While the cannabis industry has seen its fair share of ups and downs, the industry continues to be an exciting space for consumers, players in the industry and the country as a whole. Because cannabis is still illegal at the federal level, and traditional banking products and services are unavailable to cannabis operators, they are left to navigate the capital markets in a different way.
The three options for a cannabis operator to obtain capital is through debt, company equity, and real estate. This isn’t all that different from any other company, but the scarcity of capital and unfavorable terms makes it much different. While large publicly traded MSO’s have access to large debt facilities through institutional investors, most cannabis operators don’t have that ability.
As Richard Acosta, CEO of Subversive REIT (in partnership with Subversive Capital and Inception REIT) recently said in an ISCS interview regarding COVID-19’s effect on the cannabis industry, “Capital markets have certainly dried up, so you will see some forced combination of M&A as these companies fight for survival. What that means is that the companies left standing are going to be the stronger companies that are able to raise money as needed are going to be more resilient going forward.”
While that may seem like a grim reality for many cannabis operators, there is certainly hope. A sale-leaseback is a great option in obtaining capital for cannabis operators, and one that has been used by many of the largest companies in the space. A sale-leaseback is essentially what it sounds like. An operator sells their real estate to an investor and agrees to what’s typically a long-term lease on the same property, freeing up the operational capital while maintaining operations from the same facility. Not only is this a way to liquidate locked-up capital, there are numerous advantages to a sale-leaseback.
One such advantage is on the cannabis company’s balance sheet. If a company were to take on debt, that loan goes on the balance sheet as a liability as an encumbrance on the overall company. In a sale-leaseback, however, the company adds cash to its balance sheet and avoids taking on corporate debt.
Another advantage to a sale-leaseback is the amount of capital a company can realize when compared to debt. Because lenders have to mitigate risk, and one way to do that is by not lending to the full value of an asset, by default, the company wouldn’t get as much money from a loan as they would by selling their property to an investor for full value.
There are clear benefits of a sale-leaseback compared to taking on debt. In many circumstances, cannabis operators aren’t able to raise debt, and if they are, they are not able to do so on favorable terms. “We anticipate that tier 1 operators will be able to negotiate materially better terms than the rest of the industry who will also likely seek debt financing, but perhaps on much more onerous terms,” Navy Capital’s Schultz said recently.
All in all, navigating the capital markets as a cannabis company operator can be difficult, but know there are options. While debt and equity certainly still have their place, a sale-leaseback is a great tool to unlock an assets full value and provide liquidity to fuel growth, expansion and to provide operational capital.
Nolan Johnson is a Broker with B+E Net Lease, offering the first online trading platform for 1031 exchanges and net lease real estate. He can be reached at Njohnson@benetlease.com