Sale-Leaseback Versus Mortgage In The Cannabis Space

Which financing option is better for your business?

By Scott Jordan

When it comes to the topic of mortgage financing versus sale-leaseback financing in the cannabis space, emotions tend to drive the decision with people equally positioned on either side of the equation for various reasons.  As today’s financing environment is constantly evolving, it is critical for cannabis business owners and operators to understand the details of each transaction type, including the most current data, in order to make an intelligent decision between the two options.

Traditionally, cannabis companies have been subjected to higher rates and unique terms for owning property, including commercial buildings, industrial spaces and warehouses. Yet, today we are seeing a positive shift to more “canna-friendly” rates and terms that is leveling the playing field for cannabis businesses as compared to traditional businesses on both mortgage financing and sale-leaseback financing options. 

Here is a brief overview of each option and some of the pros and cons to the two scenarios. Keep in mind, your need for cash and your interest in building value will be at the top of the decision-making funnel. 

Mortgages

Mortgages on commercial buildings are similar to mortgages on residential properties.  Loans are based on the value of the building and sized at 50-65% of appraised commercial value, with level payments over a period of time, generally 10 to 20 years or more.  Interest rates can range from the mid-single digits to low double digits for industrial buildings in the cannabis space.

The advantage of a mortgage is that you continue to own your building.  The disadvantage of mortgages is that, typically, you can only raise 50-65% of its value.  If you need to raise more than 65% of the value of the building, a sale-leaseback solution may be the right way to go.

Sale-Leasebacks

In a sale leaseback transaction scenario, the cannabis business sells the property to the financing company and leases it back over time.  Annual rents are calculated from cap rates which in today’s financing environment can be 10-12% or more.  For example, if you sold a $10,000,000 building with a 12 cap, your rent would be $1,200,000 per year.  This rent is subject to escalation at as much as 3% per year.  

On the positive side, rent payments are tax deductible. A potential negative aspect to the sale-leaseback option is that the financing company or bank may not allow a buy-back of the property at all.  We are currently seeing a shift in this area though, as we are arranging more sale-leasebacks with buyback provisions for clients that typically span three to five years.

For example, we recently executed a $3.15 million sale-leaseback transaction for an Oregon cultivation property, in collaboration with John Thompson, Managing Partner, CFO Business Advisors LLC.

The entity is a multi-state, vertically integrated, cannabis company. The company elected to move forward with a sale-leaseback transaction because they wanted to extract additional equity from the property as they had an existing loan for $1.5 million on it.  The sale-leaseback arrangement allowed them to obtain $3.15 million and utilize $1.65 million in capital to drive new business operations.

Which Option is Better for You?

The answer to this question depends largely on your need for capital, the return on investment on that capital and your desire to control and own the property.  

With the sale-leaseback option, you pick up the 35-50% not financed in a mortgage, but you may not ever own the property again and will likely be subject to annual rent escalators.  Also, without control of the property, you may not be able to do what you want with the property, such as physical improvements, renovations or change in use.   

A mortgage may not allow you to raise the capital you need for expansion and growth but does offer a higher economic value at the end of the day, as it gives you ownership and control of the property and potential benefit from increased value.

As with all transactions, the devil is in the details.  We have worked through a number of these comparisons with cannabis businesses and MSOs of various sizes. Looking at the different options with a fine-tooth comb and with a number of potential financing partners and/or consultants can help you decide which transaction type is best for your current and future circumstances and how to get it financed with the correct terms and at the lowest cost.

Scott Jordan has funded over $80M in loans and equipment leases for cannabis business owners since 2014 and is founder of Alternative Finance Network. He is a frequent speaker at industry events and has been interviewed as a source on cannabis financing by various media outlets. Reach Scott at sjordan@altfinnet.com or 720-546-6574