Cannabis Business by Joe Caltbiano
Companies in want of capital have a wealth of choices in how they will increase it. From conventional financial institution loans to enterprise funding, line-of-credit accounts to angel traders, the sourcing selections are quite a few. But that doesn’t imply they’re all equally accessible in all markets always. And proper now, outdoors funding is scarce throughout extra industries than regular.
How scarce? According to one site that tracks capital transactions within the cannabis business, there have been 11 capital raises for $185.three million this similar interval in 2019. Now, although, the business has recorded just one capital increase for $8.four million throughout the identical interval. And in line with Viridian Capital Advisors, the week of April 6 additionally represented the primary time the group had not reported a single debt increase by public or non-public cannabis companies, both.
That’s most likely why one form of artistic financing concept has turn out to be extra distinguished in discussions about elevating capital at the moment. Leasebacks–quick for ‘sale-and-leaseback’-are monetary transactions that enable companies to make use of the worth of their property to get a comparatively fast injection of money. But despite the fact that companies are promoting these property for capital, they proceed to have entry to them via leasing the property after the sale.
Put one other approach: A vendor will get an infusion of money and a purchaser will get a long-term income supply. It’s the form of various monetary plan that makes lots of sense for some companies, particularly cannabis operations that sometimes use an array of costly mounted property within the development, processing and distribution of their product.
Cash-strapped companies of all types–and particularly these in at the moment’s cannabis house–could be sensible to present the leaseback concept a better look earlier than resorting to mortgage debt or fairness financing. Here’s why:
What it’s: A leaseback sale works simply as its title implies. It’s a approach for companies to promote an costly mounted asset however then instantly lease it again from the brand new proprietor. The vendor will get capital within the gross sales transaction but in addition will get to lease the asset for continued long-term use. These property may be virtually something, from actual property to manufacturing facility equipment to firm autos, together with company jets.
What’s nice about it: Whether it’s for working capital or enlargement tasks or the rest, the usage of leaseback gross sales is designed for companies to get a much-needed monetary increase by promoting one thing of theirs that has substantial worth. And they don’t have to surrender entry to that asset so long as they’re keen to lease it again from the brand new purchaser. It’s additionally the form of capital plan that carries sure tax advantages, too, due to deductions allowed for lease funds.
What’s not so nice about it: If the asset had been to extend in worth–as many real-estate property do, for instance–then the corporate that offered it clearly will lose out on placing that valuation on their books. And giving up possession in property can, usually and over time, make future makes an attempt to lift capital that rather more troublesome if it lessens the valuation of an organization.
Why it’s significantly helpful for cannabis companies: Think about all of the land and buildings utilized by cannabis growers, both for indoor and outside crops. Think about all of the farming equipment, the lighting and HVAC programs. The warehouses and cultivation buildings. The costly, high-tech CO2 extraction tools utilized by processors. And don’t overlook the retail actual property. All of those are property of nice monetary worth, particularly cumulatively. And as a result of most of those property are used over lengthy durations of time, they’re good for leaseback plans.
Even earlier than the COVID-19 pandemic hit the worldwide economic system, leasebacks already were being seen more and more within the cannabis business. During my time at Cresco Labs, the Illinois MSO I co-founded in 2013, the corporate used a leaseback framework with GreenAcreage Real Estate, an actual property funding belief (REIT), to finish a $50 million deal on the finish of 2019. And comparable actual property leaseback gross sales had been employed by different cannabis companies final yr, together with Columbia Care ($35M), Green Thumb Industries ($39M) and GreenAcreage ($72M), a subsidiary of Acreage Holdings created to purchase property holdings.
The purpose these MSOs and others turned to leasebacks in 2019 was the identical one that may drive others to contemplate it instead plan this yr: a shortage of different choices to lift capital. It’s a shortage that’s significantly extreme in at the moment’s cannabis business, regardless of its present profitability and its projected development.
With little hope of wanted banking protections on the horizon, conventional loans can stay out of attain for small- to mid-size companies, and standard knowledge sees conventional debt financing as an ongoing problem within the cannabis business this yr and past. And though fairness financing is one other path to supply capital, it’s additionally one which carries monetary downsides, equivalent to diluting inventory costs as extra shares are issued.
Leasebacks are one necessary and accessible instrument, although, that cannabis companies can use to lift capital. And it’s one that’s ideally suited to make the most of the high-dollar worth inherent within the typical property utilized by many cannabis companies, particularly these with plant-touching operations.