How do cannabis companies borrow money Cannabis real estate lending, if executed properly, presents a compelling opportunity for commercial real estate investors to find higher yield. Rob Sechrist the President of Pelorus Equity Group CEO joins Dan Humiston to explain how a cannabis focused private mortgage REIT, provides secured debt loans to commercial real estate with cannabis operators as tenants. Produce by PodCONX https://www.pelorusequitygroup.com/ https://podconx.com/guests/rob-sechrist info@pelorusequitygroup.com
How do cannabis companies borrow money
Cannabis real estate lending, if executed properly, presents a compelling opportunity for commercial real estate investors to find higher yield. Rob Sechrist the President of Pelorus Equity Group CEO joins Dan Humiston to explain how a cannabis focused private mortgage REIT, provides secured debt loans to commercial real estate with cannabis operators as tenants.
https://www.pelorusequitygroup.com/
https://podconx.com/guests/rob-sechrist
Dan Humiston: [00:00:00] today on raising cannabis capital, we are joined by Rob Seacrest the president of P Loris equity group. Rob, welcome to the show.
Rob Sechrist: Thanks. Thanks for having me, Dan.
Dan Humiston: Well, hopefully you won't mind, but I'm going to ask you to dial things back a little bit and, maybe bring us back to , beginning finance.
You co-manage deplores fund, which is a cannabis use C R E mortgage REIT. So let's jump right in here. What is a cannabis use? C R E mortgage REIT.
Rob Sechrist: sure. So CRE is commercial real estate. Is what that acronym is. Polaris equity group is a asset based value add lender. That means that we are secured by real property. So we record first lien position loans on commercial real estate. We've been experts in lending in this sector for 30 years. We've originated more than 5,000 transactions for over a billion dollars. And we formed pylorus in 2010 and we [00:01:00] pivoted to the cannabis space exclusively in 2016. And since that time we've originated 50 transactions for 177 million in the cannabis use property asset class withalmost half of that has been paid off with both private and institutional state.
Banks and credit unions.
Dan Humiston: oh my gosh. That's really cool. Cause there is so little. That funding going on in the industry, you mentioned that you work with institutional investors and I saw in the notes that you also work with private investors and family offices, but there was a lot of early resistance from those groups to working with any plant touching investments.
Do you see that changing?
Rob Sechrist: Not until the federal policy is, deconflicted. So I don't see that changing for that's a whole separate topic and happy to get into that here. Now, if you
Dan Humiston: no, , I was just curious.
Rob Sechrist: yeah, we specifically delineated to [00:02:00] be non plant touching. To clearly separate us from anything to do with cannabis operators.
And we're only lending to the owners of commercial real estate. And we are simply allowing for cannabis use tenants, all of our borrowers. And our tenants are all stringently underwritten, and we verify everything about , both of those parties. And just to clarify something that is a huge misnomer in this industry is that there's no banking and is a complete fallacy.
In fact, number of providing a report right now to somebody, you can go on Vincent, a website. And as of the end of December 31st, 2020, there was 695. Banks and credit unions accepting tier one, plant touching cannabis deposits, which includes cash across the nation in the medically licensed states and of those 695 banks and credit unions.
Many of those are lending directly, the issue of cash is only caused by the lack of the ability to take [00:03:00] credit cards in the dispensary's. And that's where the cash builds up. Everybody else is using wires and traditional methods of banking. So it's just, the dispensary is where that anomaly happens.
And so it's the credit cards that you want to solve there.
Dan Humiston: Yeah, I know we run into that a lot. We're speaking to people that are in the dispensary level or w that's it's still a challenge. It's not going to go away, but , that was an interesting clarification that you made that you're lending to the owner of the property and that owner of the property may be the cannabis business, but it also may be an individual that's leasing it to the cannabis business.
Is that correct?
Rob Sechrist: That's correct. It may be unrelated parties or it may be what we call an owner user. In the event that it's owner user, it's always going to be two separate entities. The owner of the real estate is one entity, newly formed, special purpose entity, banker remote. And the tenant will be the one that is licensed by the state to be up, if it's licensed to operate that the cannabis business
Dan Humiston: I see. That's gotta be great [00:04:00] for a lot of the cannabis companies that actually own those properties. They can get that off their balance sheet and replace it with cash.
Rob Sechrist: just touched on basically our whole thesis is that in this sector? What most people don't know at the retail level or, neophyte level in this sector is that these cannabis operators are doing 10 to 15 times more revenue per month in these facilities. But the plant.
Doesn't just magically start growing the tenant improvements in the equipment that are necessary. To do the build-out to facilitate these tenants are enormous depending on the state and depending on what license type anywhere from, 200 to $300 a foot to improve the property, not the purchase price.
And so you can have a situation, depending on what state it is, where the improvements could be actually more per square foot than the actual value of the property, but that's what's necessary. So what I'm trying to delineate here [00:05:00] is those improvements that are necessary, that must happen prior to the plant being produced are so significant , from our transactions.
There are millions of dollars, $10 million, $20 million. They're huge. What's happening is that if you were to go to a an owner of a commercial real estate building and say, Hey, , we want to be a tenant here, but you need to put in 5 million or $10 million of improvements for us into the facility that the guy may says, Hey look, the rate's great, but I just don't have that cash available.
