Cannabis-linked home lenders chart path to new legal territory – Business Observer
Len Tannenbaum, CEO of commercial cannabis real estate lender AFC Gamma, has found the pulse of the cannabis industry. It’s only officially been lending in space for about a year, but the company has already seen around $ 7 billion in potential transactions.
Over the past 12 months, more and more US states have moved to legalize recreational cannabis for adult use, opening the door to the possibility of reaping the rewards of corporate housing, regulation and taxation. legal cannabis.
Cannabis-linked real estate lenders are seeing demand on their doorstep, as hungry investors and seasoned traders look into new markets – namely New York, which Tannenbaum says “is going to be huge.”
A cannabis industry executive told Commercial Observer that “if we wanted to, we could put $ 1 billion to work in New York City. We have already been approached by the [big players] if we can write $ 100 million checks, because they have to be big and big in scale. “
More and more alternative providers of cannabis-related real estate capital are entering the space and banks, although intentionally out of sight and out of sight, are becoming more comfortable and able to finance real estate. related to cannabis. It helps that cannabis banking security legislation is currently swirling in the US Senate.
“Over the next six months you will see [the number of banks] double or triple, and the smaller banks involved will become more sophisticated, ”said Akiva Gottlieb, broker at the Lev commercial real estate brokerage. “New banks will come in and increase competition.
“It’s going to be a fun bloodbath,” he added.
Cannabis financiers who spoke to CO say New York’s new legalization law, enacted in April, is an indication of what’s to come.
“New York is the financial hub of the country, so people see it in their backyards,” said Richard Acosta, CEO and co-founder of Inception REIT. “You now have the entire tri-state region that will have recreational cannabis. The federal ban hasn’t stopped the industry.
Cannabis lenders and operators have made skydiving across different states an art and navigating the ins and outs of complex legal cannabis policy, trying to stay one step ahead of moving targets to capture the returns that cannabis can generate.
Cannabis licenses are bought and sold for up to $ 40 million each, or even more, depending on the location and type of business license. Lenders like AFC Gamma even use a cannabis operator’s license as collateral for a loan.
“We secure [our loans] through cash flow, licensing and real estate, ”Tannenbaum said. “The best case scenario is that you are secure with all three.”
Tannenbaum said one of his borrowers had just purchased a growing, processing and dispensary license in Missouri for a total of $ 3.5 million; a license to grow in Maryland will cost between $ 7 million and $ 8 million; a growing license in Pennsylvania could be worth $ 15 million.
“A Florida license is currently on the market for over $ 40 million; it went from $ 15 million to $ 20 million a few years ago, ”he said.
Over the past five or six years, the cannabis-related home loan space has become more sophisticated and institutionalized. The market went from being predominantly dominated by sale and leaseback transactions, which were seen as “the best type of financing because it was the only type of financing,” Tannenbaum said, to a better variety of products from debt.
Pelorus Equity Group, one of the first private cannabis real estate lenders to enter the scene approximately five years ago, specializes in providing value-added secured bridging loans for the construction of cannabis tenant real estate housing. . The company has deployed more than $ 180 million in debt in the cannabis industry since its inception, having funded just 52 of the roughly 2,000 deals it has seen, according to Pelorus chairman Rob Sechrist, who testifies to the rigor of the cannabis lending sphere.
Traditional bank lenders are a conundrum, deliberately trying to stay out of the limelight, but they are interested, active and competitive, Lev’s Gottlieb said.
Lev began sporadically handling cannabis-related real estate debt contracts around two years ago, and the volume of applications began to naturally increase as the industry grew.
“We quickly discovered how difficult it is to place with a bank,” said Gottlieb, adding that banks tend to be more obsessed with cannabis, due to its federal ban. “A year ago, we were lucky enough to come across a bank that was making cannabis. Today we are working with over 20 banks and we have seen over 100 transactions. There is a flurry of it.
Next quarter Lev will see his best growth in cannabis, with five bank deals, totaling $ 60 million, expected to close. Gottlieb said that once news broke that Lev was shutting down cannabis-related home loans, the doors opened. This exposure, while good for a platform like Lev, is what banks are avoiding.
