By Scott Jordan
Several factors at play contribute to the low rate lending environment for cannabis companies. Since March 2021, with the new administration in place in the United States, rates have come down for some cannabis-linked home borrowers as the most aggressive banks, credit unions and life insurance companies quietly get involved. in the industry with excess liquidity from PPP and EIDL Loans and other circumstances surrounding the pandemic.
Banks seize the opportunity to receive extra return for their portfolios and realize that the risks of federal foreclosure (which I haven’t seen happen where the cannabis company follows all state guidelines) has been minimized. in the minds of lending institutions or are able to be mitigated by structuring the transaction as a transaction between an owner (with different ownership) than the state-licensed marijuana company.
Many lenders I have spoken with want to be in the market ahead of the anticipation of the passage of the SAFE Banking Act, which, as of the date of this article, has passed the House. Banks, credit unions and life insurance companies also want to increase the average return on their loan portfolios and cannabis is a market for doing so.
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When you combine all of these factors and the fact that the actual risk is much lower than the perceived risk, we see more and more banks willing to quietly and quietly lend to cannabis companies. You probably won’t see them advertising or being public with this type of loan, but with the right relationships, qualified cannabis companies can get much lower rates and longer terms than the cannabis industry. has experienced in the past by borrowing from private lending sources.
So who gets these bank rates?
The largest cannabis companies that show EBITDA or positive earnings are the main beneficiaries of low rate loans. Why? It is never a single factor, but generally speaking it will depend on the value of the property and the profile of the borrower. Most cannabis companies receive these tariffs at traditional warehouses and retail centers in urban areas. For example, in California, Hollywood is loanable, but Adelanto is not. Banks don’t want a foreclosure that will take them a long time to sell, and they don’t want to have to consider running a cannabis warehouse.
Another critical factor to consider is that most banks will look at normal business value versus the value of cannabis. Even though cannabis owners have to spend a lot of money to modernize their facilities, for specialized equipment and power upgrades that a normal business wouldn’t need, when a bank takes out the loan and considers the risk of repossession and foreclosure of the property, they are looking to sell it as quickly as possible and therefore will give you the lowest commercial value compared to the value of the cannabis.
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Also, if you are looking for a cap rate estimate, rents are often increased to shift profitability to a real estate company and banks will only use normal commercial rent to determine value using a cap rate analysis for determine the value. Another factor to keep in mind is that when a cannabis company seizes a warehouse, many small rooms that have been created for typical cannabis cultivation will need to be demolished and therefore the foreclosure process is actually more costly for them. a bank. when they repossess cannabis-related real estate.
In keeping with the conservative nature of banks, most of them will consider a loan-to-value ratio of between 50 and 65%. They will also look for a personal guarantee (s) on the loan in order to secure these lower rates. A personal guarantee is not always required, but they will almost always ask for it. The only time I saw this as an exception was for a public company.
In general, banks would also like to have your depository business because they are looking for a “relationship” and not just a transaction and want the opportunity to provide additional products and services. Loan sizes typically range from $ 1 million to $ 15 million with a loan of 50-65% of trade value and a fixed rate of five to ten years. These are typically amortized over 20 years at rates that start at 5.5% and go up to 7.5% annualized interest rate with a prepayment penalty of three to five years.
Here are three tips for getting the lowest rates available:
- Be realistic in your appraisal and look at other commercial properties and comparable rents and values to cannabis values.
- Have up-to-date financial data, including the P + L and the role of rents in the case of several tenants, as well as copies of the available lease (s)
- Be legally banking and in compliance with all state laws, as the bank will perform due diligence before issuing a loan
It is essential to do your due diligence on the current rate environment, what is necessary to apply for the loan and who to consider working with. Also be aware that it is not the type of property that determines the loan amount, but the bank’s underwriting criteria and guidelines and the borrower’s financial data. Using a source who knows the state and the banks within it is essential to securing the lowest rates available and arranging the right loan before rates skyrocket.
Author Biography: Scott Jordan has been known as The Marijuana Money man and has been helping cannabis business owners raise loan capital to grow their businesses since 2009. He is a frequent speaker at events around the world. industry and has made more than $ 70 million in loans for cannabis companies. You can reach Scott at [email protected] or 720-546-6574.
This article originally appeared on Benzinga and has been republished with permission.