Is a REIT or SPAC right for your cannabis business?

Image of the word SPAC on a stock exchange board

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Main Street needs to understand what Wall Street is actually talking about.

So today, I’ll explain two terms often in the cannabis news: REIT and SPAC.

REIT = real estate investment trust. A REIT’s job is to own real estate, maintain it, rent it out and send the profits to the owners, who are on the hook to Uncle Sam for the taxes.

REITs are generally considered “income” investments. Investors don’t buy them to try to capture earnings growth, they buy them to get the dividend checks.

Here is an example: Innovative Industrial Properties, a New York Stock Exchange-listed REIT that trades under the ticker symbol IIPR, owns leasable cannabis assets such as greenhouses.

IIPR pays a 5.2% dividend, which is far stronger than the broader market, which pays a 1.5% dividend. The company’s payout is within shouting distance of perennial dividend superstar AT&T, which is currently yielding 5.5%.

In a business such as cannabis, which has yet to achieve consistent profitability among its publicly traded companies, such strong financial results, paid quarterly in cold, hard cash, are very appealing. (Check out some of the recent REIT deals in cannabis.)

A SPAC is different than a REIT.

SPAC = special purpose acquisition company. SPACs sometimes are referred to as “shell companies” or “blank-check” companies.

They basically exist only on paper. A SPAC says, hey, here’s the business plan. Here’s what we’re going to do and what we are asking for to sell the company to investors – even though the actual business might not even exist.

A SPAC is just an idea, a mechanism to fund a fledgling enterprise and get it off the ground.

SPACs have become very popular.

So far this year, 65 of the 80 U.S. IPOs have been SPAC deals. That’s a huge change from only 10 years ago, when SPACs typically comprised only about 5% to 10% of initial public stock offerings.

Since the beginning of the year, SPACs have raised $11 billion. But in 2021, they brought in an astonishing $162 billion, according to data from SPAC Analytics.

By contrast, there was only one SPAC deal in 2009, and it raised about $30 million. The times they are a-changin’.

Certainly, we’ve seen a boom in SPAC cannabis deals, including a $30 million raise by Leafly Holdings in January this year.

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Is creating a SPAC or a REIT right for cannabis entrepreneurs? The answer is a definite maybe.

The trouble with any sort of publicly traded entity, whether it’s a cannabis REIT such as IIPR or Warren Buffett’s Berkshire Hathaway, is the cost of compliance.

REITs and SPACs, just like corporations, must file a lot of paperwork with various regulators.

None of it is very complicated, but it’s costly and requires highly specialized employees who are adept at properly completing the required paperwork.

Private companies, on the other hand, are required to disclose very little and, in some cases, reveal almost no information.

So, while SPACs or REITs can be successfully floated to raise tons of money, doing so has an upfront cost and no end of follow-up compliance to keep things kosher.

Which brings me to my last point:

Don’t even consider any investment that you don’t fully understand, no matter how good it might sound or how much you like the salesperson.

Running a REIT or a SPAC is hard enough. Owning them also takes some effort – REIT owners must understand business and finance and the cost of capital; SPAC owners must understand and ultimately buy into the merits of an organizer’s business and its ability to sustain a competitive advantage in its market.

If you have a question about which business entity is right for you, consult an attorney and don’t stop asking questions until you’d be comfortable explaining the mechanics to a clever high school student.

None of this is really all that complicated despite the clunky acronyms and unfamiliar terminology.

But it’s wise to understand it all before you invest or choose a funding method for your enterprise.

Andy Obermueller can be reached at editorial@mjbizdaily.com.