Using Real Estate As A Collateral for Cannabis Loan
Last week we tallied the number of combined years we have in the real estate industry and the number comes to a whopping 110 years, divided between 5 Goldstalk members. Where we are most expert and where we feel confident is the structure of the deal and the creative arranging of the investment for ourselves and investing partners. Real estate investments are exciting and lucrative and have always intrigued us since they require a lot from us and rarely are two deals the same…which can require deep thinking and sometimes very creative analysis…. This is particularly true when legal MARIJUANA is involved as a subset or driver to the deal.
Using real estate as the foundation or anchor for cannabis investing can act as a major hedge against what many still consider a risky industry. Real property pledged by cannabis founders who seek large capital investment can ease the risk involved and make marijuana investments less “emerging” and untested. The types of real estate that cannabis business owners pledge as collateral for investment can include land for cultivation, retail commercial space for dispensaries and warehouses/industrial for everything else. These all are acceptable sources of collateral.
The most important determinant in selecting real estate as collateral for marijuana loans is valuation: Getting an appraisal number—a valuation— that represents the PROTECTIVE EQUITY determines how much investment should be made. Here are a few of the most important questions we ask when qualifying cannabis business owners searching for money…we use the answers as a way to measure our confidence in the deal and level of investment.
When did you acquire the real estate and how much did you pay for it?
The recent meteoric rise in real estate values in many California communities and areas—such as Desert Hot Springs, Adelanto, Sun Valley, and other outlying areas—have caused us to pause and be biased against the increased values. It is not uncommon to see marijuana real estate acquisitions in 2017 with one specific valuation and see current proposed values with 100% - 300% rise in values. These huge and recent equity appreciations are not a result of many years of paying down mortgage debt or large down payments by the cannabis borrowers, but rather riding a wave of recent appreciation that has few substantive market supports other than the unbridled confidence in the marijuana industry. In these cases, we employ more traditional valuation models or pass on the deal. Almost always Goldstalk’s valuations of the real estate is lower than what is being presented.
If you are renting the property out, who exactly are your tenants?
We want to know who is paying the rent. We want to establish a reasonable Net Operating Income. We want to establish the credibility of the lessee. Since this is cannabis, and tenancies are rarely “strong credit tenants”, we need to see if the current tenants fail and stop paying rent to our cannabis real estate borrowers, is there inherent value in the asset and ease of re-renting to other quality tenants: Re-renting to new, credible tenants make the deal less attractive. This “income approach” to valuation is central to great underwriting.
Whether you are an owner-operator or not, what is the status of your cannabis license with the BCC and the DRC and all taxation boards?
The business operating in or on the real estate must be lawful or there is no deal.
What are the intended uses for the capital/loan/investment?
Knowing the “source and use” of the requested investment is important to see if the cannabis founders are thoughtful, prudent and measured in how they will deploy investment capital. Too much capital dedicated to salaries or pending lawsuits are poor choices while capital improvements in the real property are much more attractive…
Is the request opportunity or distress based?
Attractive, conventional cannabis real estate financing is not readily available so founders are forced to search for capital using private investment firms such as Goldstalk to provide investment capital. We are curious if the capital requested is for growth and expansion or are distressed based, possibly being used to settle a dispute or get current on vendor liabilities, as an example. Goldstalk prefers opportunity based lending.
Concluding Remarks…
The safest and most predictable investment in the legal cannabis industry is real estate based. And within that discipline, there are levels of risk and rewards to consider...the borrower, amount of protective equity, type of real estate and time horizon. Goldstalk principals have combined their RE IQ and their experience in the cannabis industry to determine which investments deliver the best results for all parties.
Goldstalk, LLC provides investment capital and strategic planning services to top-notch cannabis companies in California and select regions of the world. For information about investing in the industry contact our office: info@goldstalk.com | 310-400-5599 | www.goldstalk.com.