“They usually tell us not to market who they are or that they are actively lending in space,” he said. Many have limited capital reserved for lending cannabis and cannot handle the flow of transactions that would arise from this awareness.
“We must remain agile, because these [bank cannabis lending] programs don’t always last, ”Gottlieb said. Banks typically offer a lower cost of borrowing capital than alternative refinancing or acquisition options, but both parties tend not to push the leverage too high.
Cannabis-related real estate bank loans tend to mirror what you would see for a conventional real estate transaction on stabilized and occupied property, Gottlieb said. Lev recently saw a $ 32 million portfolio refinancing for which three banks bid; they came with five-year terms, fixed interest rates below 5%, and 25-year amortization.
“This reflects the culture of the loan market today, which has become competitive,” he said. “Years ago, your best option for debt, if any, was a 15% interest rate on a two-year contract, with equity and full recourse.”
Gottlieb cited Pelorus as an example of a private lender who got involved early and started quoting interest rates of 18-25% for short-term transitional loans.
“You would think, ‘This is astronomical, how would anyone pay for this?’ Well, when it comes to cannabis transactions, real estate itself can be such a cash cow that the cash flow can actually cover debt servicing, so it’s not that big of a deal. problem, ”Gottlieb said. “And, people were desperate because there was no other option.”
Pelorus’ weighted average interest rate, through its private mortgage REIT, is 15.3%, with loans being made on a conservative basis – an average loan-to-value ratio of 46% and a loan-to-value ratio. cost of 53%, according to a May 2021 fact sheet provided by the company.
“Other debt funds have had to reduce their pricing to real estate debt fund pricing, which is around 7-10%,” Gottlieb said. “If a lender sends me a quote for more than 10%, it’s just not the company I’m in anymore. My borrowers are real estate borrowers who venture into cannabis; banks appreciate that.
Map new terrains
New York has sparked a green rush in the state. Hungry investors have flocked in, buying land and, in some cases, obscure real estate in an attempt to get to the table. After all, the market that will be created by New York’s Marijuana Regulation and Taxation Act (MRTA) is expected to grow to between $ 3.5 billion and $ 5 billion over the next few years, once established.
This all started to unfold before the two new state regulators created through the MRTA even formulated and implemented a set of regulations to govern and tax cannabis businesses in the state. Licenses aren’t even expected to start issuing until next year, once New York has a better idea of which local municipalities choose not to allow cannabis retail operations in their communities. (They have until the end of the year to vote to ban these businesses.)
“How do you know how many licenses to issue and where to issue them, unless you know who is signing in and out,” a cannabis lender told CO on condition of anonymity, adding that he expects New York to be very generous with licenses, mimicking a state like Michigan, which had issued more than 500 recreational cannabis licenses by the end of 2020, according to information from the Michigan Marijuana Regulatory Agency.
Nonetheless, AFC Gamma has left for the races in New York, according to Tannenbaum, whose company went public via the Nasdaq in March and is only the second cannabis real estate investment trust to be issued on an exchange. major. New York-based Gamma Real Estate President Jonathan Kalikow, a fourth-generation real estate professional and New York City veteran, is a partner of AFC Gamma, helping to lead the business and advice for property level guests.
Commercial ownership is the cornerstone of the legal cannabis industry. An operator, no matter where they are along the supply chain, must prove they own real estate before obtaining a license.
A New York license is considered a “golden ticket,” according to Gottlieb, and the scramble to grab one is fierce. Lev has seen a number of loan applications on vacant commercial and industrial property in New York City, where the sponsor expects cannabis use in two or three years.
“People just buy [vacant industrial with] all in cash today, ”he said, with plans to get construction funding down the line to convert it to cannabis use. “These are still in the early preliminary stages, but we are considering a few. “
Just a week after the New York law was enacted, it was reported that Green Thumb Industries (GTI) had received tax incentives from Orange County to build a former prison and around 40 acres around in Warwick, NY, for culture and transformation. In fact, GTI got involved early, acquiring Fiorello Pharmaceuticals and its licenses in 2019, making it one of New York’s 10 vertically integrated licensees.
The rush for mergers and acquisitions and the consolidation of big players to enter the market, in anticipation of legalization, has created a ripe time for those at the top.
“It’s like a Monopoly board,” Tannenbaum said.