May 1, 2023
Over a decade, the increase in real estate for cannabis businesses has been significant. This has resulted in an increased interest in financing the industry, particularly through loans that are specifically for cannabis real estate.
In contrast to other cannabis business loans, obtaining a loan for cannabis real estate can be challenging. It is because the cannabis industry is subject to more scrutiny compared to most other industries. Similar to any business, a comprehensive business plan and financial projections are required to assure the lender that their investment is secure.
In this article, we will discuss the definition of cannabis real estate loans, the various commercial property types involved, and some crucial factors to consider before purchasing.
Cannabis real estate loans follow the same principles as any other commercial real estate loan, with the determining factor being the state's regulations. In states where marijuana is completely legal, securing a cannabis real estate loan is more feasible if the business plan and product are sound. Banks now realize the potential of investing in the cannabis industry, given its rapid growth rate. In such states, the structure of cannabis real estate loans will resemble that of traditional real estate loans.
Despite the move toward the federal legalization of cannabis, some lenders who are cautious about taking risks may still be hesitant to offer cannabis real estate loans, unless the business is solely focused on medical cannabis.
However, for starting a cannabis business in a fully legal state and who have all their paperwork in order, the government is simplifying the process of obtaining loans. This is because the cannabis industry is a lucrative source of revenue for state and local economies, and governments are encouraging banks to provide loans to incentivize black market operators to transition to legitimate businesses.
· Farms for cultivation
· Industrial Processing
To prevent the monopolization of the cannabis industry from state to state, the government has intervened and prohibited businesses from expanding across various sub-industries. For instance, farms are not allowed to have industrial processing facilities, and retailers are not allowed to own farms.
The processing of the cannabis industry starts with product cultivation, which is either done indoors in aware house-like facility or outdoors in a traditional farm setting. Securing loans for this particular cannabis asset class is the most challenging due to the uncertainty surrounding federal regulations.
If the federal government decides to shutdown the cannabis industry, banks are left with land as the sole collateral. While land does hold some value, it can be challenging to resell large farms in remote areas to recover the investment.
Grown and harvested cannabis are sold to processing facilities to get cured, trimmed, and processed into the final product. These facilities are typically large warehouses designed for processing cannabis materials.
Most states require that the cannabis product packets should include all the processing details. The details include the ingredients and additives along with THC and CBD content, as regulated by the food industry. The cannabis processing industry may require expensive licensing and proof of product testing to ensure compliance with regulations.
While starting a cannabis processing facility may seem like a lot of work, it is generally easier for this asset class to obtain loans from banks. Processing facilities, which often include larger warehouses in urban areas, have collateral that makes banks more comfortable lending to this cannabis asset class.
The stage before the consumer buys the cannabis product involves the retail dispensary, where packaging, branding, and merchandising of the product takes place. Lenders favor this asset class because the property can easily be converted into other types of businesses incase of failure.
This part of the cannabis industry may appear to require less effort but is the most profitable. Due to the consistent and reliable income generated by retail dispensaries, they are highly desirable tenants for cannabis real estate loans.
The cannabis sector is always changing, and governments are adapting their approaches accordingly. So, you must stay up-to-date on changes in federal, state, and local regulations because you are a professional in this field. It's essential to grasp the various stages of cannabis as it enters the market. Here, you should learn to have some patience or you will lose money for your business. Conversely, waiting too long might lead to missing out on potential profits.
When it comes to states where the cannabis industry is highly lucrative, the result is relatively certain. Although there may be some unexpected changes, the regulations are already in place, and successful cannabis companies or groups have emerged.
If the states are relatively new to the industry, you should take a step back and try to focus on the group that others prefer.
The prospect of earning substantial profits in the cannabis industry is enticing and legitimate. However, people tend to overlook the necessary regulatory procedures and the fact that industry insiders are quite insular and not very receptive to new players. Even though the industry appears vast, it can be quite exclusive.
To overcome this, it's crucial to network and connect with significant players at the local and national levels through platforms like LinkedIn. Follow their progress and understand their business strategies. While the industry has become mainstream, some players have roots in the black market, so it's essential to be cautious while networking. Meeting more people in the industry is the only way to identify potentially problematic individuals.
A cannabis real estate loan is a type of cannabis business loan, but very beneficial, especially if you are planning to expand your business. To know more about this loan type, contact Royale Capital.