By Ryan George
It has become common knowledge that the cannabis industry has been breeding big profits, but even with a stockpile of cash, finding a landlord that will rent to a marijuana tenant remains difficult.
Cannabis businesses have two options concerning the facilities needed to operate — own it or lease it. Institutional financing for the cannabis industry is not yet available, and private financing (also referred to as ‘Hard Money’) usually requires a significant equity position, high-interest rates, several points paid upfront, and asset verification via BANK STATEMENTS — the big catch-22.
Most legitimate operators don’t have long-standing bank statements because they’ve been routinely denied access to banking services until very recently. As a result, owning a facility is not often a viable option in the cannabis industry without help from friendly private investors. And those investors want a high return on their money — especially in the cannabis industry.
Leasing, however, is an option for all, just as long as operators are willing to pay the price and put in the legwork to find a “willing landlord.” But in many cases, willing landlords in the cannabis industry demand a percentage of profits or equity in the business in addition to an escalated rent premium. Until federal regulations change, these roadblocks will likely remain.
According to Jake Meilach, Director of Acquisitions at HF Capital, “The average Cap Rate [Capitalization Rate] of our real estate investments with cannabis tenants is between 14-18% and as high as 25% Cap Rates depending on the strength of the operator and deal structure.” Based on this information and the CBRE North America Cap Rate Survey First Half 2015 (Click Here), the average cannabis cap rate is approximately 74% to 123% higher than the national average of 8.06% for Class “C” industrial space.
Now, for those of you that are not real estate savvy, a Capitalization Rate, commonly referred to as a Cap Rate is an investor’s gauge of performance on investment, and it is a ratio of Net Operating Income (income minus all reasonably necessary operating expenses) to property asset value. As a general rule of thumb in the real estate industry, a higher Cap Rate is associated with a higher risk investment, such as those associated with the cannabis industry i.e. asset forfeiture/seizure, damage from a raid, damage from an irresponsible cannabis operator, burglary, and the mortgage holder calling the balance of the mortgage due if they find out you have a cannabis tenant. But, for those with the tolerance and appetite for the risk of the cannabis industry — these are truly high returns.
