Over the past 20 years, Cannabis has slowly been legalized for medical and recreational uses on a state-by-state basis. Proposition 64, which passed in November 2016, legalized its use in California for adults over 21 and allowed for Cannabis sales and commercial cultivation. As a result, dispensaries have popped up in retail centers all around the state as well as cultivation fields and indoor “grow houses.” This phenomenon has largely been welcomed by the retail & industrial real estate investment community as these new businesses have clamored for storefront and warehouse space. The lending community, however, has met this trend with considerable pause.
In this Insights Series Post we discuss the challenges and pitfalls of financing property leased to Cannabis related businesses. We also highlight a unique lending platform we uncovered that offers financing for this property at very competitive rates.
Why is it that lenders are hesitant to finance property leased to Cannabis tenants? Well, there are two main objections:
- The first is that many lenders consider these businesses to be highly vulnerable to political & legal changes. In California, for example, even though state law permits the sale of Cannabis, over 60% of cities prohibit it. From a lender’s perspective, this means that the business supporting their collateral could be deemed illegal in a short amount of time with the change of a local administration or popular vote.
- The second is that many institutional lenders such as banks & insurance companies tend to pass on the financing due to the impropriety of the tenancy, treating it similarly to the way they treat adult entertainment tenants.
How are Cannabis properties currently being financed?
Right now, multi-tenant properties with Cannabis in a small portion of GLA (under 20%) can achieve market rate financing. To do this, we are seeing lenders omit underwriting the Cannabis tenant entirely as if it doesn’t exist within the collateral. These properties are typically larger retail or multitenant industrial buildings with financing over $10,000,000, and low leveraged loans under 60%.
Smaller properties, or properties with a large portion of GLA devoted to Cannabis, are stuck with private lender financing often in the 10% – 12% interest rate range.
Unique Program Overview
Recently, we uncovered a highly competitive institutional lender that will finance Cannabis related property with no restriction on GLA, no minimum loan size, and leverage up to 65%. These loans are recourse to the borrower but offer attractive interest rates in the WSJ Prime + 1% range.
For more details on the intricacies of this financing, please reach out to:
Ethan Schelin
Managing Partner
ethan@schelinuldricks.com (949) 335-2241