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As the cannabis sector continues to expand and competition for market share intensifies, marijuana-related companies must be tactical in seeking credit Money for real estate, extensions and extensions.
Unfortunately, most of these companies have little to no experience with construction loans, which can lead them to make very costly mistakes.
Here are the key aspects any marijuana-related business should consider when financing real estate.
1. Consider all costs
Many who are new to bridging finance underestimate the overall cost of the project. They take into account the true cost of the property but do not take into account tenant improvement and equipment costs. Or they underestimate these costs before finding a contractor to take on the project.
As a lender, we not only give you the money to get started. We will refund you after you complete each phase of the project. For example, if you’ve completed the first $100,000 of improvements and we’ve matched the invoices to proof of payment, received deposit releases from contractors, conducted a physical inspection, and signed out, then we’ll refund you the $100,000. After that, you recycle this money in draws for each subsequent stage. You need to start with enough capital to get your project off the ground.
2. Don’t just go for the lowest interest rate
If you go to a traditional lender or bank for your loan, you may be able to get a lower interest rate. But you have to ask yourself: What is that? real costs for it?
Most home loan lenders make one to two drawings per month, but some allow multiple or unlimited drawings. So instead of having to advance an amount of $100,000 all at once, you can split it up into $10,000 to $25,000 increments. The higher frequency of reimbursement for each draw offers much greater liquidity flexibility.
If you don’t close 100 percent of what you agreed to with a traditional lender by the deadline of the last draw, the lender will generally stop the draw until you correct it. They may take a week or two to edit it again, causing your project to grind to a halt. If you then fail to pay your contractor on time, you may lose the contractor and subcontractors as they move on to another job and further delay your project.
Ideally, you want to choose a lender that can process drawings quickly and approve them in 1-3 days instead of weeks. Our borrowers typically make 50 to 100 draws per project. In general, our high performance loans will get your facility up and running about 20 to 50 percent faster than with a traditional lender. The time savings are significant considering many players in the cannabis space are generating between $1 million and $5 million per month in revenue from the completed facilities.
Think of it this way: If your loan was $1 million and you chose a bank that offers 50 percent less interest charges, you might be able to save $50,000, but that’s nowhere near the income you would have made if you could to get your operations up and running three months sooner.
3. Pay attention to how your lender calculates the amount of money to be paid out
Choose a lender that bases the loan amount on realistically expected project costs. Banks often lend alternative values in use, a very inaccurate comparison metric that drastically undervalues the property. Because cannabis is illegal federally, banks do not justify actual use of the property, even if they extend a loan on it. They’ll compare it to something that isn’t, like a mall or machine shop, when properties that use cannabis generate 10 to 15 times more monthly revenue than these non-cannabis tenants. And the banks don’t account for contractor costs or equipment costs, which can be particularly high for marijuana-related properties.
You want a lender who:
- Has extensive experience financing specifically marijuana-related real estate
- Understands the intricacies of individual markets and the true value of these properties,
- Understands the true cost of what it takes to get operations up and running.
Banks are subject to particularly strict controls. This prevents them from making the larger loans that companies that specialize in lending to marijuana-related businesses are able to. With banks and traditional lenders, a borrower has to bring in much more equity than debt, which brings me to my next point:
4. Be strategic about your debt to equity ratio
You want to find a good balance between debt and equity. All transactions require at least some equity, and you need to put up money upfront to get a refund of the amount you’ve drawn.
In order to reduce the amount of equity you need to get in to reach the finish line. Equities are currently performing poorly across the board and we could be headed for a recession. So it’s not a good time to sell a lot of equity to fund your project, at least if you’re confident that stock prices will pick up again. Don’t bet against your future success.
Again, while companies that specialize in lending to marijuana businesses offer relatively expensive credit compared to traditional debt, you have to look at the bigger picture. A company that understands the true cost and value of these ventures tends to lend more money and more frequently, reducing the amount of equity borrowers have to sell and resulting in permanent loss of ownership of the company. Not only do they help you get there faster to generate revenue, but they also set you up for long-term success so you don’t lose stake in your business.
5. Before speaking to a lender, do your homework and know what you want to do
Don’t just walk up to a lender and say, “ I want to take out a loan.” You have to know what you’re asking for.
Do you mean an acquisition? A refinance? What is the address of the property? Is there a purchase price? What is the budget? What use should the property have? Who will be the borrower? Who will be the guarantor? Who becomes a tenant? What will the leasing rate be? These are the things lenders need to know.
Understand your project and present it to a lender in a way that is easy to ascertain. Lenders look at dozens of offers each week and receive transactions from experienced borrowers, who always end up in a loan request. We don’t have the time to keep asking you about things.
Prospective borrowers must at least provide a high-level summary and they should do a little research on the lender. We cannot take the time to educate them about what we do if they have not even bothered to read our website. We certainly don’t expect you to be an expert, but we hope you do some homework.