In lieu of traditional lending, private investors are stepping in with a wide range of options
By Scott Jordan
Accessing bank financing or traditional lending has been an ongoing challenge for marijuana business owners. Financial institutions have steered clear of businesses involved in the cannabis industry. Filling this void in today’s marketplace, private investors have stepped in as a willing source of capital for the needs of growing cannabis businesses.
There is rising interest from private financiers to provide various forms of debt-based financing options in several states. Some lenders have been willing to provide resources for working capital, equipment financing and now real estate without requiring business owners to give up equity in their companies.
The private lending option is a welcome addition to the marketplace as bank financing remains unavailable, and other traditional resources such as the Small Business Administration or the U.S. Department of Agriculture loans are inaccessible for marijuana business owners looking to build or improve cultivation facilities or expand retail locations. In addition, rent has escalated dramatically and traditional mortgages or securitized loans are not viable options. The search and procurement of real estate has been an uphill battle for many.
According to the Wall Street Journal, the cost to purchase warehouse space in Colorado has doubled since the beginning of 2014.
Private lending is proving to be a win-win scenario for marijuana business owners and investors looking to obtain a better-than-average return on their money. There are several types of real estate lending options that have become available to the industry, including privately lent money and non-bank-related mortgages, which may include long-term, fixed-rate, fully amortized loans or hard money loans. These loans generally require a 35-40% down payment with a good financial profile to qualify.
Working capital loans can be used for a variety of operational expenses, including the build-out of stores and coverage of other non-asset based items. They are available short-term at 12-24 months with rates varying from the mid-teens to higher than 20%, depending on the financial profile of the borrower and the lender’s tolerance for risk.
We’ve seen recent examples of friendly investors purchasing properties that were identified by the marijuana business owners themselves, then leasing the spaces back to the businesses. The investor may even be willing to provide financing for tenant improvements and purchase equipment for the marijuana business. In some cases, these mortgages become assumable, which allows the business owner to purchase the real estate from the original investor and grow the long-term value of the asset.
In Denver, we’re seeing cannabis-related real estate assets receiving a 13-15% capitalization rate — far higher than the 4-6% cap rate an owner would get on a real estate investment for a non-marijuana property.
SPARC, a marijuana collective in San Francisco, wanted to expand operations and build out its grow facility from 10,000 to 25,000 square feet. By working with a capital partner, it was able to secure a $430,000 three-year lease on equipment for its grow facility.
Through private lending sources, cannabis business owners now have access to additional capital that does not dilute their equity in the business. While interest rates may be slightly higher than in standard industries, businesses have new access to financing and growth capital to operate and expand, while protecting company assets, such as intellectual property, and preserving their own working capital.
At the same time, this scenario provides an opportunity for private lenders to identify high-quality borrowers to deliver higher rates of return on their money than the market is currently providing.
As more states legalize some form of marijuana use and cannabis continues to be the fastest-growing industry in America, there is unlimited opportunity in this emerging business sector, as evidenced by the influx of private investor dollars opening the door to a new frontier of possibilities.
Scott Jordan is the director of business development for Dynamic Alternative Finance. He has arranged more than $15.5 million in loans and equipment leases for the cannabis industry and other businesses this past year. He is an author, speaker and advocate for bringing more financing opportunities and education to alternative business owners. He can be reached by email at firstname.lastname@example.org.