WHY PELORUS EQUITY GROUP FOCUSES ON CANNABIS BUILD-OUTS
According to Fortune Business Insights’ “Cannabis/Marijuana Market, 2019-2026” report, released in June 2021, the global cannabis market size continues to gain momentum. Per the report, the cannabis market was estimated to be USD $10.60B in 2018. Fast forward to 2026, and the market is expected to be USD $97.35B, exhibiting a compound annual growth rate (CAGR) of 32.92% during the forecast period.
With adult-use of cannabis now legal in more than two-thirds of the country, the still-emerging sector is experiencing record-high demand for cannabis-ready real estate. Since 2016, when we entered cannabis real estate lending, we’ve seen a sizable uptick in the number of cannabis operators and property owners looking for more streamlined ways to finance their new construction and improvement projects. Alongside this, there has been a noticeable influx of mainstream investors entering the commercial real estate space in cannabis.
However, entrepreneurs face challenges in the space. Cannabis is still illegal at the federal level, and complex and fractured regulations have made it challenging for many looking to lock in viable sources of funding for upgrades, expansions and build-outs of cannabis-ready facilities. Entrepreneurs also face a multitude of local and state regulations that can limit where cannabis-ready real estate can be located and businesses can operate. Local property restrictions include location within a “green zone” (where cannabis property is legally permitted), a conditional use permit (CUP) and a cannabis use license for each specific property. State restrictions include state licenses for cannabis-use businesses.
For the last five years, Pelorus has been pioneering innovative new ways to bring value-add bridge commercial real estate loans to entrepreneurs in the sector. By streamlining the way new construction and improvement projects are financed in the space, we have been able to ease many of these burdens for owners and operators while also drawing in a new class of investors looking to get in on the green rush.
Our data show that the financing of cannabis infrastructure “build-out” offers investors the best risk-adjusted returns; consequently, this is our fund’s sole focus. Why is this? Cannabis properties are incredibly profitable for both owners and operators. As such, there is a large pool of either cannabis tenants eager to find building spaces to rent, or owner-operators looking to transition their properties to cannabis operations. Commercial real estate owners who lease their properties for use in the cannabis industry can realize far greater financial returns than other commercial real estate ventures.
The majority of our borrowers are owner-operators, and for these cannabis companies, improvements are typically required. These large-scale infrastructure projects require highly specialized designs such as laboratories and cold storage for cannabis-infused products and can cost millions. Entrepreneurs, who are able to find funding, also face a closing process that can take months, and in a complex, fast-paced and competitive environment operational delays can mean lost sales and higher rents.
Because Pelorus processes draw approvals quicker, we save property owners considerable time during the construction period. By delivering financing over a shorter period, even though the interest rate is significantly higher, our total cost of financing is typically lower. This enables property owners to start generating revenues sooner for a similar or lower cost of financing. The quicker our property owners start generating revenues, reduces risk for our investors, and owners will pay a significant premium for efficient and fast delivery.
Standard real estate databases do not capture the important cannabis-specific information traditional lenders need to track in real time, the size and depth of cannabis commercial real estate in the U.S., and the distribution of property types in each state. We have invested significant time, effort and capital in building what we believe is a groundbreaking data and analytics platform for the cannabis industry.
With the help of this Data Project tool, our underwriters get updates in real time, which helps us understand location-specific value drivers and gives us insight into evolving market dynamics and resultant risk. Therefore, we can factor in supply/demand characteristics and underwrite appropriately, considering the size of potential “backfill” tenants.
The cannabis industry is resilient. Without receiving government endorsement, it has added hundreds of thousands of jobs, millions in tax dollars and large-scale infrastructure projects to the U.S. economy. There are many cannabis companies that have managed to thrive without federal legalization and this demonstrates the ingenuity and agility that characterizes much of the sector.
If investors focus more on company fundamentals and specific state legislative actions that open the doors to more prosperity in the cannabis space and away from the federal government’s ineptitude, there will be revitalized optimism. Our 434% year-over-year growth in 2021 was greatly due to “build-outs”. Long term, we are confident that the sector, and the investment opportunities our fund provides through our mREIT, will be one of the best growth vehicles in a generation.
Note: Figures in this blog were correct at the time of publishing. Please read our latest press releases for the most up-to-date news and figures.
About Pelorus Equity Group
Pelorus Equity Group (“Pelorus”), the leading provider of value-add bridge commercial real estate loans to cannabis businesses and owners with cannabis-related real estate, and its Pelorus Fund, a private mortgage real estate investment trust (“mREIT”), are changing the commercial real estate lending landscape in the cannabis sector. Pelorus Fund offers a range of innovative transactional solutions to address the diverse needs of real estate investors and portfolio managers, and its flexible acquisition and bridge lending programs are the direct result of the firm’s involvement in more than 5,000 transactions of varying size and complexity. Since 1991, Pelorus’ principals quickly understand an opportunity, structure a logical solution and execute a timely close and have participated in more than $5B of real estate investment transactions using both debt and equity solutions. To date, Pelorus has completed 63 commercial real-estate loan transactions and deployed more than $350 million to cannabis businesses and real estate owners, comprising of more than 3,200,000 sq. ft. in eight states across the U.S. With the ability to fund approved construction draws for reimbursement in an average of one to three days and a single agreement covering the financing of the entire project, the Pelorus Fund helps to stabilize cash flow for its clients, so they are able to remain focused on their core business goals and objectives.
Pelorus Equity Group Media Contact