Benefits of cannabis financing in 2020
With all the hoopla about cannabis being legalized in certain states, niche lender (s) such as us has been bombarded with all kind of inquiries about financing options for any cannabis related ventures. Let’s start with some basic informations about this emerging trend in real estate financing:
- Cannabis is still illegal under federal jurisdiction even though some states such as California, Oregon, Colorado have legalized it to a certain extent.
- Since the legal aspect is still a major issue, make sure you have all the relevant and applicable licenses, permits from the state to county to city level before talking to any lending entities.
- Cannabis financing can be divided into 2 categories with a very simplified explanation so it is easy to understand:
– Cultivation: raw material
– Dispensary: finished product
- As of now, financing for cultivation is next to impossible due to a lots of restriction placed on the process and monitored by state government. In a sense, you can not growth whatever you want since it was legalized.
- For dispensary, it is real estate based so it is much more transparent and easier for the lender to underwrite the loan request.
What lenders are looking for. Make sure you have the answers to these questions when talking to lender.
- What kind of real estate is it: office building, retail center, warehouse…. Is it a stand alone building or mix in with other businesses. If it is mixed, what’s the ratio for cannabis and non cannabis business.
- Where is it? In a major metropolitan urban area or somewhere out there in the middle of nowhere. Keep in mind, cannabis is still a very sensitive subject to a lot of people so one can not easily put their operation wherever they want. Cities in a more remote area tend to have a less restrictive policy regarding an cannabis establishment in their area. However, lenders tend to avoid these area due to the low liquidity if they have to take the property back.
- What’s the market rent for such building in the area, not the actual rent. Keep in mind, since it is still off limit to cannabis related business in a lot of shopping centers, office building, the actual rent for cannabis related business is normally 3 or 4 times higher than the market rent. Lenders will use the market , not actual rent to underwrite the loan.
- What’s the financial condition of a cannabis related business, in a sense ” borrower’s ability to repay”. Another tricky part in here is almost all banking institutions, big or small, are federal chartered so they are prohibited from doing any business with cannabis related business. It is still heavily a cash business which makes it more problematic for lenders to gauge the financial strength of the borrowers. Once again, if nothing works, lender will use the market rent, value, worst case scenario to determine the level of risk they are willing to put in the deal. By saying so, it is expected that the borrower to have at least 50% equity strength in the transaction.
These are just some basic informations for cannabis related financing. Feel free to call us to discuss any loan scenario that you have.