Alternative Financing for Cannabis Operators: Opportunities in Sale-Leaseback
September 21, 2020
By Dan Olsen
The sale-leaseback can be an interesting financing option for cannabis operators. A sale-leaseback is neither debt nor equity financing; it’s more like a hybrid debt product. (For guidance, see FASB ASC Topic 842, Leases.)
With a leaseback, a company does not increase its debt, but gains access to needed capital through the sale of certain assets – then leases them back to continue operations. For cannabis operators, this can mean selling their cultivation, processing, and storage real estate to obtain much-needed operating capital, then leasing them back.
It has become an ever increasingly more viable financing option as access to funding from venture capitalists, family offices and wealthy individuals has become limited. Other traditional financing from banks is not even a possibility for cannabis companies, given cannabis’ categorization as a Schedule 1 drug.
There are several examples, certainly not limited to: –
- Cresco Labs, based in Chicago, made a $50 million sale-leaseback deal in Lincoln, Illinois, with GreenAcreage Real Estate, a REIT in New York providing sale-leaseback and construction financing to companies operating in the cannabis industry
- New York-based multistate operator Columbia Care raised $35 million by selling and leasing back six properties in California, Illinois and Massachusetts with New Lake Capital Partners, a company based in Maryland,
- Green Thumb Industries, an MSO based in Chicago, completed a $39.6 million sale-leaseback deal for a cultivation facility in Pennsylvania with San Diego-based Innovative Industrial Properties, the nation’s largest REIT focusing exclusively on the cannabis industry.
- Another New York-based MSO, Acreage Holdings, signed a $72 million sale-leaseback deal for properties in Florida, Massachusetts and Pennsylvania with buyer GreenAcreage.
Potential Benefits to Seller/Lessee...
Offers additional tax benefits: As cannabis operators will become lessors, they will be able to deduct all or a portion of their lease payments. Provides growth capital: The proceeds from a sale-leaseback transaction can be used to invest in the various aspects of the operations, such as equipment and inventory purchases, expansion, and new hire training. Improves the seller’s balance sheet: An asset purchased with debt impacts the company’s balance sheet. A sale-leaseback can improve the balance sheet health -- first, the debt on the balance sheet will reduced; second, the interest in cash; and ultimately asset turnover will improve as the fixed assets will be reduced and the revenue-generating capability of the asset will still continue to be within the operations of the company.
- Limits the issues owning the asset: With the real estate ownership, there are several inherent risks. A sale-leaseback mitigates or eliminates exposure to these risks (such as declining real estate value).
Given that it has been more difficult in recent months for marijuana companies to raise capital – in part, because of the falling stock prices of cannabis companies that aren’t turning a profit – sale-leaseback deals may continue to become more popular.
In my experience, companies in the cannabis industry do not want to be in the real estate space. Cannabis companies want to focus on their core business. At the end of the day, the returns can be much greater by investing cash from real estate and investing it back into the core business.