Marijuana financing 101: 3 tips for property owners and affiliates in the industry
I hope everyone is having a great summer. Living in Colorado It seems like every time I turn around I hear something about the marijuana industry, its growth, etc… I also get hundreds of calls a month where someone is getting into the marijuana business and they explain how they are going to “strike it rich” and make so much money. Unfortunately the vast majority will fail just like in any other business venture.
We have done loans on various properties associated with marijuana throughout the state including raw land, industrial buildings, and retail locations. We have also done loans to individuals associated with the industry on investment single family homes. I put together a list of three crucial tips for anyone even remotely involved in the marijuana industry (property owners, grow operations, retail stores, accessory products, etc…) based on our years of experience in the industry.
1. Conventional financing not an option. Banks are still not lending in the marijuana or any related segment regardless of the strength of the borrower. For example I recently received a call from a loan officer at a large bank in Denver. Their borrower was buying a retail center via a 1031 exchange. The borrower had 60% to put down from the sale of a prior property, excellent credit, etc… The one issue is that a small tenant in the center was marijuana related (it took up less than 4% of the total space). The bank would not do the loan. See prior blog: Are the feds stoned on marijuana banking Stay tuned for a future blog on how a bank will know quickly if there is a marijuana related tenant and will likely call the note.
2. Understand what the property can actually be used for. Just because a property is zoned a certain way does not guarantee it can be used for the intended use. For example, I closed a loan on a piece of land SW of Denver. Prior to our closing the borrowers had supposedly everything lined up so that they were able to grow in greenhouses. Shortly after closing the borrowers went in for the final approval and their usage was denied. The property has no value to the owners now.
3. Understand the true value of the property. See prior article in the Colorado Real Estate Journal: Are we high on marijuana? It seems like everyone and their cousin thinks that since they have smoked marijuana this qualifies them to grow and sell it. Unfortunately more players continue to enter the market ill prepared for the business driving up the price of primarily industrial spaces. I get many calls a day where someone feels they have a great deal on an industrial space and need financing; the financing is justified by an above market lease to someone in the marijuana industry. When I look at the property and what a normal user would pay, the value is sometimes 30-50% below what people are paying. This is unsustainable to overpay this much. When evaluating a property, the value has to be determined by looking at what a normal industrial user could pay in rent and or what the property has sold for to a non marijuana buyer.