Marijuana Business Magazine - January 2017

Cannabis Correction Factors How could a marijuana industry cor- rection come about? One possibility involves California’s new recreational cannabis market, which is expected to unleash a flood of marijuana into the market and create more pressure on wholesale prices and some businesses. It’s an extremely hot market now as entrepreneurs and investors prepare for a surge in business. Real estate prices in California have jumped, and anyone wanting to buy or rent space for a canna- bis business must pay a hefty premium on top of already expensive real estate. “Most groups are into build or renovate mode and planning to occupy themselves or lease out at cannabis rates, which tend to be significantly higher than traditional commercial leases,” said Morgan Paxhia, managing partner of San Francisco-based Poseidon Asset Management. Looking ahead, however, distressed opportunities may arise when under- capitalized operators compete against sophisticated businesses that have extremely deep pockets.This trend could force the smaller players to close up shop or seek buyers.There also might be more immediate opportunities to snap up existing medical cannabis companies in California that can’t make the switch to a regulated market on their own. Lawyer C. Adam Foster has seen some businesses make big strategic missteps – which could lead to fire sales – in Denver, where he’s a partner at the Hoban Law Group specializing in marijuana law. Fos- ter knows of a number of Denver cultiva- tors in recent years that expanded their operations – for example, from about 10,000 square feet to some 50,000 square feet of warehouse space. After signing multiyear leases, the growers encoun- tered financial troubles for one reason or another, including cost overruns and crop failures.These growers then failed to meet their rent obligations. Another factor that could trigger distressed sales is marijuana busi- ness owners who violate increasingly complex MJ regulations and laws. There already have been instances where business owners committed serious rules violations and were given six months by regulators to sell their businesses, according to Foster. In those cases, he estimates a new buyer could potentially scoop up the busi- ness for a 25%-75% discount. Foster expects that unsophisticated cannabis business owners will run into similar regulatory problems in Califor- nia especially because the new rec and EXECUTIVE SUMMARY The marijuana industry is on a roll, with new businesses launching across the nation and prices for property to launch a new venture climbing. But there are opportuni- ties to buy struggling businesses at discounted prices, and an eventual correction could prove a boon to bargain hunters. Be aware that: • Cannabis is like any other commod- ity business and is vulnerable to boom-and-bust cycles. • Falling wholesale prices, industry consolidation and other factors could result in faltering MJ companies becoming available at bargain prices. • You’ll need a network of industry sources, lenders, real estate brokers and landlords to locate distressed businesses. • Cultivators and poorly capitalized businesses are considered potentially ripe targets for bargain hunters. • You should be wary of buying a cul- tivation facility that previously used pesticides or any business with past links to the black market. medical markets are more tightly regu- lated than the previous MMJ industry. “The industry has become much more regulated and complicated,” he said. In 2011, for example, all the marijuana rules and regulations in the United States covered about 200 pages. By 2016, they could fill a book with more than 700 pages, he said. Finding a Distressed Business You can use a variety of methods to track down a distressed business. But don’t expect the task to be easy. “There’s no efficient market yet for transaction opportunities,” said Anthony Georgiadis, a partner in Chicago-based GreenThumb Industries, which owns coast-to-coast MJ cultivation and retail operations. “Up to this point, they’ve usually been word of mouth,” he said. That likely will continue, according to Leslie Bocksor, a former investment banker who founded Electrum Partners, a Las Vegas consultancy. “Everything in this industry comes from networking,” and finding a distressed business will be no exception, he said. You also might tap into your lender network, suggested Paxhia. Lenders might have an early line on operators that are struggling to make their payments. For example, some “hard money” lend- ers – which provide high-interest loans to risky businesses, including marijuana entrepreneurs – could be quick to look for another MJ business owner if the initial one can’t make its payments. Anthony Georgiadis, a partner at Green Thumb Industries. Photo courtesy of Green Thumb Industries Morgan Paxhia of Poseidon Asset Management. Photo courtesy of Poseidon Asset Management 50 • Marijuana Business Magazine • January 2018