Throughout the past year, I received dozens of calls from commercial property owners who rent a portion or all their building out to cannabis-related businesses.  They are seeking information about what kind of loan they’ll be able to refinance into after their existing bank loan matures and comes due in the near future.   Instead of having this conversation several dozen times on an individual basis, I thought it was best to write this blog post, “Financing Options For California Cannabis Landlords”. 

First, a little background on real estate lending to cannabis businesses:

At present, and probably for the foreseeable future thanks to United States Attorney General Jeff Sessions’ recent public statements, banks cannot lend directly to a cannabis-related business for real estate purposes.  Banks also cannot accept cannabis-related deposits.   (I’ve noticed that some of our borrowers have depository relationships with credit unions and community banks.  However, banking deposits are not my area of expertise).  Thus, cannabis businesses cannot have a direct banking relationship.  

There are also very few private money lenders (aka “hard money lenders”) making loans against the real estate used for cannabis businesses (dispensaries, licensed growing and extraction facilities).  When I say “very few” I mean only a handful of private lenders willing to make these loans.  So, less than ten lenders that will consider making these loans.  And only 2-3 are reliable that when they issue a loan commitment they will deliver. 

The landlords who call me are often caught in a Catch-22 situation when it comes to renting to cannabis businesses.  They can charge double the rent of what they’d charge a regular tenant and will have several cannabis businesses submitting lease applications.  However, once their existing bank loan with a 3.50% to 4.75% Note rate reaches maturity in the next 6-18 months, they face the uncertainty of having to come up with the cash to pay off the loan in full or refinance with a private money lender where the interest rate could be anywhere from 9.00% to 13.00%. 

Most of the landlords I talk to love the premium rents being paid by their cannabis tenants.  They don’t want to evict their tenants and give up that cash flow stream.  Nearly every landlord does not have cash on hand to pay off a $1-2 million mortgage when the existing loan matures. 

For landlords in California faced with this dilemma, I outlined three landlord programs that are getting funded through one institutional lender and two private money lenders.  

  • Institutional Lending:
    50% Max Loan-To-Value (LTV).  Prefer 30-40% LTV
    $1,000,000 to $3,500,000 loan amounts
    75% to 7.75%  (Amortized or Interest-Only (I/O))
    3-5 Year Fixed / 30-Year Amortizations
    2-3 Year Prepayment Penalty
    3 Points Origination
    Southern California preferred 
    Urban / Suburban properties
    Seeking excellent BWR financial strength, credit, liquidity, prime location, etc.
  • Private Money 10-15 Years:
    Up to 50-55% LTV. Prefer <50% LTV
    $350,000 to $2,000,000 loan amounts
    00% to 12.25% (Amortized or Interest-Only)
    Up to 15-Year Amortization.  
    Also available:  5yr I/O due in 5; 10-Year I/O due in 10
    Sliding Scale Prepayment Penalty / Guaranteed Interest – depends on the length of loan
    4-5 Points Origination
    Urban / Suburban Locations / Agricultural
    Warehouse, Ag, and some Retail (limited)
  • Private Money 3-Years:
    Up to 50% LTV – prefer to be at 40% LTV
    $300,000 to $500,000 loan amounts
    50% to 9.99%
    3-Year Fixed Available
    12-Month Prepayment Penalty
    5 Points Origination
    Southern California preferred – retail buildings (dispensaries)
    Urban / Suburban properties

The institutional program has very attractive terms but it’s limited to excellent properties in desirable locations to very financially solid borrowers.  Inflated rental income from cannabis tenants does not factor in the value of the property.   Instead, market rate non-cannabis rental income is used to determine value along with taking out all the money invested in tenant improvements on the property, which frequently amount to $200-500K in a licensed production facility.   

If a borrower cannot obtain institutional financing, then we have a couple private money lending sources that will lend to landlords.  The 10-15 year amortization option leans toward owner operator borrowers.  However, this private money fund will make loans to landlords if the overall scenario makes sense (location, low-LTV, borrower strength, tenant strength, liquidity, etc).  The 3-year private money is more for smaller retail buildings in Southern California used as a dispensary.

The cannabis landlord real estate loan market in California is limited to just a few lenders making loans.  I don’t see lenders jumping into the market any time soon since I’m inquiring with numerous private money fund managers each week about their interest in making a cannabis-related loan.   Almost nobody I talk to is ready to jump into this loan market now or in the near future.  

My prediction is that maybe a few more funding sources will enter into the market for making private money loans against the real estate used for cannabis businesses over the next couple years.  However, these new entrants will probably be wealthy individuals making a 1-off loan to a cannabis entrepreneur or cannabis landlord who comes highly recommended from a trusted source like a CPA, Attorney, or Wealth Manager.