The Sale Leaseback: A win-win for cannabis operators and investors
What is a sale leaseback?

Cash is the lifeblood of cannabis businesses, like most businesses cannabis operators need to grow and evolve to meet the needs of the market and deliver value on the assets they possess. A conventional business could go about raising capital by selling shares of stock, selling assets or getting a loan from a bank. Because cannabis is still classified as a Schedule 1 drug by the federal government, only the first two options are available. A growing trend in the cannabis industry is a sale leaseback, where cannabis operators sell real estate and other assets to investors with the condition that the investor will lease these assets back to the operator.

How can cannabis operators raise capital?

Benefits to the Seller
An operator that enters into a sale leaseback with an investor will quickly realize one key benefit—immediate cash, which is the obvious objective of this type of deal. However, by taking a closer look there are some other benefits as well to consider:

  • Expansion: TAs consolidation becomes a growing trend in the cannabis industry, larger MSO’s utilize the capital to acquire new or existing licenses from smaller operators.
  • Survival: For the same reason as above, smaller operators free up capital to become fully integrated for certain tax benefits increasing their net income as much as 25%-30%.
  • Equity: Theoretically a sale leaseback does not change the operator’s equity in their own business, however choosing a sale leaseback prevents a loss in equity which would occur by selling stock.
  • Tax advantages: Once the transaction is complete the operator then becomes a tenant which means a portion or all of the lease expense can become a tax deduction. (Tax Rule 280e might now allow this.)
  • Balance sheet: Given the seller uses the proceeds from the sale to invest in their business, reduced assets and increased revenue will result in an increased return on assets. Furthermore, if the seller had debt on the real estate and other assets, that will be eliminated at the point of sale.
Benefits to the Investor
The growing popularity of sale leasebacks reflects the value investors see in them. Each type of investment has a risk-reward quotient which is generally influenced by both internal and external factors. Successful investors speculate based on experience and expertise, and the amount of experience necessary for success varies greatly from one type of investment to another. Sale leasebacks are quite simple. Instead of investing in the business itself, sale leasebacks allow for a compartmentalized investment structure, that is producing high cash flow from day one. Take a look at a few more benefits below:

  • Market scarcity: As noted above, cannabis operators are quite limited in the means available to acquire capital. We are starting to see cap rate compression in some municipalities, however, generally speaking, investors who participate can achieve favorable terms by working with the operators who are their tenants.
  • Passivity: Sale leasebacks are attractive to passive investors and are sometimes considered “Mailbox Money” or “Coupon Clippers”. The buyer of the real estate enters into a prearranged agreement with terms for how the lease will be carried out, often over a long period.
  • Tax Benefits: Cannabis is scheduled as an illicit substance by the federal government however real estate is not. Since 2017, Rittertime has been consulting or co-investing with investors looking to diversify their commercial real estate portfolio, specifically through the means of a 1031x exchange that allows diversifying clients to defer capital gains taxes.
Sale Leaseback Process
Considering a sale leaseback investment with a cannabis operator? Let us quickly breakdown the process for you:

Share with us the basic information about your current investments and/or return requirements and what market or what type of cannabis company you are interested in.
After reviewing your information we will go more in-depth about your needs and present current and available opportunities in an in-person (or virtual) consultation.
Review the opportunities with your attorney, tax advisor, and/or financial advisor.
Identify specific opportunities and connect you directly with the operators and facilitate the transaction.
Sit back and watch your dollars go to work as the growing cannabis industry becomes deregulated and socially acceptable across the world.
Want to hear more?
Please share some basic info with us below!