Sale-Leasebacks & Real Estate Investment Trusts (REIT) in the Cannabis Industry

Sale-leasebacks are creating many successful agreements between investor and operator.

Due to a severely limited supply of viable cannabis zoned locations, there is now an extraordinary opportunity for commercial real estate investors looking to capitalize on a thriving new industry.

This also has created a large opportunity for the property owners to convert their property investments into cash. Investors are now searching for new models to get into the cannabis industry and the purchase of real estate is a relatively safe option, compared to operating a dispensary, or other license requiring business.

We would like to introduce you to the concept of a sale-leaseback in the cannabis industry.

A sale-leaseback is an agreement where an asset’s seller leases the asset back from the purchaser. Immediately after sale, the seller of the asset becomes the lessee and the purchaser becomes the lessor, as defined in the leaseback agreement. This presents a very great option for cannabis operators who own their real estate to quickly generate operating capital.

How is a sale-leaseback for cannabis structured? The seller usually structures the transaction for a period of 10-15 years, with options to extend. The lease period is often set for a timeframe that meets the buyers investment criteria. The viability of the investment for the Buyer is based on the experience and financial strength of the Seller.

After closing, the Seller will be the Tenant and needs to be able to perform under the lease for an extended period. These two requirements are some of the most important core competencies that a  Real Estate Investment Trusts (REIT) will consider in a Sale Leaseback.

Are there Real Estate Investment Trusts (REIT) in Cannabis?

In the past couple of years there are cannabis REIT’s that have been formed and are targeting various types of investments.

We have seen some REIT’s in the cannabis industry aimed at only acquiring assets that are generating 12% to 15% cap rates and have a minimum value of $30mm.

This often leads the operators and the REIT’s directly into each other’s paths.

Many of the cannabis operators have been looking for ways to secure additional capital and the concept of a “sale leaseback” is one of the more creative, yet effective ways with which both investors and operators can achieve their respective objectives.

What are the Details of a Sale Leaseback Agreement?

Typically in a sale leaseback, the owner of the real estate is also the business operator and the buyer is purchasing the property with a predetermined arrangement in which the seller will become the tenant and “lease back” the property under terms that have already been agreed upon by both parties.

Most arrangements require that the buyer lease the property back to the seller for a lengthy period of time and allows the seller/tenant to have the option to renew their lease at the end of the initial lease term.

Some of the most established operators are deciding to pursue sale leaseback models as a way to increase cash flow for operations, debt servicing, expansion, and a variety of other reasons. One of the most common reasons is to add more value to the balance sheet, since holding real estate is not a core competency of most cannabis businesses.

Sale Leasebacks allow a business to more quickly buildout operations by locking down capital that is hard to come by in the cannabis industry.

Recent Examples of Sale-Leaseback Deals in Cannabis:

• In December, Chicago-based Cresco Labs closed a $50 million sale-leaseback deal in Lincoln, Illinois, with GreenAcreage Real Estate, a real estate investment trust (REIT) in New York. Source
• Also in December, New York-based multistate operator (MSO) Columbia Care raised $35 million by selling and leasing back six properties in California, Illinois and Massachusetts. New Lake Capital Partners, based in Maryland, bought the properties. Source
• In November, Green Thumb Industries, a Chicago-based MSO, completed a $39.6 million sale-leaseback deal for a cultivation facility in Pennsylvania with San Diego-based Innovative Industrial Properties (IIP), the nation’s largest REIT to focus exclusively on the cannabis industry. Source
• In October, New York-based Acreage Holdings, another MSO, signed a $72 million sale-leaseback deal for properties in Florida, Massachusetts and Pennsylvania. The buyer was GreenAcreage, created in May to buy properties from Acreage Holdings and other cannabis companies. Source

“Operators have come to appreciate more the value of sale-leaseback transactions as an efficient manner to raise capital, without incurring substantial dilution in ownership,” – Paul Smithers, president and CEO of Innovative Industrial Properties (IIP)

How is a Cannabis Real Estate Investment Trust Managed?

The management teams that have been assembled for these REIT’s are experienced real estate and investment professionals from other industries that have excelled in their space and see an opportunity in transitioning to the cannabis industry.

Many analysts attribute the overwhelming success that many of these REIT’s have had to the transfer of professional talent from other industries that are extremely competitive and require talented and educated professionals. Consequently, there are more and more options that are becoming available for investors looking to get in on the green rush without actually touching the plant or really being “in the business”.

The combination of experienced management teams and investment professionals assists to bring in new professional talent to improve the industries operations as a whole. This model provides a lot of opportunity for both investors and operators best interests.

Are Sale Leaseback Arrangements for Cannabis Actually Feasible?

These agreements are very attractive to investors that are professionals in real estate transactions, but are not interested in the cannabis aspects of the business. Investors may find other avenues more risky and thus you can generate a better offer quickly, by selling your cannabis real estate.

As the industry continues to evolve and the inevitable legalization on the federal level takes place, there will be another surge in investment capital and equity searching the market for places to invest. The future is bright, and the winners stand to get in on the ground floor of a new era and one of the fastest growing industries in the world, all through real estate if they want, without ever touching one plant. Utilize the high value of a legal cannabis approved property with the interests of real estate investors.