When Koach Capital started meeting with single-state operators (SSOs) and multi-state operators (MSOs) 3 years ago, we were surprised at how many of these operators could not get bank financing for their properties. What also surprised us was how much they paid for these properties. At Koach, we often refer to it as the "Canna Tax". Essentially, it is a premium that is often paid for owning a property in a "green zone". The green aspect of the zoning label refers to both the property's zoning permitting cannabis use, or as a reference to the color of marijuana. In our view, though, the more accurate color for these locations is gold, as these properties often trade for 2x - 4x the current market price per square foot. Of course, this is due to the fact that these properties are so limited. As an example, in Michigan only 10% of cities have opted in to allow cannabis dispensaries in their cities or townships.
Furthermore, the zoning restrictions in these few cities or townships typically allows for very few properties to be in the green zone. Therefore you can understand the premium even though the property itself may be considered sub-par by more traditional real estate valuation methods.
A few banks and credit unions are now starting to consider providing loans for these properties but due to the federal regulations still in place, lending institutions ascribe a high risk to these properties. As such, they will not consider the cannabis value of a property. They will only loan against the go-dark or multi-use value of the property. Therefore, operators often pay 2-4x the market price for these properties and lenders provide traditional Loan to Values (LTV), but that is only on the market value, not the (significantly higher) cannabis value that matches the actual purchase price. As you can see, this creates many situations where operators are only able to secure financing of 15% to 30% of the actual purchase price. In some unique situations, we have seen exceptions to this, allowing the LTV to be slightly higher but it is extremely rare and often due to previous deep relationships.
Koach and other sale-leaseback (SLB) providers can overcome this problem by acquiring the building and often provide capital that goes beyond the basis in the building to allow for Tenant Improvements. This allows operators to continue planting flags in new markets without the need to put up significant Capital Expenditures (CapEx). In addition, as touched on in our previous article, operators generally see a 20-30% IRR on capital invested in their operations. Sinking cash into real estate of course rarely provides those drastic of returns, meaning that expansion utilizing SLBs proves much more accretive to investors in the operator than holding ownership of real estate. So what was a huge problem has been alleviated by offering a sale-leaseback, which removes debt off the balance sheet and provides a simple operating expense (OpEx) as a fixed budget-able expense and allows that capital to be deployed in other more lucrative projects.