Cannabis companies in the United States have engaged in tricky sale/leaseback arrangements with the nation’s largest provider of capital to the industry. Many of those leaseback loans have 16-year ironclad contracts which started at an outrageous interest rate- a rate which will increase at 3% each year, leading to an interest rate greater than 20% on borrowed money in the contract’s final year.
The financier is Innovative Industrial Properties (IIPR). Michigan companies cited by company literature as having sale/leaseback loans include Cresco MI, Green Peak MI, Emerald Growth MI, Ascend MI, LivWell MI, Holistic MI, and Green Peak MI Retail Portfolio.
To remain competitive with other companies which may have secured financing at a more realistic rate, the article suggests these cannabis players engage in aggressive and anti-industry actions to avoid defaulting on their expensive loans. These acts include rekindling the War on Drugs; keeping barriers to entry high; limiting the number of licenses allowed in Michigan; and promoting expensive and difficult-to-achieve new operating standards, designed to keep smaller companies from becoming successful.
“I can confirm that some of Michigan’s largest industry players are pushing lawmakers to change the rules this year,” said Ryan Basore, head of Redemption Cannabis. “They want more law enforcement action against caregivers and small companies, they want tough manufacturing standards and they definitely want to limit licenses in the state. They definitely want to keep people like me out of the industry.”
“I’ve certainly seen larger companies in the state pushing these agenda items,” said Robin Schneider, Executive Director of the highly influential Michigan Cannabis Industry Association. “We weren’t sure why. It all makes sense now.”
Details of the corporate financing arrangements come in an article by Robert Tracy writing on SeekingAlpha.com, who evaluated the fitness of IIPR’s stock dividend potential. In focusing on the sale/leaseback option, Tracy shared a chart from the IIPR December 2020 Annual Report. It lists tenant companies from 16 states and includes loan amounts, total costs and year acquired.
In a sale/leaseback, a property owner in need of money will sell his property to a company like IIPR, which then leases the property back to the former owner. That former owner, now property tenant, gets a lump sum of cash to float their business and in exchange agree to pay a monthly lease and an interest payment on the monies gained. Companies are locked in to the loan terms and rates, Tracy explains. “IIPR has 16-year ironclad contracts that can’t be amended.”
To establish a proper baseline of standards Tracy cites loans from Village Farms International, a Canadian cannabis company with three different business loans secured through Canadian financial services. Each of the three loans have an interest rate of under 5%. The sale/leaseback loans offered through IIPR to American cannabis companies start at an 11-14% interest rate, which increases annually at the 3% rate. Tracy lists interest rates as high as 18% by 2025 and more than 20% by 2035.
The dangers of such an arrangement are clear and obvious. “Would you buy a car with a loan priced at 12% where the monthly payments last for 16 years and increases 3% each year?” he asks.
This ever-escalating loan burden creates a competitive disadvantage, Tracy points out. “Come the year 2030, what percentage of IIPR’s current investment portfolio will still be able to pay interest rates north of 20% and what percentage will have defaulted on their leases?” Tracy asks.
In order to avoid defaulting on their leases and losing their cannabis businesses, Tracy says IIPR loan partners should begin self-preservation actions, even if they are contradictory to the success of the industry as a whole.
Tracy writes that IIPR partner companies can’t compete long term with industry players who’ve secured their financing at more reasonable interest rates, or have financing which doesn’t have a 3% annual increase. One of the suggested strategies for these sale/leaseback companies to remain viable is to eliminate the competition. Closed-market techniques employed by cannabis industry lobbyists include efforts to inspire law enforcement to renew the War on Drugs; imposing more regulatory requirements, like adopting expensive and difficult-to-achieve performance standards; limiting THC content in cannabis products; raising taxes; and implementing limits on the number of cannabis companies allowed to license in any given state.
Another suggestion made by Tracy to keep the IIPR sale/leaseback partners viable is to keep the average cost of cannabis at a high rate. If overpriced cannabis is the industry standard, the IIPR sale/leaseback partners will not be disadvantaged by their high interest loan agreements. If there’s a free market for cannabis and pricing falls as supply grows, the IIPR tenants will have created an unwinnable business model for themselves.
On a national scale, one desperation strategy listed by Tracy to ensure survival of these mega-interest loan partners is to fight against federal legalization of cannabis, or federal banking reform.
Cannabis is an “emerging industry legally blocked from accessing traditional investment and commercial banking services,” Tracy explains, adding “IIPR (is) effectively the only game in town.” Currently, IIPR is the only major loan vendor in the field. Federal banking reform will open up the financing industry, enabling cannabis companies to get reasonable rates on loans.
“If Federal prohibition ends before 2023, then come the year 2025 how will an IIPR tenant, paying a cost of capital by then of over 18% and contracted to increase each year for the next 10 years, be able to survive in an agricultural commodity business where the key to survival is to lower costs each year and when competitors’ cost of capital is closer to 5%?” Tracy writes, later adding: “By 2030, IIPR’s tenants’ interest rate burden will exceed 20%. How will these tenants compete in a post-prohibition world where competitors can access commercial banks offering single digit rates?”
According to Tracy, these IIPR loan partners have 16-year commitments to their financial burden; if competitors can secure financing at the Canadian rate of 5% or less, the IIPR sale/leaseback companies will not be able to expand at the rate others can. Higher corporate operating costs mean each gram of cannabis sold comes with a higher attendant cost; in a cannabis market where price is the single most prevalent factor in a consumer’s purchase decision, having overpriced cannabis is a death sentence.
The sale/leaseback loans offered by IIPR have snared some of the state’s most visible companies. According to the IIPR-generated chart provided in Tracy’s article, it appears Michigan’s Green Peak has taken an expensive loan on their cultivation facility and another loan for their retail facilities. Their 2018 16-year loan is listed on the chart at $15.7 million dollars, and the 2019 ‘retail’ loan carries an $11 million total cost.
LivWell has the largest exposure to the IIPR scheme in the state, per the chart. Their 2019 loan commitment is listed at $41.9 million. The remaining Michigan firms listed are Emerald Growth ($10 million), Ascend ($19.5 million), Cresco ($15 million) and Holistic MI ($10 million).
If one or more of these companies can’t make the payments on their expensive loan, it’ll be obvious in short order. They are tenants, after all, not business partners; if a tenant stops paying rent, you evict them, says Tracy. “…If the borrower (ie. tenant under a sale-leaseback structure) defaults, the lender (ie. landlord under sale-leaseback) doesn’t need to wait around for an extended bankruptcy to take control of the assets. The turn around can be fairly quick.”–
Rick ThompsonCANNABIS MEDIA SPECIALISTphone: 586 350-8943Publisher, Michigan Cannabis Industries Report mcirmagazine.comOwner, Michigan Cannabis Business Development Group micbd.comEditor, TheSocialRevolution.orgNamed Citizen Activist of the Year 2015 by national media source Crystal Trichome Award winner- Journalist of the Year 2016Radio: Jazz Cabbage Cafe, The Planet Green Trees Radio Show, moreActivism: MiNORML and MiLegalize, Board member of bothPrint: High Times, Hybrid:Life Magazine, Culture Magazine, moreInternet: Editor, The Social Revolution; contributor, The Weed News, more4mrick@gmail.com