Marijuana Business Magazine - January 2017

Landlords are another source. It’s common for a landlord to bankroll, or carry back, the loan on a property. That’s because commercial banks won’t make loans on MJ cultivation facilities, Foster said. If the first company fails, a new busi- ness that gets wind of the space could be better positioned than the failed operator because that firm already would have hun- dreds of thousands of dollars sunk into the heating, ventilation and air conditioning system, electrical upgrades and security. A well-connected real estate broker who specializes in cannabis properties also might be able to help you find a distressed property. “No one is going to advertise that they are a disaster,” noted Paxhia, so a broker specializing in MJ properties could be aware of a floundering business. In Denver, Foster knows of several brokerage firms that from time to time have listings of businesses that are for sale. Those lists could be a starting point to determine whether the business owner is under pressure to sell, he said. You also can check the foreclosure notices published in local and national papers such asThe Wall Street Journal. “I’ve known people to skim the public trustee (the government agency that sells foreclosed properties in Colorado) notices and, after doing a little research, have found cultivation facilities in fore- closure,” Foster said. Sectors Ripe for Picking Cultivators are the most vulnerable to falling wholesale cannabis prices, Rubin said. “It all comes down to basic econom- ics of supply and demand,” he added. “Wholesale prices are coming down because legal supply is outpacing legal demand.” Georgiadis of GreenThumb Industries made a similar point. “We know supply is going to increase,” said Georgiadis, who lives in Florida. “However, we have no real way of being able to quantify demand.My guess is that in the short term, prices will spike …and that over time you will see gradual price compression to the point where wholesal- ers and retailers make gross margins more in line with traditional industries.” That, in turn, could pressure less- efficient cultivators if the selling price falls below their cost of production. Businesses that lack deep pockets also could land in hot water. “Those who aren’t well-funded are in danger of becoming road kill,”Bocksor said. Foster already has seen cases in Denver where cultivators projected pay- ing $500,000 to upgrade a warehouse only to discover it cost about $700,000 – and the construction process took eight months instead of the expected four or five months. “If you don’t have a cash cushion, it can be hard to absorb” those unexpected costs, he said. Rubin likened cannabis growers to a small farmer. “A small farmer might be able to survive one bad season,” he noted, “but he might not be able to survive back-to-back bad seasons.” ◆ BUYER BEWARE I f you’re interested in buying a cultivation center or a retail shop, even at a bargain price, be concerned about mold and other environmental problems as well as issues such as poor parking. “I think there are tons of red flags,” said Adam Koh, the editorial director at Cannabis Benchmarks, which researches thewholesale price of cannabis as a division of NewLeaf Data Services. Previously, he served as a cannabis consultant and a cultivation manager for a large MJ operation in Denver. “I remember once these HVAC contractors cut a hole in awall (in aware- house in central Denver) and therewas somuchmold that they immediately got restoration guys to come in and that was not cheap,” he noted. “And something that a lot of people in the industry don’t want to talk about is the use of pesticides. Unfortunately, pesticide residue could be another issue,” Koh added. “I would not buy a cultivationwarehouse unless I had a very thorough environmental inspection.” Leslie Bocksor – a former investment banker who founded Electrum Partners, a Las Vegas consultancy – said he would not buy a distressed property if the reason it failed was because the former owners had some connection to the black market. “You have to be concerned about being tainted by the reputation of the former owners,” he cautioned. “I don’t want to have anything to do with a property whose former owners had a connection to the black market or even the gray market.” Morgan Paxhia, managing partner of San Francisco-based Poseidon Asset Management, said it’s important to look closely at why the initial business failed. Was it because of a poor location and lack of parking? Orwas it because a retailer couldn’t compete against a vertically integrated competitorwhose costs were lower? Could you bring value to the property with better man- agement and a better display? “You have to look at every business on a case-by-case basis,” he said. — John Rebchook Leslie Bocksor 52 • Marijuana Business Magazine • January 2018