NEW YORK (MainStreet) Originally formed as a real estate company to acquire, rehabilitate and re-sell distressed assets, Longview Real Estate (LCOR) changed its name and ticker symbol in January to Cannabis-Rx (CANA) and is now seeking to fund the growth of cannabis real estate facilities with $30 million.
"Producers of legalized cannabis are looking to expand their operations by creating more and larger grow facilities but they are having difficulty accessing traditional lines of credit and loans from U.S. banks that are concerned about potential ramifications related to the current discrepancy between state and federal laws," said Llorn Kylo, chief executive officer of Cannabis-Rx, which is based in Scottsdale, Ariz.
The discrepancy lies in the fact that although legal in some states, recreational use of pot is still illegal federally.
"The key challenge to anyone looking to lend money to marijuana-related businesses is the disconnect between the relaxed laws of states like Washington and Colorado versus federal law which prohibits the activities which have been legalized in those states," said Andrew Maguire, attorney with McCausland Keen & Buckman in New York and Philadelphia. With $16 million in financing, CANA plans to invest in industrial commercial properties, such as warehouses, that suit the needs of dispensaries, medical clinics, growers and others who supply products and services to the cannabis companies.
"We have an additional $14 million credit facility available through a low interest line of credit," Kylo told MainStreet.
There are, however, related risks which could deter lenders from dabbling in real estate that caters to cannabis related companies.
"If a future administration decides to aggressively target the cannabis industry, a borrower could default on a real estate loan after its dispensary or growing facility is shut down by the federal government," Maguire told MainStreet. "The lender would then find itself with direct ownership of the facility after having foreclosed on the collateral real estate."
In order to attract cannabis-related tenants, CANA is willing to renovate buildings based on the requirements of the business and incorporate those additional renovation costs into the lease.
"We could provide a grow facility with the electrical, HVAC and security upgrades needed to excel in the market," said Kylo. "And we plan to acquire buildings that have the required zoning to operate within the regulated cannabis industry but are not yet setup as grow operations or storefronts."
In some cases, Kylo and his team may even be willing to consider providing start-up or operating capital.
"While we generally look for spaces that are 20,000 square feet or greater, if we find a property that is a different size but still has great economics, we would absolutely move forward with the deal," Kylo said.
Ever the cynic, Timothy Sykes warns investors about cannabis penny stocks.
"Every penny stock company is hyping their cannabis industry plans because of the success of related stocks like Advanced Cannabis Solutions (CANN) and Zoned Properties (ZDPY) both of which had very questionable run ups and CANN got halted by the Securities and Exchange Commission (SEC) last month," said Sykes, a penny stock expert and entrepreneur. "Investors should be very wary of such companies and these latecomers."
--Written by Juliette Fairley for MainStreet