How to Get Cannabis Real Estate Bank Loan Before Getting SAFE Banking Passes

By Scott Jordan

There are several factors that contribute to the low interest rate environment for cannabis companies. Since March 2021, with the new administration in the U.S., rates for some cannabis home borrowers have fallen as the more aggressive banks, credit unions, and life insurance companies deal with the excess liquidity of PPP and EIDL loans and other circumstances related to the pandemic.

Banks are seizing the opportunity to generate additional returns on their portfolios, realizing that the risks of federal seizure (which I’ve never seen if the cannabis company followed all government guidelines) have been minimized in the minds of the credit institutions, or in the Are able to be mitigated by structuring the transaction to take place between a landlord (with different ownership) than the state-licensed marijuana company.

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Many lenders I’ve spoken to want to be in the market before the SAFE Banking Act, which the House passed as of the date of this article, is passed. Banks, credit unions, and life insurance companies are also interested in increasing the average return on their loan portfolios, and cannabis is a marketplace for doing this.

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When you combine all of these factors and the fact that the actual risk is much less than the perceived risk, we see more banks willing to quietly and discreetly lend to cannabis companies. You probably won’t see these types of loans advertised or publicized, but with the right connections, qualified cannabis companies can get much lower interest rates and longer maturities than the cannabis industry has in the past when borrowing from private sources of credit.

So who gets this bank interest?

The larger cannabis companies that have positive EBITDA or positive earnings are the main recipients of low-interest loans. Why? It’s never just a factor, it generally comes down to the value of the property and the borrower’s profile. Most cannabis companies receive these tariffs for traditional warehouses and retail centers in urban areas. In California, for example, Hollywood is loanable, but Adelanto is not. Banks don’t want foreclosures that will take a long time to sell, and they don’t want to consider managing a cannabis warehouse.

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Another critical factor is that most banks look at normal commercial value versus cannabis value. Even though cannabis owners will have to spend large sums of money on facility upgrades, specialty equipment, and power upgrades that a normal business wouldn’t need when a bank takes the loan and considers the risk of repossession and foreclosure of the property, they’re looking to sell it ASAP and therefore get the lower commercial value compared to the cannabis value.

RELATED: How Long Does Senate Take to Approve the SAFE Banking Act?

When looking for a cap rate valuation, rents are often increased to bring profitability to a real estate company and banks only use normal commercial rent to determine value using a cap rate analysis to determine the value. Another factor to consider is that many of the small spaces created for typical cannabis growing will have to be demolished when a cannabis company foreclosures a warehouse, and therefore the foreclosure process is actually more expensive for a bank when they do Repossessing cannabis real estate.

In keeping with the conservative nature of banks, most loans will target between 50 and 65%. You will also be looking for a personal guarantee (s) on the loan to cover those lower interest rates. A personal guarantee is not always required, but you will almost always ask. The only time I’ve seen this as an exception is for a public company.

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In general, banks want to have their deposit business too because they are looking for a “relationship” rather than just a transaction and want the ability to offer additional products and services. Loan sizes generally range from $ 1 million to $ 15 million with 50% to 65% commercial value credit and a five to ten year fixed rate loan. These are usually amortized over 20 years, starting at 5.5% and up to an annualized interest rate of 7.5% with a three to five year early repayment penalty.

Here are three tips to help you get the lowest prices available:

1. Be realistic in your valuation and consider other commercial properties and comparable rents and values ​​versus cannabis values.
2. Have up-to-date financial information available, including the income statement and rental list if there are multiple tenants, as well as copies of the rental agreement (s)
3. Be legal banking and abide by all state laws as the bank will conduct significant due diligence before granting a loan

It is important to review your due diligence regarding the current interest rate environment, the requirements for applying for the loan, and who you are working with. Also note that it is not the property type that determines the loan amount, but the bank’s underwriting criteria and guidelines, as well as the borrower’s financial details. Using a source that knows the state and their banks is key to getting the lowest interest rates available and arranging the right loan before interest rates rise.

Author Biography: Scott Jordan, known as The Marijuana Money Man, has been helping cannabis business owners raise leverage to grow their businesses since 2009. He is a frequent speaker at industry events and has completed over $ 70 million in loans for cannabis companies. You can contact Scott at sjordan@altfinnet.com or 720-546-6574.

This article originally appeared on Benzinga and was republished with permission.