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Scotsman Guide Commercial Edition |
ScotsmanGuide.com | April 2018 78
<< Cannabis continued from Page 77
Across the U.S., cannabis investors will find a combined market that reached $6.7 billion in sales in 2016 and is projected to grow to $50 billion by 2026, a meaningful sevenfold increase within one decade. Additionally, Maine
and Vermont are poised to join the group of states
with legal medical and recreational cannabis. Maine
voters approved recreational use in 2016 but the state
Legislature has delayed a vote to implement a retail-sales
and regulation system. Vermont’s law, meanwhile, is set
to go into effect July 1 of this year.
Institutional investors remain wary of federal policy
on cannabis and have largely opted out of financing
this industry, while angel investors lack the specialized
knowledge required to meet the industry’s unique real
estate financing needs.
Along with the overall lack of investors, there also
has been tremendous hubris within the legal-cannabis
financing industry. This includes oversized valuations;
large funding rounds, or securities offerings, for companies that have never sold a product; and many
commercial mortgage brokers who do not perform
the same due diligence on cannabis deals as they
would for potential investments in any other industry.
Before you can identify appropriate deals within the
cannabis industry, you first have to remove much of the
industry’s mystique that has been created by the regulatory and legal environments surrounding the product.
As these environments soften, the cannabis industry will
likely develop into a much more standard commodity
market than we see today. This evolution will produce
two key changes with broad implications to keep in
mind when evaluating any cannabis-related deal.
First, expect a substantial price drop for the product.
Cannabis has a lot in common with most fruits, vegetables and spices. Unlike mature commodity produce,
however, cannabis commands a much higher price.
You do not see tomatoes selling for $1,000 a pound.
The closest price analog would be truffles, but their
high price derives from the challenges of bringing
truffles to market. Cannabis, by contrast, can be grown
by someone in their backyard.
When you apply a standard economic perspective
to cannabis, you see that price compression will
inevitably impact the marketplace. Practically speaking, this means reviewing the budget for every deal
to make sure it accounts for a future inflection point
where prices decrease.
Second, expect a shift in the face of the industry.
The cannabis industry may evolve similarly to the
post-Prohibition alcohol industry. When you look at the
makeup of the roughly $220 billion alcoholic-beverage
industry, you don’t see a lot of “two-guys-in-a-garage”
business owners who have made it. Instead, you see
a lot of large, vertically integrated players covering
everything from production to distribution.
The cannabis industry is ripe for similar, significant
consolidation over time. So, when you review a deal, pay
careful attention to how the underlying business plans
to scale and what size its operation aspires to reach.
Five years from now, the cannabis industry will look
very different than it does today, with real implications
for which deals you should champion and which you
should not. Knowing this will increase your chances of
picking the right deals and succeeding as a mortgage
broker within the industry.
The primary quality mortgage brokers must leverage
for success in the cannabis industry is simple: They
must maintain the discipline to consistently apply the
same basic underwriting process to a cannabis deal
that they would apply to any other deal.
This discipline is rare in the cannabis industry. There is
something about a hot, new industry that makes people
believe the standard rules of investments do not apply.
With every deal, no matter how good it looks, do your
homework and approach it like you would any serious
business opportunity in any other industry. Learn the
market and its key drivers. Track how the market is evolving. And don’t get too caught up in deals that look too
good to be true. They likely are.
Know the market well enough to find people to
successfully assist with financing. In the cannabis world,
many people seek — and receive — funding who
“When you apply a
see that price