Marijuana Business Magazine February 2020

Marijuana Business Magazine | February 2020 76 “Our most recent sale-leaseback was for 15 years, with two five-year options to renew,” Caltabiano noted. THE DOWNSIDES Still, a sale-leaseback is not for everyone, said Investor Intelli- gence analyst Regan. The long terms of the lease, often 15 years, and high interest rates are concerns, he said. The interest rate can range from 12% to 15%, or up to three times as much as a traditional industrial sale-leaseback deal. “Cannabis companies should try to incorporate low-cost early termination clauses and even consider paying a higher rate in exchange for flexibility,” Regan said. “If the laws change and more lenders enter, future competitors will get leases at lower rates while you’re stuck paying the higher, ‘federally illegal’ rate for many years.” OWNER’S RESPONSIBILITIES One concern from cannabis companies is that their new landlord will demand a role in the business. “Cannabis companies are sensitive about maintaining full autonomy and control over their mission-critical facilities,” IIP’s Smithers said. “They will typically inquire as to our level of influence or day-to-day involvement in their oper- ations. We are able to assuage their concerns by explaining that we are focused on being a real estate capital provider and do not get involved in their daily operations or business decisionmaking.” But it can be difficult for a marijuana company to part with its real estate. Caltabiano of Cresco said it is only natural to look at real estate as more than just a line item on a financial statement. “You try not to be emotional about real estate,” he said. “But I do think people take pride in a building that you built with your blood, sweat and tears.” Different Properties Draw Different Investors A marijuana company that wants to sell a big cultivation or processing facility and lease it back from the buyer has several potential real estate investors to investigate. But if a cannabis company wants to sell and lease back a small retail store, there might not be as many interested parties. “Generally speaking, if you look at a sale-leaseback from the investor’s perspective, it costs about the same to do a $50 million deal for a big warehouse as it does a $1 million deal for a retail dispensary,” said Joe Caltabiano, the president and co-founder of Chicago-based Cresco Labs, a vertically integrated multistate marijuana company. “So an investor gets a bigger bang for his buck with a big deal,” said Caltabiano, who had a background in real estate and finance before helping to launch Cresco Labs in 2013. Paul Smithers, the president and CEO of San Diego-based Innovative Industrial Properties, the biggest player in the cannabis sale-leaseback arena, said the real estate investment trust (REIT) targets transactions valued at $5 million or more. But Miami-based Tower Commercial Real Estate, a privately held commercial real estate brokerage firm, believes it has carved out an underserved niche by focusing on sale-leaseback contracts for marijuana stores. “About 80% of our sale-leaseback deals have been for dispensaries,” said Scott Allen, Tower’s senior marketing director. Earlier this year, the company raised $50 million from “sophisticated investors who have the financial acumen to realize the opportunities in cannabis,” he said. The money is being used primarily to target sale-leaseback deals for small marijuana shops. At press time, Allen and Rob Foster, a senior director at Tower Commercial, were working on a sale-leaseback deal with a multistate operator for about 40 dispensaries in 10 states. The deal was expected to close in early 2020. The smallest deal the company has done was for a retail store worth about $500,000—about a tenth the size of a small deal for a large REIT such as Innovative Industrial Properties. Foster said his company doesn’t encounter many competitors courting small marijuana retail outlets. Tower Commercial’s biggest competitors are the small retail and shopping center owners willing to take the additional risk of leasing space to a marijuana company in exchange for far more rent than a traditional tenant would pay, Allen said. He added that the company is looking to raise another $50 million or more from well-heeled individuals to target sale-leaseback deals involving marijuana retailers. “The big brokerage firms can’t compete in this space because marijuana remains illegal at the federal level,” Allen said. “So, selfishly, that reduces our competition. And we don’t see any shortage of opportunities.” – John Rebchook Scott Allen, left, and Rob Foster of Tower Commercial focus on sale-leaseback deals for marijuana stores. Courtesy Photo Ca $ h Cow