Len Tannenbaum, CEO of cannabis commercial real estate lending company AFC Gamma, has found a “pulse” in the cannabis sector. Officially, it only provides loans in this area for about a year, but the firm has already seen potential deals worth about $ 7 billion.
Over the past 12 months, more and more US states have begun to legalize recreational cannabis use for adults, opening the door to potential reward opportunities associated with hosting, regulating and taxing legal cannabis businesses.
Cannabis real estate lenders see demand on the doorstep as hungry investors and seasoned operators peer into new markets, namely New York, which Tannenbaum says will “be huge.”
One cannabis executive told the Commercial Observer that “if we wanted to, we could invest $ 1 billion in operations in New York. We have already been asked [big players] if we can write checks for $ 100 million because they have to be big and big. “
There are more and more alternative providers of capital in real estate with cannabis, and banks, although deliberately hidden from sight and sight, are becoming more convenient and able to finance real estate with cannabis. It helps that the Safe Possession of Cannabis Act is currently circulating in the US Senate.
“Over the next six months, you will see [the number of banks] double or triple, and the smaller banks that will participate will become more sophisticated, ”said Akiva Gottlieb, a broker at Lev, a technology brokerage firm for commercial real estate. “New banks will come and the competition will grow.
“It will be a fun massacre,” he added.
Cannabis finance professionals who spoke to CO point to New York’s new legalization law passed in April as an indication of what needs to happen.
“New York is the financial center of the country, so people see it in their backyard,” said Richard Acosta, CEO and co-founder of Inception REIT. “You now have an entire three-state territory that will grow recreational cannabis. The federal ban hasn’t stopped the industry. ”
Cannabis lenders and operators have transformed skydiving into different states and grasping the intricacies of complex cannabis legal policies as they try to stay ahead of moving targets in order to reap the profits that cannabis can bring.
Cannabis operating licenses are bought and sold for up to $ 40 million each or more, depending on location and type of business license. Lenders like AFC Gamma even use the cannabis operator’s license as collateral for the loan.
“We provide [our loans] on cash flows, licenses and real estate, ”Tannenbaum said. “At best, all three will provide for you.”
Tannenbaum said one of his borrowers just bought a cultivation, processing and dispensary license in Missouri for a total of $ 3.5 million; a growing license in Maryland will cost between $ 7 million and $ 8 million; a Pennsylvania growing license can cost $ 15 million.
“The Florida license is now selling for over $ 40 million; a few years ago that figure rose from $ 15 million to $ 20 million, ”he said.
Over the past five or six years, cannabis-related real estate loans have become more complex and institutionalized. According to Tannenbaum, the market was dominated by sale and leaseback transactions, which were considered “the best type of financing since it was the only type of financing,” to a greater variety of debt products.
Pelorus Equity Group, one of the first private cannabis real estate lenders that burst onto the scene about five years ago, specializes in providing secured value-added bridging loans for home construction for cannabis tenants. The company has invested more than $ 180 million in the cannabis sector since its inception, according to Pelorus President Rob Sehrist, funding only 52 deals out of the roughly 2,000 they’ve seen. cannabis lending industry.
According to Lev Gottlieb, traditional bank lenders are a mystery, they deliberately try to stay out of the limelight, but they are motivated, active and competitive.
Leo began sporadically conducting cannabis-related real estate deals about two years ago, and the volume of inquiries began to grow naturally with the growth of the sector.
“We quickly figured out how difficult it is to place in a bank,” Gottlieb said, adding that banks tend to be more restricted in cannabis use due to its federal ban. “A year ago, we were lucky enough to stumble upon a bank that dealt with cannabis. Now we are working with more than 20 banks, have made more than 100 transactions. There are a lot of them “.
Leo will have the best of all cannabis options next quarter – five bank deals totaling $ 60 million that are in line to close. Gottlieb said that as soon as it became known that Leo was closing down hemp-related real estate loans, the gate swung open. However, such a vulnerability, while good for a platform like Leo, is something that banks avoid.
