As is widely known, the growing cannabis industry remains subject to disparate state and federal legal limitations and, consequently, is an industry with many challenges to market entry and expansion. One challenge is the struggle to gain access to necessary resources, such as financing, to develop a cannabis company’s product and business model. Traditional industries and sources of financing remain unable or reluctant to deal with the emerging cannabis industry due to some real and perceived risks related to cannabis. One recent development in the market has been the introduction of a real estate solution to provide financing.
The first-ever cannabis REIT (real estate investment trust), Innovative Industrial Properties, Inc. (IIPR), went public on Dec. 1, 2016 and on Dec. 19, 2016 closed a sale-leaseback transaction with PharmaCann LLC, a fellow cannabis industry trailblazer that obtained the first of five licenses for cannabis production in New York. In the sale-leaseback deal, IIPR acquired PharmaCann’s 127,000-square-foot medical-use cannabis cultivation and processing facility in Montgomery, N.Y. for $30 million. The cash from the deal will allow PharmaCann to expand its operations, including recruiting new high-level personnel, and refine its products and dispensing practices, without needing to dip into its capital reserves or issue additional equity.
“Financing is challenging for marijuana companies and we had millions tied up in this building,” said Jeremy Unruh, PharmaCann’s general counsel and chief compliance officer, and “a leaseback transaction was one way to loosen up capital.”
Cannabis companies lack basic access to even the most traditional financing vehicles, as even the major credit card companies like MasterCard and Visa, as well as major banks, will not accept these companies as customers if they believe they are even remotely promoting the use of marijuana. One such example includes a marijuana research website that had its bank account closed by a major bank because it provided a link to a dispensary discount coupon.
IIPR maintains that its unique focus on buying industrial medical cannabis facilities from cannabis growers and sellers will provide an influx of capital to cannabis companies, and the REIT, in turn, will offer the cannabis companies leaseback deals so that the cannabis companies can continue operating. The REIT gains a reliable tenant generating rent revenues, as well as benefiting from increasing property values.
In November, when it was announced that IIPR would become the first such REIT to be listed on the New York Stock Exchange, much like other “firsts” in the cannabis industry, commentators worried that the NYSE could be breaking its requirement to not list companies that aren’t in compliance with the law. Despite both Nasdaq’s and the NYSE’s rigorous reviews of potential clients, the NYSE was persuaded to list IIPR, in part, it is believed, because the company's executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry and co-founded two NYSE-listed REITs: BioMed Realty Trust and Alexandria Real Estate Equities.
IIPR’s listing represents a departure from the experience of other companies. In the past, we have seen other cannabis companies, such as the social media company MassRoots, being denied listing by Nasdaq due to concerns that Nasdaq could be accused of aiding and abetting criminal activity under federal law.
Unruh applauded IIPR’s listing, likening the achievement to other milestones, such as passing of the Rohrabacher-Farr Amendment, which barred the DOJ from spending federal funds to enforce the Controlled Substance Act against responsible medical cannabis licensees or the announced commitment of Scott's Miracle Gro to the cannabis industry. Unruh added, “IIPR’s publicly traded REIT will be the very first opportunity for institutional investors to comfortably generate exposure to an industry that currently lacks the sort of transparency that SEC oversight provides.”
The real estate sector is a prime example of the cannabis industry’s ability to enliven stagnant markets. For example, it has been reported that cannabis has dramatically boosted the warehouse business in Colorado, where marijuana is legal for both medical and recreational use. Following the November 2016 elections, 29 states and the District of Columbia have laws legalizing marijuana in some form. With more states legalizing medical use and even expanding the scope of legalization to recreational use, one can expect a greater need for available financing in this industry. The development of a market for REITs to acquire and leaseback real estate assets may provide a useful alternative to traditional finance options.
Thompson Coburn represents PharmaCann on multiple corporate, finance, intellectual property and other matters. Kevin Young is a partner and Emily Jenkinson is an associate practicing in the firm’s corporate practice with a special focus on cannabis.
The firm’s cannabis practice, led by Diane Romza-Kutz and Barry Weisz, counsels cannabis businesses on critical business issues, including navigating the application of disparate laws to their businesses and structuring deals for capital and diversification. If you have any questions about financing cannabis businesses or require corporate assistance, contact a member of the cannabis team.