On July 22, 2020 Leaflink, a B2B hashish market, closed a $250 million senior secured credit score facility with an undisclosed non-public lender. Within the press launch, Leaflink described the deal as “one of many largest debt financing offers accomplished in hashish to this point and…an vital milestone for the trade.” When most individuals consider hashish trade financing for retailers or operators, fairly than debt financing, they consider sale-leasebacks with a hashish actual property funding belief (REIT). Leaflink intends to make use of the cash to offer provide chain financing choices to its retailer purchasers via its new platform Leaflink Monetary. This weblog submit provides a short overview on why sale-leasebacks are ubiquitous and why debt financing is on the rise.
Issues with Conventional Financing
Marijuana is against the law below federal regulation. As such, cannabis-related companies face stiff competitors from illicit markets, and have restricted entry to U.S. capital markets and conventional financing. Companies instantly engaged in producing or promoting marijuana, for instance, had been ineligible to obtain PPP loans, regardless of being deemed important in lots of states. Fairness offers are additionally waning as inventory worth is doubtful. Canadian hashish shares have carried out poorly over the past 2 years partly resulting from strict rules and legal opponents regardless of gross sales being authorized in Canada. These are vestiges of longstanding illegality. U.S. firms would possible face the identical end result even when Congress legalized marijuana in 2021.
Hashish operators have restricted financing choices and lots of battle with liquidity points. In a sale-leaseback, a hashish operator sells property (i.e., greenhouses, warehouses, dispensaries, and so forth.) to a REIT after which leases it again. This enables an operator to get quick money with out diluting possession pursuits. Nonetheless, sale-leasebacks have their very own distinctive drawbacks. A sale-leaseback is finally the sale of an asset, even when operations stay the identical. There are solely a handful of hashish REITs for operators to work with contemplating the trade’s age. Lease phrases are likely to replicate the overall lack of choices and the inherent dangers in working with cannabis-related tenants (as beforehand mentioned on this weblog). Leases are sometimes long-term (15 years or extra) internet leases with excessive cap charges, and including lease as an expense reduces EBITDA.
Acquiring a brief time period mortgage is mostly extra preferable than getting locked right into a long-term, high-cost lease for a hashish operator, however the identical endemic obstacles apply to debt financing. Hashish is a fledgling trade with few specialists. Valuating collateral is a way more tough activity for lenders with out the wealth of background information sometimes out there in a deal. Federal regulation additionally restricts the sector to non-public lenders regardless of bipartisan assist for the SAFE Banking Act. Regardless of these elements, in an effort to get a mortgage, cannabis-related firms principally want to point out lenders money and optimistic stability sheets. This disqualifies most operators, however ramping up debt financing looks as if the subsequent logical step for thriving, multi-state operators. Certainly, Curaleaf, certainly one of premier multi-state operators within the U.S., closed a $300 million mortgage early this 12 months and a $5.5 million sale-leaseback in July. For the overwhelming majority of small hashish operators and retailers precluded from such loans, Leaflink has the potential to broaden entry to liquidity.
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