Bearing all the assumptions on value that we learned in part 1, let’s take a look at the range of rates we’re currently seeing in the industry and how they got there. An easy way to think about pricing is this: more rick = more expensive.
Let’s take a look a couple of leading factors:
This one seems fairly self-explanatory. The higher you go in the capital stack, or the more leverage you need, the more expensive the money.
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A loan at 50% LTV for an infill location may price between 8-9% but that same deal at an 80% LTV would price in the 12-15% range.
Again, taking a look at the deal from the lender’s perspective: more money in = more risk = more expensive.
Likewise, if your project involves any type of construction, the higher the loan to cost for construction the higher the interest rate.
This is directly related to the valuation of the deal learned in part 1. A piece of property located in West Hollywood on the Sunset Strip is going to have a much higher non-cannabis value versus a warehouse in Calexico.
As the non-cannabis value decreases the price of the loan goes up. Whereas the Sunset Strip rate may come in at 8%, the Calexico deal comes in at 17%.
It’s at this point that we get the most resistance from clients. It’s understandable because we’re always looking for the best deal possible and traditionally bank terms will price at 4%. This however, is not a traditional asset for deals and therefore prices accordingly.
While not directly tied to pricing it is nevertheless an important point to understand.
At this stage in the cycle 90% of all cannabis lenders are requiring personal guarantees for any and all loans.
If you’re new to the real estate world you may be curious what recourse means. Quite simple recourse is a personal guarantee (PG for short). A personal guarantee is essentially an agreement to make yourself personally liable for the debt. If you default on your loan the lender can come after your personal assets in order to be made whole.
There are a couple of lenders out there who will lend without recourse being a requirement, but they are on a deal by deal basis and extremely rare.
In the third and final part in this series we’re going to take a look at a couple of real cannabis deals that we’ve financed recently. We’ll break them down so you can see how a real world scenario played out.