Which financing option is better for your company?
By Scott Jordan
When it comes to mortgage financing versus sale-leaseback financing in the cannabis space, emotions tend to make the decision, with people positioned equally on either side of the equation for various reasons. As today’s financing environment continues to evolve, it is vital for cannabis business owners and operators to understand the details of each type of transaction, including the most up-to-date data, in order to make an intelligent decision between the two options.
Traditionally, cannabis companies are subject to higher rates and special conditions for owning real estate, including commercial buildings, industrial spaces, and warehouses. Today, however, we are seeing a positive shift towards more “canna-friendly” rates and terms that level the playing field for cannabis companies versus traditional companies in both mortgage financing and sale-lease-back financing options.
Here’s a quick rundown of each option and some of the pros and cons of the two scenarios. Remember, your cash needs and interest in increasing in value are high in the decision funnel.
Commercial mortgages are similar to residential mortgages. Loans are based on the value of the building and are sized 50-65% of the estimated commercial value, with even payments over a period of typically 10 to 20 years or more. Interest rates for industrial buildings in the cannabis sector can range in the mid single digits to low double digits.
The advantage of a mortgage is that you still own your building. The disadvantage of mortgages is that you can typically only raise 50-65% of their value. If you need to increase the value of the building by more than 65%, a sale-leaseback solution can be the way to go.
In a sale-leaseback transaction scenario, the cannabis company sells the property to the finance company and leases it back over time. The annual rents are calculated from cap rates, which in today’s financing environment can be 10-12% or more. For example, if you sold a $ 10,000,000 building with a cap of 12, your rent would be $ 1,200,000 per year. This rent is subject to an escalation of up to 3% per year.
On the positive side, rent payments are tax deductible. A potentially negative aspect of the sale-leaseback option is that the financing company or bank may not allow the property to be bought back at all. However, we are currently seeing a shift in this area as we arrange more sale-leasebacks with buy-back arrangements for customers that typically last three to five years.
For example, we recently completed a sale-leaseback transaction for $ 3.15 million on a plot of land in Oregon in collaboration with John Thompson, Managing Partner, CFO Business Advisors LLC.
The company is a vertically integrated multi-state cannabis company. The company opted for a sale-leaseback transaction because it wanted to raise additional equity on the property as it had an existing $ 1.5 million loan. The sale-leaseback agreement enabled them to receive $ 3.15 million and use $ 1.65 million in capital to drive new business activities.
Which option is better for you?
The answer to this question largely depends on your capital needs, the return on that capital, and your desire to control and own the property.
The sale-leaseback option gives you the 35-50% not funded in a mortgage, but you may never own the property again and are likely to be subject to annual rental increases. In addition, without control of the property, you may not be able to do what you want the property to do, e.g. B. physical improvements, renovations or changes in use.
A mortgage may not allow you to raise the capital you need to expand and grow, but it does offer greater economic value at the end of the day as you gain ownership and control of the property and have potential benefit from an increase in value.
As with all transactions, the devil is in the details. We went through a number of these comparisons with cannabis companies and MSOs of various sizes. Looking at the various options with a fine tooth comb and with a number of potential financing partners and / or advisers can help you decide which type of transaction is best for your current and future situation and how to get it on the right terms and on the right ones Conditions can finance the lowest cost.
Scott Jordan has funded over $ 80 million in loans and equipment leases for cannabis entrepreneurs since 2014 and is the founder of the Alternative Finance Network. He is a frequent speaker at industry events and has been interviewed by various media outlets as a source on cannabis funding. Reach Scott at email@example.com or 720-546-6574