“They usually tell us not to sell who they are, or that they are actively lending space,” he said. Many have only a limited amount of capital set aside for cannabis lending and cannot cope with the flow of deals that would arise with such awareness.
“You must stay nimble because these [bank cannabis lending] programs don’t always go on, ”Gottlieb said. Banks tend to provide a lower cost of debt than alternative refinancing or acquisition options, but both parties are reluctant to leverage too much.
Cannabis bank real estate loans tend to reflect what you would see in a typical real estate transaction on stabilized and occupied property, Gottlieb said. Leo recently saw a $ 32 million portfolio refinancing that three banks applied for; they came with five-year terms, fixed interest rates below 5 percent, and 25-year depreciation.
“This speaks to the culture of today’s credit market, which has become competitive,” he said. “A few years ago, your best debt repayment option, if any, was 15 percent interest on a two-year stock deal and full recourse.”
Gottlieb pointed to Pelorus as an example of a private lender who came in early and began setting interest rates between 18 and 25 percent for short-term bridging loans.
“You might be thinking, ‘This is astronomical, how could someone pay for this? “Well, when it comes to cannabis deals, real estate itself can be such a cash cow that cash flows can cover debt service, so it’s not such a big deal,” Gottlieb said. “And people were desperate because there was no other way out.”
Pelorus’s weighted average interest rate through a private REIT mortgage is 15.3 percent, with loans provided on a conservative basis – the average loan cost is 46 percent and the loan-to-cost ratio is 53 percent, according to May data. Newsletter 2021 provided by the company.
“Other debt funds have had to cut their prices to the value of real estate debt funds, which ranges from 7 to 10 percent,” Gottlieb said. “If a lender sends me a quote for an amount exceeding 10 percent, this is simply not the business that I do anymore. My borrowers are real estate borrowers at risk of acquiring cannabis; banks appreciate it. ”
Mapping new terrain
New York has caused green fever in the state. Hungry investors poured in, buying land and, in some cases, obscure properties to try to take their seats at the table. After all, the market that will be created by the Marijuana Regulation and Taxation Act (MRTA) in New York is projected to reach $ 3.5 billion to $ 5 billion over the next few years, once it is created.
This all began to unfold even before the two new state regulators created through the MRTA even formulated and implemented a set of rules governing and taxing cannabis businesses in the state. Licenses won’t even begin to be issued until next year, once New York City has a better understanding of which local municipalities will decide to waive permission to retail cannabis in their communities. (They must vote to ban this business by the end of the year.)
“How the hell do you know how many licenses to issue and where to issue them if you don’t know who agrees and refuses,” one cannabis lender said 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 at the end of 2020, according to the Michigan Marijuana Regulatory Authority.
However, Tannenbaum said AFC Gamma was racing in New York, whose company went public through the Nasdaq in March and is only the second cannabis real estate investment trust to go public on a major exchange. New York-based Gamma Real Estate President Jonathan Calicow, a fourth generation real estate professional and veteran of the New York scene, is partnering with AFC Gamma to help guide and advise clients at the real estate level.
Commercial real estate is the lifeblood of the legal cannabis sector. An operator – no matter where he is in the supply chain – must prove that he owns the property before he is granted a license.
According to Gottlieb, the New York license is viewed as a “golden ticket,” and the ambition to obtain it is very high. Leo has seen several loan requests for vacant commercial and industrial facilities in New York City, where a sponsor predicts cannabis use in two or three years.
“People just buy [vacant industrial with] all the cash today, ”he said, planning to further fund the construction to convert it to cannabis use. “They are still in the early, preliminary stages, but we are looking at some of them.”
Just a week after New York City law came into effect, it was reported that Green Thumb Industries (GTI) received tax credits from Orange County to build an old prison and about 40 acres around it in Warwick, NY, for cultivation and processing. In fact, GTI went early, acquiring Fiorello Pharmaceuticals and its licenses in 2019, making it one of 10 vertically integrated licensees in New York.
The influx of mergers and acquisitions and the consolidation of major players to break into the market in anticipation of legalization has created an opportune moment for those at the top.
“It looks like advice on monopoly,” Tannenbaum said.