According to Fortune Business Insights' "Cannabis/Marijuana Market, 2019-2026" report, which was released earlier this June, the global cannabis market size continues to gain momentum. Per the report, the cannabis market was estimated to be USD $10.60 billion in 2018. Fast forward to 2026, and the market is expected to be USD $97.35 billion, exhibiting a compound annual growth rate (CAGR) of 32.92% during the forecast period.
With the recreational use of cannabis now legal in 17 states and the District of Columbia, and east coast states like New York, New Jersey and Virginia transitioning from a medical-only market to adult-use, the still-emerging sector is experiencing record-high demand for cannabis-ready real estate.
However, for business and property owners operating in the space, federal laws have made securing financing for expansion and improvement projects difficult. Making matters more complicated, build-outs of cannabis assets can cost millions and include highly specialized designs such as laboratories and cold storage for products. Even when owners and operators secure financing, the closing process can be lengthy. For entrepreneurs in the fast-moving space, these challenges and a need for faster financing options have often resulted in operational delays, costing cannabis owners and operators millions in lost sales or higher rents.
Southern California-based Pelorus Equity Group, a pioneer in cannabis lending, is looking to change the cannabis commercial real estate landscape. The firm, which has been providing value-add bridge commercial real estate loans in the cannabis space for the last 5 years, has been on a mission to ease these burdens for owners and operators while it draws in a new class of investors eager to get into the marketplace.
Pelorus CEO Dan Leimel told Benzinga that his firm has 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, along with a noticeable influx of mainstream investors entering the commercial real estate space in cannabis.
Last December, Pelorus inked a $13.3 million deal with Acreage Holdings, Inc. (CSE: ACRG.A.U, ACRG.B.U), (OTCQX: ACRHF, ACRDF) for construction loans. The financing loan at an annual interest rate of 16% over a term of 18 months from Pelorus has been helping the company fully build out its existing 80,000 square foot cultivation and processing facility in the fast-growing Illinois cannabis market. Just 6 months after signing the deal, Acreage was able to scale its operations in the Prairie State by more than 76% at a time when the state's market demands were surging.
Pelorus via its fund, a cannabis-focused real estate investment trust (REIT), also offers the advantage of near-equity-like returns and will see a 16% interest return from Acreage over an 18-month loan period.
Pelorus' loan model is to finance the construction and conversion of highly specialized properties. Real estate owners and cannabis companies like Acreage are willing to pay a premium for Pelorus' financing, but so far it's been a win-win for both investors and entrepreneurs.
Leimel went on to say, "Because we process 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."
Pelorus has already completed 52 loan transactions and deployed $181 million to cannabis businesses and real estate owners. With the goal of creating more loan demand across North America, the firm views these loan investments as a calculated move to leverage the rapidly growing cannabis market.
Pelorus President Rob Sechrist said, "Our digital platforms enable us to understand the supply dynamics of cannabis-related property across the county. We know their location, the property type and size – details that are essential to accurately assess risk and value. When you can get a truly accurate view of the situation in an instant, you can price with confidence and move quickly. For cannabis companies with millions at stake and limited options, it's all about who can get them the right financing, fastest. We know that's us."
The unique aspect of Pelorus' loan model is that the company focuses specifically on the cannabis industry with the main goal of stabilizing cash flow for its customers. The main strategy for Pelorus is to shift the equity capital component to the real estate side of the business, improving the value of customer facilities and lending off of that model.
"We've been able to approve construction draws in an average of 1 to 3 days and 1 agreement can cover the financing of the entire project,'' Sechrist added. "We provide access to expert sector knowledge and a deep network, and even though our lending rates are high, our total cost of lending is typically lower, and our quicker draws mean both owners and operators can generate revenue sooner."
Pelorus also leveraged a huge opportunity for growth during the COVID-19 pandemic as cannabis facilities were deemed essential while other real estate classes were severely impacted. In addition to cannabis facilities and operations being predominantly recession-proof, Pelorus believes it is well-positioned to continue its current growth model.
For more information on the Pelorus Fund and Pelorus Equity Group, visit www.PelorusEquityGroup.com.
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