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Cannabis Investors On Accessing Capital Through Alternative Methods: 'Sale-Leasebacks Are Very Real'

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Cannabis Investors On Accessing Capital Through Alternative Methods: 'Sale-Leasebacks Are Very Real'

Accessing capital through traditional methods like equity or debt financing has become increasingly difficult for cannabis businesses. 

On Monday, a panel of experts gathered online at the Benzinga Virtual Cannabis Capital Conference to discuss alternative solutions to accessing capital and increasing cash flow.

The panel featured Benzinga’s CEO Jason Raznick as moderator and included:

  • Joe Caltabiano, cannabis entrepreneur and co-founder, Cresco Labs Inc (OTC: CRLBF)
  • Rob Sechrist, president, Pelorus Equity Group
  • Leonard Tannenbaum, CEO, Advanced Flower Capital
  • Thomas Haug, CEO and managing member, Aspen Tree Advisory

Traditional Real Estate Debt Vs. Sale-Leaseback

Selling real estate property and then leasing it back from real estate investment firms has become a growing trend in the cannabis industry. Benzinga’s Raznick asked the panel to share their views on this funding method vs. traditional real estate debt financing.

Caltabiano said his company was able  to secure traditional real estate debt with great interest rates.

These deals required low loan-to-value rates — around 40% to 50% — had slow process times and were not offered by many banks, he said. 

"If you talk to 100 banks, maybe you get two that are interested and one will get across the finish line."

Pelorus' Sechrist said that while some traditional banks are willing to offer real estate loans to cannabis companies, these institutions usually don’t understand cannabis financing and are slow to underwrite.

For these reasons, sale-leasebacks become an interesting approach for cannabis companies looking to raise capital quickly, said Cresco's Caltabiano. 

"Sale-leasebacks are very real. There are a multitude of operators who will participate in them, have the capital sitting there and are looking for good quality tenants to buy assets from."

Longer waiting times are a disadvantage of traditional lending. Although a sale-leaseback is faster, it has its disadvantages.

Assets are truly being sold, so it’s important to understand the effects of this transaction on balance sheets before giving in to the temptation of “fast capital,” said Caltabiano. 

He recommends this approach for businesses that are already up-and-running and know they can make their payments, as opposed to start-ups that are still trying to prove out their business models.

For the latter, this approach can become much more risky and difficult to close, since lenders are liable to doubt the business’ payback capacity.

Recent Pricing Variations For Loans

“Cannabis is here to stay, and COVID proved that,” said Advanced Flower Capital's Tannenbaum. 

His firm is focusing on lending capital to established multistate operators in a combination of cash flow and real estate lending.

“Pricing has gone up a lot, right now it’s probably at its peak. It will go down in about a year,” said Tannenbaum, referring to the rise in lending rates within the last year. On average, interest rates rose from around 12% to around 20%, he said. 

While borrowers know they're taking “expensive money,” they also know it’s worth it because the expansion possibilities provided by this capital are highly profitable in the present market, the CEO said. 

Investors: Finding the Best Opportunities

Raznick asked Aspen Tree Advisory's Haug to share his thoughts on where investors can find the best opportunities within the cannabis space.

Haug advised non-cannabis investors who are entering the space to start with what they know.

“If you’re a real estate investor and you haven’t invested in the cannabis space, that may be your entry point. If you’ve been historically a retail investor, maybe a dispensary.”

When entering any new business, investors should rely on experts and advisors who have gone through the learning process and understand the market, Haug said. 

 

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