And I'm not willing to take that on. , you could build that into the lease rate and you could make it work. And many of them do. But typically, what is the issue is that these cannabis operators have to use up all that gunpowder off of their balance sheet prior to them ever having a revenue.
So they're having to sell their company at the worst possible time. So what we did is we shifted that capital coming from the tenant who may or may not own that real estate off of the tenants balance sheet. [00:06:00] And we moved it onto the balance sheet of the owner, which is actually improving the value.
I imagine being a unrelated party and improving a building for millions and millions of dollars that you don't even own. It's just doesn't make sense. So that was our whole thesis waswhether they're owner user or non-related parties money is not coming from the cannabis operator.
Dan Humiston: . I know we used to run into problems, trying to get banks, to help us with improvements on properties. So that I think is a little bit unique to what you're doing too, is that it's not just the property, but you're also providing the money necessary to make the improvements , in the facility.
I think that's a really important distinction as well.
Rob Sechrist: Yeah. So there's another element here as well. We have a hundred percent closing ratio across the country many lenders. Don't have that ability to say that we track all of that across the country. Our competitors and the cost of goods and the licenses and all that. These properties, because they do so much orders of magnitude more income. It's important to get these facilities [00:07:00] built as quickly as possible. I'll give you the example of acreage holdings. We did that transaction for 13 million. They do millions and millions of dollars a month. And that transaction was free and clear.
You had about $20 million into it. We lent them an additional 13 million. So the total cost basis, once we were fully deployed would be 33 million, let's just say that they did $5 million of revenue there in that particular facility. A traditional bank would process draws every month.
Another private lender might do it every 10 days. We do it in one to three. Why that's so important is that we will probably save our borrowers on average, at least 20% in time. And if it was a more institutional price lender it may be 50% in time. So if it was just two months, that's $10 million, the premium on our loan on that particular loan is about 1.3 million annually. So if we just save them over a week, they're in the money.
Dan Humiston: .
Wow. That is really important. And I hope people [00:08:00] picked up on that because you're right, time is money. And when you're building out, it's it can't be done fast enough. It can't get done fast. And if you're sitting there staring at this facility and saying, man, we need this done
and if there's a a bottleneck in your funding,
Rob Sechrist: yeah. If I can give the flip side of that transaction, if you went with a more institutionally priced lender at 6%, , it might take an additional. Six months to get those draws process. And remember when we agreed to make a loan, you still have to put the money out and then we reimburse you.
And so if it's a bank and they're doing it every month, you might be putting out 2 million to 5 million a month. So it didn't even solve your problem of moving it off your balance sheet. And so at a certain point, you're going to say, I'm waiting for this money. I don't want to advance anymore. And the contractor starts slowing down and they're looking for other projects where as opposed to we do unlimited amount of draws.
Typically we do 50 to a hundred draws per transaction. So they're free flowing every few days. , this money is being reimbursed a [00:09:00] hundred thousand here, a million there. Just keep it going as quickly as possible. They have total confidence that they can go as fast as they possibly can. So you want to get the facility voice stabilized.
Dan Humiston: Yeah. Makes a lot of sense. Just give us a, an idea real briefly is what the process is for somebody to get a loan
Rob Sechrist: You got to have an asset. You've got to have a very experienced operator and you've got to have a sponsor that's personally guaranteeing that loan that can substantiate, can qualify for that transaction. These are loans of. Five, 10, $20 million that the guarantor needs to be somebody that can support that type of transaction or that group.
A lot of our transactions are guys that have already emerged into this space. They've already raised the money. Purchase the properties out of pure equity. And then they find us down the road and they're like, look, now we don't have to use any more equity. We can start utilizing the existing equity to build out the rest of our facilities or expand our operations.
So , you gotta be experienced. We're willingly [00:10:00] land with best in class operators in sponsors.
Dan Humiston: Especially if you did 175 million, it was 175 million. Is that what you've done so far?
Rob Sechrist: Seven so far. We'll put out about another 50 million in the next 30 to 45 days.
Dan Humiston: Wow. I have our florist is information in the show notes. So if you want to take some of the next money that's coming available.You want to reach out to. Rob directly or through somebody through their website. And yeah. And if you're an investor that it's interested in, in, in looking at this seems like a pretty secure investment.
There's a piece of property there to back this up. So it's not such a it's it seems like a pretty low risk investment. Rob, I appreciate you being on the show today.
Rob Sechrist: Sure I'm happy to do it. To follow up with us, you can just send an email to info. I N F O at Floris equity group. If it's a loan request, we don't accept calls. We see too many transactions a day for us to go down that road. So you would just need to put in your loan request. If it's an investor, you just need to delineate that.
You're interested in learning more about the [00:11:00] floor's fund, and we're happy to share more about our private mortgage rate that we use as our primary funding vehicle.
Dan Humiston: okay. I'll definitely have that link in the show notes. So if anybody missed it, it'll be in the show notes. Rob, we got to do this again at the end of the thanks again for being on the show.