The Sale-Leaseback Transaction; A Utility Tool for Cannabis Operators and Lenders Alike

As the US economy goes through its struggles, the cannabis industry continues to pick up momentum with each passing month. Although any realistic amendments to federal banking and criminal regulations seem to be far off in the future, the cannabis industry is made up of clever investors and operators alike, and together they are finding opportunity wherever it exists. In the sphere of real estate finance, the sale-leaseback transaction (the “SLB”) has become wildly popular, and for good reason. This financing tool provides lenders with a unique investment vehicle in which to capitalize on this nascent industry, while giving operators and license holders the ability to access value in company assets for growth capital through reinvestment in core operations. This short discussion will present a few of the benefits that the SLB provides each player and how it’s a unifying tool for lenders and operators.

 

The goal of a lender on a mortgage loan real estate investment is to timely receive back their principal with as much interest collected as possible. Depending on the terms, this often means that the borrower can pay off the loan early and capitalize on fluctuating interest rates. Although receiving a payoff is never a bad thing, this causes balance sheet uncertainty and the potential to lose out on intended investments. Alternative to the mortgage loan, the SLB offers long-term, steady cash flow without the ability for a payoff or refi, at a highly premium rate given the inherent risk that exists in the cannabis industry; the 12-14% cap rates you see in mortgage loans are readily captured via comparable rental rates. With enough capital and proper underwriting, the SLB allows lenders to build a robust portfolio of real property that is solidified with immediate and long-term tenancy, benefits from long-term increases in land values, and runs on above-market rent. Additionally, by requiring a net lease arrangement (which most leases in the space are, and frankly, should be), these opportunities offer a hands-off, self-contained investment vehicle that are backed by a guarantor, even leading some to compare it to buying a bond. However, while returns offered by bonds are typically low, in the cannabis industry, the SLB offers lenders an incredible amount of upside given where market rates currently stand.

 

It’s no secret that federally regulated banks and industry lenders can’t touch cannabis operators. It’s also no secret that most operators and license holders are starved for cash and eager for growth. The time for lenders to capitalize on these transactions is now while the race to grow is fierce and regulations have narrowed the available financing community. Operators have little interest in the long-term increases in property values compared to the immediate growth value provided by an influx of cash from a land sale. As such, lenders in this space see to realize value in a multitude of ways through utilization of the SLB.

 

For operators, regardless of their size, everyone is in growth mode and in order to grow, you need capital. There are two traditional means to obtain capital – debt financing and equity. While a much more in-depth conversation, one downside with raising money through equity is that you lose pieces of your dream to outside investors forever. Alternatively, debt offers immediate cash without the tradeoff of lost profits and control. A form of debt financing, the SLB is a hybrid model that includes a wide variety of benefits to the operator. It provides an influx of cash without the requirement of a down payment, a balloon payoff or a future refinance at a time when interest rates are uncertain. Furthermore, and possibly most important, SLB’s improve a company’s balance sheet by reducing debts, increases its assets in the form of cash and a long-term lease, and limits risk associated with owning real property. In short, with a well-crafted lease, the SLB is the ultimate growth tool for a cannabis operator who owns real property.

 

Finally, in an industry where regulations are stringent and hurdles and roadblocks exist around every corner, it’s crucial for all parties seeking to get a piece of the pie to work together. Anyone who has gone to an industry conference has seen this dynamic of excitement, community and cooperation. This culture exists in every corner of the space and the financing sphere is no different. One final benefit of the SLB is that it creates a long-term working relationship between like-minded partners. The lenders that The Anderson Firm represent understand the importance of these relationships and the need to find creative solutions to difficult problems. As professionals in this space, at The Anderson Firm, we’re always happy to field questions and provide free initial consultations for anyone interested in learning more about sale leaseback transactions, the benefits and pitfalls of certain net lease arrangements, or any of the other foregoing topics.

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