Increasing Cash Flow For Your Cannabis Business With a Sale Leaseback

February 9, 2020 Cannabis Business, Cash Flow, Financial Strategy

Do you own a cannabis business? 

Then it’s no news to you that cash flow is one of the main, if not the main, issues for a cannabis business. That’s why owners of businesses like marijuana dispensaries, cannabis distributors, and cultivators are always on the lookout for new ways to solve the cash flow issue. What’s an innovative way to raise money for your cannabis businesses? Many are turning to the sale-leaseback.

But let’s take a step back and explore just why it is that cash flow is at the top of every cannabis business owner’s mind. 

Lack of Federal Legalization and Limited Cash Influx Options

Because cannabis is still illegal at the federal level, there are many regulations and restrictions that create disproportionate challenges for compliant business. Yes, even for those operating even in state legalized communities. The 280e tax code being a prime example, as well as the restriction on federal banks from providing financing options, or any finance services at all, to cannabis businesses. 

Many smaller banks are hesitant to take on cannabis entrepreneurs as clients because of both the legal intricacies and the cultural stigma around the industry. (Though many Americans are starting to view things differently thanks to state legalization.)

This leaves cannabis business owners with the need to be more resourceful than entrepreneurs who are involved in other, less-regulated industries.

Luckily, there are a few investors and investment firms out there who believe in the cannabis industry. They’re willing to take the risks involved with the promise of a national-boom that many believe is to come in the very near future. And, for the time being, those risks are unfortunately quite real.

Unpredictable Performance in the Stock Market

The sad fact is that not enough investment firms are jumping on the bandwagon. And why is that? Because the cannabis industry is still extremely volatile. After the record-breaking stock prices the cannabis industry saw at the start of last year, cannabis stocks plummeted from the second quarter onward, and they haven’t recovered since. 

While businesses in other industries may consider providing more shares to investors, the consensus among financial experts—especially those specializing in the cannabis niche—is that doing so for a cannabis businesses would be a bad idea. Issuing more shares in a cannabis company, especially if the industry has been performing so poorly in the market, waters down the worth of each share, and therefore the networth of the cannabis company.   

This leaves the cannabis community with the question of what happens next. Currently, there are two levels of action that are being set in motion: the on-the-ground solution that individual cannabis business owners are turning to, and there’s a more forward-thinking push for change at the legislative level.  

The SAFE Banking Act  

Introduced last year by Ed Permlutter, Democratic representative from Denver, Colorado, the Secure and Fair Enforcement (SAFE) Banking Act allows for the creation of financial institutions that provide financial services to cannabis businesses in legalized states. 

While many similar legislations have been proposed, this was viewed by many as the bill that might actually make it through. It passed in the House of Congress by a landslide, and was largely starting to be regarded as a bipartisan, apolitical concern. 

Hype notwithstanding, it will soon be a year since anything has been done with that bill. The more practical-minded are losing hope that it will ever progress in any significant way. After all, say experts in the industry, If progress were to be made, it would have done so already. The fact that it didn’t pass was quite a blow to the cannabis community, which could have greatly used a break, for once. Being able to receive financing options from banks would mean less leg-work, less need for creativity, and somewhat drastic measures… like the sale-leaseback. 

Drastic as it is, the sale-leaseback is a viable option for many cannabis entrepreneurs out there. 

The Sale-Leaseback: One Of Today’s Most Popular Solutions

Also known as just “leaseback” for short, the sale-leaseback is a process in which you sell the real estate your business is operating out of, then lease that property back as a tenant. 

As with all things, there are pros and cons that have to be weighed out before taking the leap, like effects on monthly budgeting. Here’s what you need to know about unlocking funds with a sale-leaseback for your cannabis business:

1. The sale-leaseback provides your cannabis business with a significant influx of cash flow all at once. 

True, you’ll still be spending money on renting the space back each month, but whereas that is an expense stretched out over time, the money you get immediately can be used to grow your business in the meantime. 

There is also the question of how being a tenant may affect your business. Being the King/Queen of the Castle allows for pride in your space and freedom in your business. But with the right contract and the best terms, there will be very little impact, if any, on the day-to-day operations of your business.

2. Some of the most successful cannabis businesses have negotiated leasebacks for their businesses.

Cresco Labs, Acreage Holdings Inc. and Canopy Growth Corp. are the most high-profile examples of recent leaseback deals that were made. In fact, even while these companies were acquiring and merging, they relied on the leaseback to cover their bases, so to speak.

3. To fill this need, there are real estate investment trusts (REITs) that have a niche in the cannabis industry. 

The greatest comfort in having to sell your place would be knowing that you can be a tenant with terms that are ideal for your business. Some other landlord who does not understand the needs of, say, a cannabis sativa cultivator, or a producer of CBD oil and edibles, may provide terms that restrict your business’ operations. Not so with a company like GreenAcreage Real Estate that was created for this exact purpose, and has a solid grasp of what’s par for the course when it comes to having a cannabis business as a tenant. 

4. It’s not right for every business. 

Some businesses found that the sale-leaseback was not right for their cannabis business. Perhaps your mortgage terms won’t allow you to receive enough cash on your property, or the lease would be much higher than monthly-mortgage rates. 

These and other valid concerns are why no business should make these decisions without the guidance of a financial professional. 

If you would like to explore the idea of a sale-leaseback for your business, or other cashflow solutions, contact us today. Call now: +1.424.274.3188