Asset-Based Lending for the Cannabis Industry
Guy Godfrey CannaCon Radio interviews Jason Richards, VP of Lead Funding.
Lead Funding is now providing cannabis real estate lending after 11 years of loaning over $500 million dollars in private lending to real estate developers. Mr. Richards was interviewed from CannaCon in Seattle and talks about lending money to cannabis companies to purchase real estate for dispensaries, grow facilities and extraction facilities.
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Hey, this is Guy Godfrey coming to you live on CannaCon Radio, live from CannaCon 2019. I’m here with Jason Richards from Lead Funding. Do you want to tell us a little bit about what you do and what your company does Jason?
Jason Richards:
Yes, Lead Funding has been around for a number of years now. We’re working on year 11 right now, financing cannabis related industry, grows, dispensary, any number of cannabis related components of it where financing obviously is a little bit restricted on the federal level.
We offer an avenue for those folks in a private realm that is a fully integrated, direct lending, and providing the capital in a very streamlined efficient manner for guys to keep their business up and running, working capital to improve their current position, to acquire new space, to do build out on a grow facility, things of that nature. Anything real estate based we can finance.
CannaCon:
These are strictly real estate investments, or do you invest for capital expenditures as well?
Jason Richards:
Cap X can be what the capital is used for, but it’s real estate based, yes.
CannaCon:
Okay. This is a funding like loans. You guys don’t ever invest in the companies themselves?
Jason Richards:
That’s Correct. That’s an important point. That’s actually the value that we provide, we don’t have any even pledge requirements in the business. We don’t have any interest in owning the business. We’re not a loan to own company, so we have no interest in taking over any of the assets of the business. We’re trying to finance more as a partner than any other avenue. We don’t want to have any ownership of the business, that’s not our model at all. It’s just strictly debt.
The benefit is it’s going to cost so much less to give up an interest payment versus an ownership interest in the company. We find that it’s at least half the cost and usually more a third of the cost of equity just in the short term. That’s not counting the longterm profit surrender that you have with an equity partner.
When there is an ownership interest, they call that mezzanine financing. There is generally a pledge where the control of the company is essentially surrendered immediately in the event of default, and so there is actually a lot more teeth in and reduced liability in a mezzanine style financing where you’re taking an equity interest, or even a pledge of interest. It increases our liability. We’re working more just from the standpoint on asset value as a result.
That’s why it’s real estate based, but the beauty of it is it’s not just what that property is worth now. In many instances, there is a ton of work that has to go into, especially with a grow facility, or processing extraction facilities, the equipment, et cetera, that goes into that and improves that value so much.
To give you an example of a loan that we’re funding here in the Seattle area, in a matter of a couple of weeks, the property was bought for 2.4 million. Their build-out costs were 3.6 million. It’s a very substantial large facility that they’re building out. We can finance based on the end value, so they’re able to fund a whole lot more of it than just the 2.4 that they bought, so we’re funding what amounts to more than a 100% of acquisition cost.
CannaCon:
When you say that it’s a real estate based loan, do you mean that they’re taking their property and using it as the collateral for that loan?
Jason Richards:
That’s exactly right, yes.
CannaCon:
Are there any restrictions on the type of property that you’ll accept as collateral for a loan?
Jason Richards:
Not so much restrictions, it’s part of the underwriting, of course. If it’s a property that we can see doesn’t have an ability to be purposed for that and so licensure is not available, for example, then a value in use as cannabis facility would be restricted. If you can’t actually do that with it, then we’re looking at just the value in general use, so it changes value. It changes the underwriting components of it.
We can finance real estate independent of it being a cannabis use facility, so we do that type of financing, but obviously if it’s a cannabis business it’s imperative that they can run the business at the end, so that’s part of the underwriting process. I wouldn’t say restriction. We could still do the financing, but it would have to be that they had a business model that supports the purpose.
CannaCon:
As a piece of collateral, while your goal is not to own the company, in the case of a default, you would take possession of the property?
Jason Richards:
Certainly, yeah, any lender would. Now, the beauty of our model is that we work as a partnership with these folks, with all of our business owners and investors. We have a very, very low default rate we’ve been very fortunate to achieve because of our high touch and our relationship driven model, we’ve been able to work with business partners in cannabis and investors, that have performed. We’ve had seven defaults over an 11-year period and we’ve done $500 million dollars worth of loans, so it’s equated to less than 1% of our loans have defaulted.
CannaCon:
That’s pretty good.
Jason Richards:
We’re doing better than the big banks did, especially during the economic downturn.
CannaCon:
You think?
Jason Richards:
Yeah. Yeah, that’s the goal. I mean, we don’t want that, so we’re not jumping into deals. We’re telling people it’s a bad deal if it’s a bad deal too. For some guys, if we can finance deals that make sense that the banks look at and say, it doesn’t make sense to us, because we can leverage with less capital and from the cannabis business themselves.
CannaCon:
Yeah. I mean it’s kind of funny. It’s like sometimes we’ll be talking to peers and they’ll start complaining about fees on a checking account, or restrictions by the liquor control board, or whatever. I look at them and say, “Dude, it beats prison.” I feel like we’re making a lot of strides here.
Jason Richards:
Right?
CannaCon:
I mean, just talking about getting equity financing for a cannabis producing business is bananas.
Jason Richards:
Yeah.
CannaCon:
It’s amazing.
Jason Richards:
Yeah, absolutely!
CannaCon:
Can you imagine getting a loan to grow weed 10 years ago, 20 years ago, 30 years ago?
Jason Richards:
Impossible. Underground financing from illegal operations is where you’re getting the money from, right.
CannaCon:
What would you say the average length of a loan is from your company?
Jason Richards:
The average length of the loan? Most of our loans are paid off in less than a year, some go two years.
CannaCon:
You don’t ever do any of the more traditional three, four, five, 10, any of those models?
Jason Richards:
Right, yeah, yeah. It’s not our model. We don’t have a pay down requirement on it, and so it’s interest only and that allows them to ramp it up. Our interest rates are double what the banks would charge, so it’s not a long term viable, I wouldn’t say a long term viable, it’s not a longterm goal usually for people to keep that amount of debt on the books at that interest rate, so it’s generally paid off quickly.
CannaCon:
It’s still cheaper than credit cards though, right?
Jason Richards:
Oh yeah. Yeah, it’s less than half of what a credit card costs you, exactly, yeah.
CannaCon:
Well, that sounds like a great advantage to a business owner trying to expand.
Jason Richards:
It definitely is, yeah. When you compare it, like I said, to equity it’s night and day.
CannaCon:
How do people get a hold of you if they’re trying to inquire about your services?
Jason Richards:
You can reach us at a leadfunding.com, L-E-A-D funding.com. We’re all over the country. As far as financing goes, we’re based in Denver. We’ve got a (303) area code number. (303) 834-3494. Email me [email protected]
CannaCon:
Cool. Thanks a lot. That was a lot of great information. Thanks for coming on CannaCon Radio.
Jason Richards:
Thanks for having us!
CannaCon:
You’ve been listening to CannaCon Radio where the cannabis industry talks business. Please don’t forget that you can find us on iTunes, SoundCloud, Spotify, everywhere else you that find podcasts. Don’t forget to like, subscribe and comment. You guys know the drill. You can also find us on our social media. Remember the easiest way to do that to hit us on our website, cannacon.org. Links are at the bottom on Facebook, Twitter, and Instagram. We really want to hear from you, so please like, subscribe, comment. Until next time, peace.
Jason Richards:
Peace.