Lawrence S. Brown is the CEO of Evergreen Private Finance and has more than 20 years
of experience in growing highly successful specialty finance and investment companies.
He also has acquired, managed and sold real estate in the Washington, D.C., metro area.
He is a venture-capital investor and a limited member of Centripetal Capital. As a noted
entrepreneur, he has structured and financed more $2 billion in loan products across multiple asset classes.
Reach Brown at 301-928-5750 or firstname.lastname@example.org.
would not receive it if they attempted to open a business in any other industry. But there also are many sophisticated, proven businesspeople who are either established within the industry, or now entering it, who
are looking to build a proper business. Invest in them.
Maintain your discipline about which businesses you
get behind. It may sound simplistic, but there are both
great success stories and horror stories in cannabis
financing. The horror stories occur when brokers and
investors forget these fundamentals or believe they
don’t apply to the cannabis industry. The great success
stories occur when brokers and investors maintain
their discipline and treat the cannabis industry like any
other — and that begins with choosing the correct
market for a deal.
Unfortunately, there is no one-size-fits-all rule to evaluate
markets for cannabis deals, since cannabis is individually
regulated by each state. Different states have different
products, different prices for the same products and
different regulatory regimes. These regulations are
fluid and it’s critical to stay on top of them.
The most fluid elements of regulation are, of course,
which states have made cannabis legal, which states
have not and which are likely to make it legal in the future.
The deals you will look for will hinge on the current
regulatory maturity of the market you’re considering.
In a market like Colorado, where cannabis has been
legalized for a relatively long time, the greatest op-
portunities exist in long-term growth via scale and
consolidation. In a market like New York, however,
where cannabis is not yet legal but where regulations
are likely to change soon, you will see a lot of entrepre-
neurial activity and the greater investment opportunities
may reside in short-term growth.
At the individual market level, business dynamics
can vary widely, depending on market demographics
— different demographics prefer different products
— and competition. Pay attention to how many licenses
are given to a market you are considering entering.
In some markets, there is only one legal operation
within a 20-mile radius. In other markets, there might be
eight businesses in direct competition with each other.
The industry has reached a point where a single store
closure can dramatically change the structure of every
other deal in that market. Without this information, any
deal you put together will be woefully incomplete.
The importance of treating cannabis ventures like
deals in any other industry can’t be overstated, but it
is true there are a few specific challenges and opportunities to keep in mind when seeking or structuring
financing for this product.
As a general rule, even cannabis-friendly investors
will approach deals from this industry with added
caution. Investors want to see well-capitalized companies that have enough financial backing to meet
the terms of the loan. And to close cannabis-property
deals, you will have to provide more than just the
standard documentation. This industry requires
Even with strong borrowers, the potential for a federal
crackdown on legal cannabis dramatically changes the
risk-adjusted profile of any deal within the cannabis
industry, in particular when you seek financing for
improvements. You may receive a deal for a $6 million
warehouse build-out and the numbers work when
cannabis sells for $79 an ounce. If the business closes,
however, there is no other product to store in that
warehouse that would sell at those prices and make
those numbers work.
This concern extends to every deal in the cannabis
industry. You might have a very interesting business
infrastructure, but if the underlying economics won’t
work for any other product, then a standard investment
will be unsustainable. With property-improvement
deals, lenders are careful about how much financing
they provide and what their exposure is. A lender may
finance up to 75 percent of the acquisition costs, but
may require additional collateral, such as another piece
of real estate, personal guarantees or other assets, to
close the deal.
Finally, when putting together a deal, commercial
mortgage brokers should look for interest rates and
terms similar to where the bridge-finance industry as a
whole is at right now — somewhere between 10 percent
to 15 percent interest, with loan-to-value ratios up to
70 percent or 80 percent for qualified borrowers.
n n n
In summation, the cannabis industry may be new,
but the best ways to capitalize on the opportunities
it brings are not new. Learn the key market drivers.
Understand the role of regulation within the industry.
Protect against the industry’s unique risks. Only partner with real business people who take the opportunity as seriously as you do. And, rather than spending
your time attempting to convince people with capital,
but against cannabis, to invest in this market, focus on
talking to the industry players who are open to it. n
<< Cannabis continued from Page 78