(Kathryn Scott Osler, Denver Post file)

Pot property financing entices private investors

When some banks began calling commercial notes they held on properties leased to marijuana businesses, it opened the doors to private financiers willing to take on the fledgling industry and its associated risks.

From hard-money lenders — investors who offer short-term, high-interest loans — to publicly traded real estate investment trusts focused on marijuana clients as tenants, the lack of conventional financing has created a sector that’s gaining steam and drawing stares.

They are investors with an appetite for high risk and high returns, all of it hinged on an industry that’s been around for a few years — retail sale of medical marijuana has been legal since 2009, but the business began to boom Jan. 1, when recreational retail sales began.

Bankers struggled with the dilemma of how to finance a once-illegal industry, seeing difficulty in balancing the need for profitable investments with the requirement to do it legally. Marijuana possession, sales and consumption is still illegal under federal law.

The risk made banks, including Wells Fargo, give commercial clients an ultimatum: Drop the marijuana-related tenants of property financed with bank funds, or pay up the entirety of the loan.

“A couple of the bigger banks have a scorched-earth policy, moving immediately to eviction or simply calling the note, with no courtesy to allow them to do anything else,” said Robert Frichtel, a former commercial mortgage broker who is CEO of Advanced Cannabis Solutions in Colorado Springs. “And even the hard-money guys are sniffing around now.”

Real estate as leverage

If marijuana has the potential to be a multibillion-dollar business — and the early returns of state sales tax revenues alone seem to bear out the prediction — the land on which they sit has even bigger appeal for potential return.

For example, ACS in December bought a 5,000-square-foot steel building and parking lot on 3 acres near Pueblo for $450,000, financing $170,000 with a four-year private note.

With a medical marijuana grower as a tenant until 2022 — and a commitment for the tenant to pay property taxes and insurance while ACS builds an 8,000-square-foot custom greenhouse — rent is to top $100,000 a year, or nearly $1,000 a square foot.

Existing properties suitable to the industry — not any property will do — without any changes are also commanding higher prices.

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“What was $50 per square foot a few years ago is now in the $100 range, and there are multiple offers for them,” Frichtel said about the available properties that can accommodate marijuana clients.

Moving into and investing in the marijuana sector can be tricky, but using real estate as the leverage for a publicly traded company is savvy, experts say, mostly because it removes the risk that would come with owning a cannabis business.

In other words, serving the fringe is better than being smack in the middle.

A few companies like ACS — the first to play in the marijuana-landlord sector — have cropped up as a result. Many bought out already-established companies that were publicly traded, known as a reverse merger, and turned their corporate focus toward weed.

For example, Zoned Properties in Arizona is geared to buying properties and leasing them to cannabis companies, with druthers to move into Colorado. Arizona resident Marc Brannigan in September 2013 bought 91 percent of what was then Vanguard Minerals Corp., a publicly traded mining company with interests as far off as Mongolia, to create the new business.

Likewise, ACS was once Promap Corp., a provider of maps to the oil and gas industry. ACS sold off the mapping function of the business at the end of 2013, about four months after it acquired the Centennial-based company and moved it to Colorado Springs.

Shortly after, ACS announced it had acquired a $30 million line of credit from private investors to purchase properties.

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The timing to buy into commercial properties specifically for the marijuana industry couldn’t be better, with prices still below historic highs of a few years ago. But that appeal is also why things are moving so quickly.

“The speed with which the industry is growing and the number of players moving into it is phenomenal; it’s daily,” said Kerry Blasdel, a real estate investor in Colorado Springs who has stepped into the competition.

“A very private network”

But not everyone is a buyer. Some lenders simply want to move in for a few quick bucks and move on.

They are the hard-money lenders, with terms reminiscent of the 1970s — rates hitting 16 percent on interest-only notes that are for two or three years.

“It’s the result of what the banks won’t do,” said Blasdel, who’s taken on a few hard-money loans to bridge his financing on properties he’s leasing to the marijuana industry.

That bridge is for when regulators will come around and allow the industry to access banking services like any other business.

Until then, private money is about the only source for landowners such as Blasdel to acquire financing, albeit short-term. The funders are often private-equity firms with a band of high-income investors who shun spotlight or inquiry.

“They are behind the scenes, a very private network for a reason,” Blasdel said. “They’re not on websites, always through referrals.”

Three such lenders reached by The Denver Post were less than enthused about discussing their business openly, though property records show their terms.

“How we assess risk and how we do it is part of our investment program, and we simply don’t discuss it,” said Robert Amter, founder of Montegra Capital Resources, which public land records show has a handful of notes to owners of buildings that house marijuana operations.

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One of them is a two-year, $600,000 loan on a building in Aurora that leases to a retail marijuana operation. The interest rate was not included in the recorded documents.

Blasdel said his real estate funding comes from two individuals who are willing to risk it all on the association with marijuana — and reap the benefits from the terms of their loans. Industry standards for hard-money loans seem to average about 14 percent to 16 percent, and are usually for no more than 65 percent or 75 percent of the amount needed.

“One is amortized over four years,” he said of the notes, refusing to reveal their interest rates. “The other is an eight-month call, interest only, the worst terms I’d ever had in my life.”

Weighing the risk

But the risk is worth it, he said, though he realizes he’ll need new funding when the notes come due.

“It’s the biggest wild card in any industry, with the threat of the feds coming in and stealing your property, a loss on the order of a few million,” he mused.

The question mark is whether the federal government, already tense and terse about legalized marijuana in several states, will scoop up industry proceeds — cash and land included — should a business have questionable or illegal ties. Federal laws against drug trafficking say property used in an illegal enterprise is subject to seizure — whether the criminals own it or not.

“I owe a debt of gratitude to these guys, even if they’ve screwed me on the deal,” Blasdel said of private lenders. “Without them, the rest of the chain doesn’t exist.”

Frichtel at ACS sees his business as filling a necessary niche: “It’s like selling blue jeans and shovels to the miners.”

David Migoya: 303-954-1506, dmigoya@denverpost.com or twitter.com/davidmigoya

This story was first published on DenverPost.com