Cannabis business owners face unique challenges when it comes to securing financing, primarily due to the industry’s complex regulatory landscape. With limited options available to access traditional banking and lending services, cannabis business owners must explore alternative solutions to raise capital and expand their operations. One such option that has become increasingly popular in recent years is cannabis sale leasebacks.
What Are Cannabis Sale-Leasebacks?
Cannabis sale-leasebacks refer to a financing arrangement where a cannabis business owner sells their property or real estate to a third-party investor and immediately leases it back for a specified period. The investor then becomes the property owner and assumes responsibility for maintenance, repairs, and property taxes while the business owner retains the right to use the property for their operations. The new owner or landlord is in fact responsible for paying NNN expenses, but in most cases, the lease stipulates that these are now an obligation or responsibility of the tenant since the leases are in most cases on a NNN basis. This arrangement allows the business owner to unlock the equity in their property while continuing to use it for their operations. Unlocked equity must be used for working capital capex or business purposes only (ie. no dividends).
How Do Cannabis Sale-Leasebacks Work?
The process of a cannabis sale-leaseback typically follows these steps:
- The cannabis business owner identifies a property they own or are in the process of acquiring that they would like to use as a way to obtain capital.
- The business owner and the real estate investor negotiate the terms of the sale and leaseback agreement, including the sale price, lease duration, and rental payments. It is key that the price of the property is valued on an AS IS basis or based on the replacement cost value of the property in order to actually pay for the real value of the property and not pay a “Cannabis” premium derived from the high CAP rates operators pay derived from the regulatory environment.
- The business owner sells the property to the investor. Since most leases are on an NNN basis, the tenant is responsible for maintenance, property insurance, minor repairs, and property taxes.
- The business owner signs a long-term lease agreement with the investor, which outlines the terms of the lease, including rental payments, lease duration, security deposits, NNN expenses, guarantees, buy-back options (if applicable) and any conditions for renewing or terminating the lease.
- The business owner continues to operate their business on the property and pays rent to the investor for the duration of the lease.
- At the end of the lease term, the business owner has the option to renew the lease, purchase the property back from the investor, or vacate the premises.
How Can Businesses Benefit from Cannabis Sale-Leasebacks?
Access to Capital: One of the primary benefits of cannabis sale-leasebacks is the ability for business owners to access capital quickly without giving up equity in their business. By selling their property, business owners can unlock the equity in their assets and use the funds for working capital, expansion, or other business-related matters.
Reduced Risk: Cannabis sale-leasebacks can also help reduce the risk for business owners by shifting the burden of property ownership to the real estate investor. The investor assumes responsibility for maintenance, repairs, and property taxes, freeing up the business owner’s time and resources to focus on their core operations.
Long-Term Stability: Leaseback agreements typically offer longer lease terms than traditional leases, providing business owners with more long-term stability and predictability. This stability can be particularly beneficial for cannabis businesses that face uncertainty due to evolving regulations and the rapidly changing legal landscape.
The Bottom Line
Cannabis sale-leasebacks offer a unique financing solution for cannabis business owners looking to access capital quickly and efficiently amid the capital constraints operators face given the regulatory environment in the US cannabis industry and the limited access to institutional capital and traditional bank financing.
As long as the regulatory constraints persist, cannabis sale-leasebacks will be a solid and simple financing solution for business owners. However, it’s essential to work with experienced real estate investors who understand the unique challenges and regulatory landscape of the cannabis industry.
If you are looking for cannabis real estate funding, or cannabis sale leasebacks, check out Alta Fund. They help cannabis entrepreneurs overcome industry-specific challenges and reach their full potential by providing quick, flexible, and reliable cannabis business loans. For more, write to ir@alta-financial.com.