Marijuana Sale and Leaseback: Pulling Money From the Land

green-dollar-14208409254foEveryone who grows cannabis needs real estate. Some growers start with a small piece of land, but others require acreage to accomplish their goals. New growers, in particular, tend to over-reach on the land piece. As business operations proceed, and harvest dates are pushed back for any number of reasons, the grower may wish it had held back some cash for operations, rather than dropped so much into the land. That’s where the sale-and-leaseback comes in.

Leaseback deals are a time-honored way for companies to access capital. In short, a leaseback is just a financial transaction where an entity sells a piece of property and immediately becomes a tenant, leasing that property “back” for a significant term. The selling entity is often cash-strapped but wishes to continue in its line of business, and at its present locale. The seller therefore finds a buyer, and works with that buyer to negotiate a long-term sale and lease. On paper things look different; but on the ground, everything stays the same.

We have worked on a series of leasebacks in cannabis of late, and we should see an increase in these transactions going forward. The leaseback model may be ideal for an industry where traditional financing is unavailable. For example, if a marijuana business has stretched its budget by buying real estate, making improvements, and preparing the land for operations, that parcel may be sucking up cash: however, it may also have real liquidation value. With limited options for drumming up cash, companies can look to the land.

Leasebacks are not only attractive to cash-strapped enterprises. We have handled leasebacks for producer clients who are profitable but wish to free up cash to commence operations at a second locale, with an eye toward market share. In jurisdictions like Oregon, where a single entity can hold multiple licenses, aggressive operators see the leaseback as a unique leverage option. In the eyes of these operators, freeing up cash for a second or third site is a crucial head start in a burgeoning industry.

We have also handled leasebacks for companies built for the sole purpose of entering these transactions. Formally, these companies may be structured as partnerships, LLCS, or even real estate investment trusts (REITs). Once a leaseback partner is identified, a typical approach is to structure the transaction as a sale and triple-net lease, which targets investor preferred returns upwards of ten percent based on those rents, and increasing property values. These companies prefer to invest in highly regulated states, like Oregon, Washington, Colorado and, hopefully soon, California.

We predict that leasebacks will continue to be more prevalent for grow sites than for retail or other uses, because of the size and value of the properties at issue. We also predict that as industry competition intensifies, operators will increasingly turn to the leaseback. These transactions are a proven way to move money from real estate holdings to core business– namely, growing and selling pot.

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