The past few years have boosted the U.S. cannabis industry in several ways, increasing production and sales and prompting more states to legalize or at least begin the process of legalizing cannabis for medical and/or recreational use to help to fill budget gaps.
Last year, four more states – Arizona, New Jersey, Montana and South Dakota – fully legalized cannabis, bringing the total to 15 states, while Mississippi legalized pot for medical use. This year, the cannabis industry could reach a new high, with 21 more states expected to legalize it in some form.
As the cannabis industry continues to grow, so do the opportunities for cannabis real estate investors. But the cost of capital for this specialty area is high due to its federal status as a Schedule I controlled substance. So real estate investors interested in entering this market may not know where to find financing, and let alone how to get the best deal for their acquisition.
There are now companies that specialize in providing real estate capital to state-licensed cannabis operators, such as NewLake Capital Partners, based in New Canaan, Connecticut. The small-cap cannabis REIT, launched in 2019, finances both bespoke construction projects and property extensions and purchases cultivation facilities and dispensaries across the country. In the first quarter of 2022, NewLake saw a 130% year-over-year increase in revenue to $10.2 million. His last deal, in April of this year, involved acquiring and signing a long-term triple net lease with a subsidiary of C3 Industries Inc. for a 40,000 square foot land. cultivation facility in Missouri. The acquisition totaled $7.2 million.
WMRE asked Anthony Conigilio, President and Chief Investment Officer of NewLake Capital Partners, to share his expertise in the cannabis real estate finance market.
This Q&A has been edited for length, style, and clarity.
WMRE: Different states have different rules regarding the location of cannabis facilities, but can you provide a general rule on the best sites for this use and how to find them?
Antoine Conigilio: Since the rules vary from state to state and often from municipality to municipality, it is difficult to find a rule of thumb. However, for states that score license applications, a site in economically depressed areas or with a higher concentration of incarceration for marijuana possession may be attractive as they generally score well due to the expected positive impact. on community jobs and tax revenue. For dispensaries, the golden rule of real estate still applies: location, location, location, as long as it is allowed.
WMRE: What are the possible financing conditions for this type of real estate use, knowing that traditional lenders will not finance cannabis real estate?
Antoine Conigilio: Lenders range between 17 and 20% all inclusive for financing costs. Sale-leaseback transactions are between 11 and 13%.
WMRE: What is the term spread between lenders who offer financing for cannabis real estate?
Antoine Conigilio: The market is currently quite tight given the relatively small number of companies with capital to serve this sector. There are still traditional real estate agents who think they can secure a property and find the financing later for a transaction, but it just doesn’t work that way in cannabis real estate. Too many operators have been burned by groups that promise them a deal, but can’t find the funding to shut down. Because of this, there are fewer companies vying for deals, most of which are public, resulting in a narrower spread between pricing options.
WMRE: How can cannabis real estate investors find the best deals?
Antoine Conigilio: Successfully investing in any real estate transaction means finding the right tenant and a property with strong cash flow. The properties of the cannabis sector make this more difficult, given the high growth and highly regulated nature of the industry. Expertise in understanding credit quality in the cannabis industry, as well as specific usage and licensing, is essential to good decision-making.
WMRE: What are some of the challenges associated with these transactions?
Antoine Conigilio: Some of the common issues are management’s inexperience in operating a high growth business in a highly regulated market, overly optimistic projections, negative cash flow, inability to raise capital for plans CapEx, local ownership restrictions and regulatory delays.