medical-only states make it very hard for companies to check all the bank’s boxes for securing a loan.”
For a better picture, think of coffee. Who would you assume a bank would lend to first, a Starbucks or a mom-and-pop shop? Starbucks because it is a corporate chain that comes with guarantees. The same goes for marijuana. Many well-known medical marijuana (MMJ) providers are still not considered corporate, thus not as secure in the eye of the bank.
When it comes to states that allow recreational marijuana, you can have a company you never really heard of selling homemade baked goods, bringing tens of millions of dollars in revenue a year. Many banks would view a tenant like this as more secure than a tenant in a medical-only state.
Marijuana Businesses and the Federal Law: What to Know Before You Buy
On the other side of the coin, the issue of conflicting state and federal standpoints on marijuana is a continuous thorn in the side of the cannabis industry. Even though marijuana is entirely illegal in only five states, it remains illegal federally. This restriction causes constant uncertainty for anyone looking to start a cannabis-related business.
Representatives within the house and senate are currently working to fix these conflicting laws. In fact, the recent passing of the SAFE Banking Act, introduced by Congressman Ed Perlmutter of CO, is a reform that provides legal protection for ancillary businesses providing service to the cannabis industry. This legislation would mean that banks, regardless of the federal stance on cannabis, would be protected for lending to cannabis-related companies.
Although many view the bill as a huge step in the right direction, some consider the SAFE Banking Act an opportunity for mega-corporations like Amazon and Walmart to step in and dominate the space — eventually forcing out the small businesses that pioneered the industry. The SAFE Banking act is one of many bills that have been or are soon to be presented to federal regulators.
How the Law Applies to Cannabis Real Estate Loans
Regardless of the apparent movement toward federal legalization, until it’s in stone, some risk-averse lenders are still hesitant to provide a cannabis real estate loan unless they are solely a medical cannabis provider.
“For some lenders, they actually prefer to lend to strong medical marijuana dispensaries because they view those to have a lower risk of getting shut down by the government, if in the instance that occurred,” Gottlieb explained.
The good news is that if you happen to be trying to start a cannabis business in a fully legal state, if you have all your ducks in a row, the government is paving a pathway to make it easier to acquire loans. It’s not only because it’s a cash cow industry beneficial for state and local economies. Governments are also pushing banks to provide loans to the industry to incentivize black market operators to abandon their shady ways and form legitimate businesses.
“The government is trying to bring the black market into the green and the light,” Gottlieb said. “It’s the same thing as what happened with alcohol 100 years ago. The way they move products into the legalized market is to allow black market players to operate legally.”
Commercial Property Types That May Qualify for Cannabis Real Estate Loans
Much like the food industry, there’s a general three-step process cannabis goes through before it’s in the hands of the consumer:
- farms for cultivation
- industrial processing
Within each of these steps lies a sub-industry or, in the lender’s view, an asset class.
The government has stepped in and prevented one business from expanding across each sub-industry to prevent industry monopolization state-to-state. Farms cannot also have industrial processing facilities, and retailers cannot own farms.
Each asset class has some advantages and disadvantages regarding being approved by a bank for a cannabis real estate loan.
First you have to grow the product. Farms can be either an indoor grow in an extensive warehouse-like facility or outdoor cultivation in a typical farm scenario.
This cannabis asset class is the hardest to secure loans for. It goes back to the uncertainty factor related to the federal government. If they shut down cannabis for whatever reason, the banks are left with no collateral other than the land. Although land does hold some value, large farms in the middle of nowhere are hard to resell to recoup their investment.
Once farmers grow and harvest cannabis, they sell it to processing facilities. These are typically large warehouse set-ups where materials are cured, trimmed and processed into the final product.
Most states require every detail of processing, every ingredient/additive, the THC content, the CDB content and other information to be included on the packaging of the good, much like the food industry. Although the processing facility doesn’t have to provide the packaging of this product, they have to give the information of the product’s contents. Cannabis processing can involve costly licensing, and proof of product testing may be required.
