The sale-leaseback is a unique financing option that a lot of cannabusinesses are turning to. The transaction is neither debt nor equity financing; think of it more like a hybrid debt product.
With the sale-leaseback, a company doesn’t increase its debt; instead, it gains access to needed capital through the sale of certain assets and then leases those assets back to continue operations. For cannabusinesses, this can be in the form of selling any cultivation, processing, and storage real estate in order to obtain much-needed operating capital and then lease it back. This kind of transaction is perfect for cannabis companies because think of all the land and businesses cannabis operators use—from land, warehouses, farming machinery and retail space, these are all assets with great financial value.
What Is a Sale-Leaseback?
Cannabis operators have restricted financing options, which leads many to struggle with liquidity issues. In a sale-and-leaseback, commonly known as just a sale-leaseback or even just a leaseback, a cannabis operator sells their property (greenhouse, warehouse, dispensary, etc.) to a REIT and then leases it back. This allows an operator the chance to get some fast cash without reducing their ownership interests.
In essence, the sale-leaseback allows the cannabis operator to take the money they make to invest and help grow their business instead of having their equity tied up in real estate. This allows them to yield a higher return than owning real estate.
Sale-leasebacks are extremely common in other non-cannabis real estate sectors, like office buildings, apartment complexes, shopping centers, warehouses and hospitals.
But, given that cannabusiness is a relatively new industry and the fact that cannabis is still illegal at the federal level, there are a limited number of cannabis REITs that operators can work with.
How Does a Sale-Leaseback Transaction Work?
A leaseback transaction for real estate comprises two agreements:
- The property’s current owner-occupant agrees to sell their asset to the investor for a set price.
- The new owner agrees to lease the property back to the existing tenant under a long-term leaseback agreement and therefore becomes the landlord.
The transaction allows a seller to remain the tenant while transferring ownership of an asset to an investor. On the other hand, the purchaser is purchasing a property with a long-term tenant already in place, which allows them to generate cash flow immediately.
In a sale-leaseback, the seller-tenant no longer has an ownership interest as they essentially forfeit the right to receive any appreciation on the value of the property. If they stop being able to make the monthly payments, they will have to renegotiate the lease, or they may be evicted.
Why Cannabis Companies Are Turning to Sale-Leasebacks
Whether for working capital or expansion projects, or anything else, sale-leaseback transactions are intended to give companies a much-needed financial boost by selling an asset with substantial value. The best part is, as long as they’re willing to lease it back from the new buyer, they don’t have to give up that asset. Here are some benefits that are causing cannabusinesses to turn to sale-leaseback transactions:
- Sale-leaseback is an increasingly viable financing option for cannabis businesses as access to funding from venture capitalists, family offices, and wealthy investors is limited in the space. What’s more, traditional financing from banks is completely out of the question because cannabis is categorized as a Schedule 1 drug.
- Sale-leaseback transactions are an ideal way to raise cash while retaining access to key properties.
- Since there is still a lot of ambiguity around the legalization of marijuana federally, it’s very hard for cannabusinesses to get loans.
- A sale-leaseback is a long-term lease agreement that locks in expenses.
- There are tax benefits associated with sale-leasebacks. As cannabis operators become lessors, they can deduct all or a portion of their lease payments.
- Selling real estate and leasing it back frees up sanded capital, which allows the company an opportunity for growth capital and the chance to reinvest in their core operations. The proceeds from a sale-leaseback transaction can be used to invest in different aspects of the cannabusiness operations, such as equipment and inventory purchases, expansion, and new hire training.
Here are some examples of recent sale-leasebacks in the cannabis space:
- Chicago-based Cresco Labs made a $50 million sale-leaseback deal with GreenAcreage Real Estate, a REIT in New York providing sale-leaseback and construction financing to companies operating in the cannabis industry.
- New York-based multi-state operator (MSO) Columbia Care raised $35 million by selling and leasing back six properties in Illinois, California, and Massachusetts. The properties were purchased by New Lake Capital Partners out of Maryland.
- Green Thumb Industries, an MSO based in Chicago, made a $39.6 million sale-leaseback deal for a cultivation facility in Pennsylvania with San Diego-based Innovative Industrial Properties.
- New York-based MSO, Acreage Holdings, signed a $72 million sale-leaseback deal for properties in Florida, Massachusetts, and Pennsylvania with the buyer GreenAcreage.
In the short term, we expect marijuana companies to continue to use sale-leaseback transactions at an increasingly large rate. That’s because it’s become harder for marijuana companies to raise funding in the past couple of months thanks to falling stock prices of cannabis companies that aren’t turning a profit. This will lead sale-leaseback deals to become even more popular. However, in the long-term, as marijuana becomes more and more accepted, it’s likely that traditional funding sources will get on board with helping cannabusineses. This leaves the future of sale-leaseback transactions unknown.