Marijuana Business Magazine February 2020

Marijuana Business Magazine | February 2020 74 During a conference call with analysts in late November, Ken Amann, Cresco’s chief financial officer, described sale- leaseback deals as a “great alternative source of capital today.” He noted that Cresco is carrying about $100 million of property, plants and equipment (PP&E), much of which could be monetized through a sale-leaseback—provided Cresco determines that is the right move. A SIMPLE FORM OF FUNDING One of the appeals of sale-leasebacks is they’re straightforward. Most multistate operators (MSOs) are familiar with sale- leasebacks, according to Scott Allen, a senior managing director at Miami-based Tower Commercial Real Estate. Earlier this year, Tower Commercial raised $50 million from well-heeled investors to focus on sale-leaseback deals for marijuana retail store operators. Allen said even if the founder of an MSO isn’t familiar with a sale-leaseback, the company typically has lawyers and accountants on its staff who are knowledgeable about them. “A sale-leaseback contract in the marijuana business is pretty much a standard lease-agreement contract,” noted Rob Foster, a senior director at Tower Commercial. “It’s not like if you are issuing stock and you have to wade through 150 pages of really complicated details.” REITS ARE KEY PLAYERS A handful of REITs and other private investment companies focus on cannabis real estate. San Diego-based Innovative Industrial Properties (IIP), which became the first marijuana-focused company to trade on the New York Stock Exchange in late 2016, is by far the largest cannabis-focused REIT. As of early January, IIP’s cannabis property portfolio included 46 marijuana properties in Arizona, California, Colorado, Florida, Illinois, Maryland, Michigan, Minnesota, Nevada, New York, Ohio and Pennsylvania. Together, the facilities total more than 3.1 million square feet—the equivalent of about 17 Walmart Supercenters. Cresco Labs did a $50 million sale-leaseback for this marijuana cultivation facility in Lincoln, Illinois, with GreenAcreage Real Estate, a real estate investment trust. Courtesy Photo Ca $ h Cow Do Your Due Diligence Selling a cultivation facility or other real estate in exchange for a lease that can last 10 or 15 years is a big step for any cannabis company. As part of a cannabis company’s due diligence, attorney Marc Adesso believes it is important to focus on the long-term financial health and experience of your new landlord, typically a real estate investment trust (REIT). Here are questions that Adesso, a capital market and securities attorney at the Nashville, Tennessee-based Waller law firm, suggests when weighing a sale- leaseback deal: • What is the management team’s previous level of experience with operating a REIT outside the cannabis space? • What is the cap rate (a formula for the imputed interest rate based on the income generated by the property and the sales price), and is it commensurate with the current economic outlook and the state of the cannabis industry? • Given that the typical interest rate is very high for marijuana sale-leaseback deals, what are the costs and terms of lowering cap rates and interest rates if MJ is legalized nationwide? • Has the REIT secured sources of leverage such as debt funding? Cannabis industry REITs have struggled to find debt in dollar amounts that are in line with traditional REITs. • If the REIT has secured debt funding, how does it plan to use the money and in what amounts? An overleveraged REIT could be a red flag. • If the REIT is privately held, does it have plans to go public? If so, what is the timetable for the planned initial public offering? • Especially in the case of a private REIT, what is the funding source or sources of private capital, such as family offices, private funds and wealthy individuals? • Is there any risk that the REIT will fail any of the tests required to maintain its REIT status under the IRS tax code? – John Rebchook Marc Adesso Courtesy Photo