Cannabis is a segment of real estate representing a $50 billion asset class, making it one of the largest new asset classes in the country
After the rollercoaster ride that kicked off 2022 on Wall Street, it's time to spend some energy understanding what's happening in the cannabis stock sector. With federal legalization continuing to be teased, as well as state-by-state legalization chugging along, what is next for the cannabis industry?
Today we sat down with Rob Sechrist, President of Pelorus Equity Group, the leading provider of value-add bridge commercial real estate loans to companies in the cannabis sector, and has more than 18 years of experience in the real estate finance industry. Rob’s primary role at Pelorus Equity Group is the development of strategic alliances with both private and institutional investors, formation of equity partnerships, coordinating the company’s growth into new markets, and as an underwriter of transactions. Rob also oversees the direction of the marketing programs to borrowers, brokers, and investors. Today, Pelorus raises several million a month through the company’s investors and equity partnerships.
Schaeffers: What major opportunities do you see in the cannabis industry?
Cannabis is a segment of real estate representing about a $50 billion asset class, making it one of the largest new asset classes in the country, with cannabis properties generating up to 10 to 15 times more revenue than non-cannabis tenants.
We see a huge investment opportunity in this arena, which is why we operate the largest privately held mortgage REIT in the sector. We have over a quarter of a billion dollars in assets under management, and our investment vehicle is private, meaning that our share price never changes. This means that there is no volatility on the balance of your principal investment – what you're going to get back when you redeem out of our fund. In addition to that, our target yield for our fund is 15% net IRR. We've achieved that every single year we've been in full operations, and we just achieved 15.8% for the last year.
Schaeffer's: What major obstacles do you see in the cannabis industry?
Cannabis-use buildings require very specific infrastructure (specialty-use equipment, HVAC/power, and water), so carefully managing these investments are at the core of a successful operation. Currently, federal laws cause many traditional lenders to stay away from financing cannabis real estate, especially since requirements for stand-alone financing of projects are unsustainable for a large scale lender. And even when financing is found, it’s still a complex and laborious process. Delays are typical and often cost millions of dollars.
Cannabis' legal status gives insurers and other third parties the ability to deny a claim. They also provide lender protections, such as errors and omissions insurance, title insurance, and property insurance, which state that if you're doing something federally illegal, the policies may be null and void. Getting your real estate situation right the first time is vital. If done incorrectly, you risk losing significant time and money. That’s why property owners need to find the right lenders to understand an opportunity, structure a logical solution, and execute a timely close.
Schaeffer's: What motivated you to join this stigmatized industry?
After working in the lending world for decades, we saw an opportunity when our local Congressperson, Dana Rohrabacher, passed the Rohrabacher-Blumenauer Amendment in 2014. We realized that cannabis was the largest newly created asset class for lending in the country, and after analyzing the space for a couple of years, we originated our first transaction in 2016. Shortly thereafter we became the first dedicated lender to the sector. We were often the first to do a lot of things in lending, both in product types and asset types, so this was something that was intriguing to us. We also believe in the many benefits cannabis brings to the U.S. and wanted to be a part of getting people off of opiates. So we had a vested interest on that side as well.
Schaeffer's: What do you think the next 'big thing' in cannabis will be?
One exciting trend is the ability to use more robust data to understand all the different markets for cannabis-use properties. Pelorus made a significant investment in developing this data and now has the most extensive real estate data available for cannabis-use real estate across the country. Pelorus made a significant investment to build our own proprietary database to pinpoint – in each state, county, city, or each of these zones – what types of licenses there are, who owns the licenses, their addresses, who owns the properties, where they're situated, who the lenders are, etc.. We wanted to know the current capacity for any one market, for different types of licenses, and know when the market was going to be approaching saturation.