Marijuana Business Magazine March 2020

A NewModel for Cannabis Industry Investment The roster of states legalizing adult-use recreational marijuana keeps growing, and with hemp now legal at the federal level, the market for CBD products has exploded. To fund their ambitions and grow their businesses, cannabis companies – from cultivators to distributors to dispensary operators – are increasingly turning to private equity investors for capital infusions to fund their operations and their acquisition of needed real estate for those operations. The total capital raised by the cannabis industry skyrocketed 460% ($8.5 billion) from 2017 to 2019 alone, according to the 2019 Marijuana Business Factbook. For cannabis investors and business owners alike, a new approach to preferred equity offers distinct advantages over traditional debt and equity financing to execute, grow, and capitalize on industry opportunities with less downside risk. A New Approach to the Capital Stack for Cannabis Investment In the past, two financing structures, mezzanine loans and preferred equity investments, were the primary ways to recapitalize the capital stack and achieve higher leverage. A new financing formula, called RE Preferred Equity, could help cannabis industry companies and developers bring additional capital in and achieve higher leverage on projects with lower costs and reduced risk compared to other equity and debt instruments. Prefer red Equi ty The green rush continues unabated. This is representative of a general real estate deal. Actual values vary from one deal to the next. TOP 20% Common Equity 10-20% return MIDDLE 20% Preferred Equity 6-12% return FIRST 60% Debt 4-8% return R I SK & RE TURN The Old Model: Preferred Equity