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5 Important Factors to Look For When Investing in Commercial Real Estate

Weed companies need to do their due diligence before buying property

Opinions expressed by Entrepreneur contributors are their own.

As the cannabis sector continues to expand and competition to gain market share intensifies, marijuana-related businesses need to be tactical when looking to borrow money for real estate, expansions, and build-outs.

Unfortunately, most of these businesses have little to no experience with construction loans, which can cause them to make very costly mistakes.

Here are the key aspects every marijuana-related business should consider when looking to finance real estate.


1. Consider all the costs

Many who are new to bridge lending underestimate the total project cost. They'll consider the actual property's cost but won't consider the tenant improvement and equipment costs. Or they'll undervalue these costs before finding a contractor to take on the project.

As lenders, we don't just give you the money to start. We reimburse you after you've completed each phase of the project. For example, once you finish the first $100,000 of improvements, and we've matched the invoices with proof of payment, received lien releases from contractors, do a physical inspection, and sign off, then we reimburse you with the $100,000. After that, you'll keep recycling that money in draws for each subsequent phase. You need to start with sufficient capital to get your project underway.

2. Don't just go for the lowest interest rate

If you go with 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 the real cost of doing that?

Most construction lenders do one to two draws a month, but some allow multiple or unlimited draws. So instead of having to advance a $100,000 chunk of money at one time, you can break that up into $10,000 to $25,000 increments. The higher frequency of being reimbursed for each draw offers much greater cash flow flexibility.

Going with a traditional lender, if you don't complete 100 percent of what you agreed upon in the allotted period of the last draw, generally, the lender will stop the draw until you get it corrected. This may take a week or two for them to reprocess it, bringing your project to a standstill. Then, if you're unable to pay your contractor on time, you may lose the contractor and subcontractors because they'll move on to another job, further delaying your project.

Ideally, you want to go with a lender that can process draws quickly, approving them within one to three days instead of weeks. Our borrowers typically make 50 to 100 draws per project. Generally speaking, our high-performance loans will complete your facility about 20 to 50 percent faster than you would by going with a traditional lender. The time savings is significant, considering many players in the cannabis space are generating between $1 to 5 million a month in revenue in the completed facilities.

Look at it this way: If your loan was a million dollars, and you went with a bank that offered 50 percent less cost in interest, you may save $50,000, but that's not remotely close to the revenue you would have generated if you were able to get your operation up and running three months earlier.

3. Be aware of how your lender is calculating the amount of money to dole out

Go with a lender that bases the loan amount on a realistic anticipated project cost. Banks often lend off alternative-use value, a very inaccurate comp metric that drastically undervalues the property. Because cannabis is federally illegal, banks don't justify the true use of the property, even though they're making a loan on it. They'll comp it to something it's not, like a strip mall or a machine shop, when cannabis-use properties yield 10 to 15 times more monthly revenue than these non-cannabis tenants. And banks aren't taking into account contractor costs or equipment costs, which can be particularly hefty for marijuana-related properties.

You'll want a lender that:

  • Has significant experience funding specifically marijuana-related properties
  • Understands the intricacies of individual markets and the true value of these properties,
  • Understands the true costs of what it takes to get operations up and running.

Banks are subject to particularly stringent controls. This prevents them from delivering the more substantial loans that firms specializing in lending to marijuana-related businesses can. Going with banks and traditional lenders, a borrower needs to pour in much more in equity than debt, bringing me to my next point:

4. Be strategic about your debt-to-equity ratio

You want to strike a good balance between debt and equity. All transactions require at least some equity, and you need to put up money at the outset to be reimbursed for the amount you draw.

To reduce the amount of equity, you need to come in with to get to the finish line. Stocks are currently performing poorly across the board, and we may be heading toward recession. So it's not a good time to sell off a lot of equity to fund your project, at least if you have faith that stock prices will rise again. Don't bet against your future success.

Again, while firms specializing in lending to marijuana-use businesses may be offering relatively high-cost loans compared to traditional debt, you have to look at the whole picture. A firm that understands the true cost and value of these ventures typically loans out more money and more frequently, reducing the amount of equity borrowers have to sell, which is a permanent loss of ownership of the company. Not only are they helping you get to the finish line faster to start generating revenue, but they're also setting you up for more long-term success, so you don't lose stake in your company.

5. Do your homework and know what you want to do before talking to a lender

Don't just go to a lender and say," I'd like to get a loan." You need to know what you're asking for.

Do you mean an acquisition? A refinance? What's the address of the property? Is there a purchase price? What's the budget amount? What's the use of the property going to be? Who's going to be the borrowing entity? Who's going to be the guarantor? Who's going to be the tenant? What's going to be the lease rate? These are the things lenders need to know.

Understand your project and present it to a lender in a manner that's easy to ascertain. Lenders look at dozens of deals a week and get transactions from sophisticated borrowers who always come in in one loan request. We don't have the time to keep asking you for stuff.

At the very least, potential borrowers need to provide a high-level summary, and they should do a little research on the lender. We can't take the time to educate them on what we do when they haven't bothered even to read our website. We certainly don't expect you to be an expert, but we hope you'll do some homework.