Despite all the work that may seem to be involved in starting a cannabis processing facility, it’s much easier for these asset classes to receive loans from banks. Because of the collateral that accompanies processing facilities such as larger warehouses in urban settings, banks are more comfortable lending to this cannabis asset class.
The final step before the consumer purchases the cannabis product is the retail dispensary. Retail is where all the packaging, branding and merchandising of the product occurs. This asset class is a favorite of lenders because the property type is easily convertible into other types of businesses if it happens to go bust.
This phase of the cannabis food chain, although it seems like the least work, makes the most money. Proof of steady, reliable income makes a great tenant for a cannabis real estate loan.
3 Expert Insights Into Cannabis Real Estate Loans
Because the cannabis industry is now big business, borrowers need to approach lenders prepared with the same documentation they would need if they invested in housing, hospitality or other retail properties. That means coming to the table with business plans and a proforma model that outlines partnerships and product flows from the farm to the consumer.
Whether you’re a newcomer trying to break into cannabis real estate investing or a seasoned pro looking to expand into different asset classes, there are a few critical points to be aware of. Fortunately, Akiva Gottlieb is here with some sage advice for all prospective investors.
1. Be Extremely Nimble When Seeking Cannabis Real Estate Loans
The cannabis industry is constantly evolving, and so are the manners in which governments approach it. As a professional, you have to be continuously tuned in to changes in federal, state and local regulations. A city new to cannabis real estate development may only give out five to ten thousand licenses at $10,000 apiece. Two years down the line, the same town may issue triple the amount at a third of the cost as cannabis becomes more accepted and restrictions loosen.
It’s crucial to understand the different phases of cannabis as it enters the market. Depending on when you decide to enter, a little patience can wind up saving your business a lot of money. On the flip side, waiting too long could result in a loss of potential revenues.
2. Invest in Established Cannabis Groups
In states in which the cannabis industry is the most profitable, the game’s outcome is predictable. There could be some last-minute changes, but regulations are established, and so are the successful cannabis companies/groups.
Some states are newer to the game. Being a player in these states could mean your company takes off and becomes the one other latecomers want to attach to and invest in. But, if you’re trying to enter the game now, you’ll likely need to partner with other groups.
Even if a new cannabis group seems to be taking off, Gottlieb suggested that the proof is in the pudding.
“If I were investing in a cannabis business, I’d much rather partner with an established group that’s been around for five or six years and learned from its mistakes,” he said. “You have to be a proven fighter in this industry to be considered a long-term player.”
3. Start Communicating With People In the Network
The potential to make big money in the cannabis industry is real and exciting. Unfortunately, this emotion can make people overlook the regulatory hoops they must jump through, as well as the obstacle that the players within the industry are very tight-knit and not necessarily welcoming to newcomers. It can be very “small,” despite how seemingly massive it is.
Take the time to network and talk to big players, both locally and nationally. Try to connect on LinkedIn or through other channels. Follow their growth and learn how they got there.
Pay attention to how they do business. Despite how mainstream and accepted cannabis may be right now, many people come from the beginnings of the black market.
That’s not to say everyone comes from the world of shady practices. Many are intellectuals that have a firm grasp on business, investing, and want to build their companies the right way. But it’s important to understand that some aren’t, and it’s in your best interest to avoid those people. The only way you’ll understand who those people are is if you begin networking with many people within the industry.
Cannabis Real Estate Loans: Turning Over a New Leaf
Cannabis real estate loans are only one step in the path towards forming a successful business. Nonetheless, it’s a crucial one in an industry that depends on a perfect balance of risk tolerance, timing, business acumen and connections.
To understand if your cannabis real estate loan will likely be approved, you should first understand your local and state government’s stance on the substance. Also, it would be best if you approached your lender the same way you would as any other CRE loan. Understand how the lending institution views your property’s asset class, and present a sound business plan to them as to why they should lend to you.