Cannabis has long been considered a green industry by the masses.
As a standalone item, the cannabis plant is very environmentally friendly. This is particularly true when it comes to hemp, a variety of the cannabis plant with a huge range of environmental benefits. An extremely versatile and robust crop, hemp uses far less land and water than other common crops and even captures carbon dioxide and regenerates soil. Approximately 20,000 products can be made from its seed, fiber and flower, from biodegradable plastics to food supplements, meaning all in all – it is an environmentally and economically sustainable crop
Yet as with most things, when cultivated in mass, the cannabis plant isn’t quite so green anymore. With its high demand for water, land and artificial lighting, cannabis cultivation can actually leave a large environmental footprint (this does however, pale in comparison to the food industry).
What’s more, many firms do not properly understand how to correctly treat and apply chemical fertilizers and pesticides, and use a machine gun approach to growing their crops. This can result in unnecessary bleed waste, which in turn can kill micro-organisms and contaminate soil, water and other vegetation. Packaging has also been cited as particularly environmentally unfriendly in the cannabis industry, with several organizations using single use plastic for their products, due to the strict guidelines attached to packaging products of a medical or pharmaceutical nature.
A field of hemp plants, (Cannabis sativa L.)
So as the CBD, medical and even adult use cannabis industries become increasingly commercialized across the globe, there is risk cannabis might start moving in the wrong direction when it comes to sustainability.
Still relatively new, the cannabis sector is nascent and exciting, with the global cannabis market size valued at $10.60 billion in 2018 and projected to reach $97.35 billion by the end of 2026. Yet as the industry grows, so too will its footprint.
I’ve seen it first-hand. The industry being hugely competitive, so for companies vying for precious investment and fighting for a spot on the stock market, often, sustainability is the last thing on their minds. In my opinion, this is wrong. Not only morally – we all play a part in looking after our planet – but it’s also a poorly calculated business decision.
It’s no secret sustainability and ESG have become a hot topic when it comes to investing. Just yesterday, Credit Suisse told CNBC that the pandemic has accelerated the trend towards sustainable investments. The bank has even introduced an exclusion strategy whereby those investing can actively exclude controversial sectors.
So with the environment firmly on investors’ minds, cannabis firms need to realize that actually, if they want to secure the support of forward-thinking shareholders, they need to consider more than just the bottom line and truly take the sustainability of their operations into account.
Outdoor growing can require less energy inputs
Luckily, there are practices which cannabis cultivators can take on board to reduce their environmental footprint. To start with – growing outdoors. This enables cannabis farmers to harness the sun’s natural power, saving them money on electricity bills and increasing energy efficiency. With cannabis being a rather thirsty plant, water use is also a major concern – although this is nothing compared to the amount of water used by cotton plants. However, it is in fact possible to design indoor operations which recycle close to 100% of the water use, including capturing the perspiration from plants – at AltoVerde this is something we are looking to implement in our upcoming Macedonian sites.
Firms keen to improve on sustainability should also cultivate in a way in which soil is fully replenished and repaired after use – this is called regenerative farming, and it’s extremely effective for maintaining and improving soil quality, biodiversity and crop yields. Another interesting concept is the use of hemp. Some farmers have started using hempcrete – a concrete-like material made from harvested cannabis plants. As if the recycling aspect wasn’t good enough, hempcrete is actually carbon negative, meaning the production of hemp for hempcrete removes more carbon from the atmosphere than it produces.
It’s been incredibly exciting to be a part of the cannabis industry and I am excited to watch its growth in the years to come. It’s taken hard work for the sector to improve its traditionally poor image and to be accepted across the globe, so now, cultivators must lead by example and stop industry from being branded as one which pollutes. By transitioning to more environmentally sustainable practices, firms will be doing their bit for the planet, attracting the investors of tomorrow and ensuring their own success for years to come.
In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices in order to navigate a rapidly changing landscape of regulations, supply chain and consumer demand.
The California legal flower market is the largest in North America. According to recent BDSA data, monthly cannabis sales in January 2021 were $243.5 million. Flower sales represented 35.6% of overall sales, or about $87 million, representing a $1 billion yearly run rate for 2021 flower sales in California.
Union Electric was founded in California in 2020 as one of OpenNest Labs’ first incubator brands. Its model is uniquely asset-light, and focused on filling an area of opportunity with a consumer-first approach, aimed at an underserved market: the working-class customer. The name Union Electric was inspired by the punching-in and punching-out aspect of working a union job — more specifically, the average cannabis user’s job. The name also represents the brand’s union of stakeholders: Customers, cultivators and retailers alike, working together to provide affordable, quality products.
Max Goldstein is the CEO of Union Electric and Founding Partner at OpenNest Labs. Max incubated Union Electric at OpenNest Labs, a cannabis venture studio he helped co-found, and launched the brand in 2020 the day after COVID lockdowns began in California. Prior to Union Electric, Max worked at Google managing a 90 person, 12-market partnerships team.
Aaron Green: How did you get into the cannabis industry?
Max Goldstein: I’ve had a fun entrepreneurial and professional journey. I started my career in my 20s with Google working in the marketing department sitting at the intersection of new product development and customers. During that time, I really learned the ins and outs of bringing products to market and building brands. I had to understand how to value and champion the customer, or the user. At Google, I was sitting at the intersection of people building products that are affecting billions of people’s lives and users and customers that potentially have really cool insights and feedback. It was an incredible learning experience. I was able to focus on what I’m good at, which is that early stage of businesses and most importantly, listening to the consumer and developing products and services that they ultimately really want.
Max Goldstein, CEO of Union Electric and Founding Partner at OpenNest Labs
Near the end of 2018, I co-founded OpenNest Labs, a cannabis venture studio. We came together as a four-person partnership to form OpenNest, as an assortment of skill sets, with all of us contributing an area of focus that we could really combine our experiences to take focused and concerted efforts at building brands that resonate with different consumers across various form factors in cannabis and health. My partner Tyler Wakstein has been in the cannabis industry for several years and helped launch the brand, hmbldt (which is now Dosist) and a number of other projects in the cannabis space.
Green: Was Union Electric an incubation project out of OpenNest?
Goldstein: Yes. Union Electric is the first project we incubated out of OpenNest. We launched the day after the pandemic. So, it was interesting timing.
At Union Electric we’re focused on the core, everyday consumer of cannabis. I think a lot of folks, particularly the new money that have come into the industry, have often focused on new form factors or things that they think the new cannabis consumer is going to enjoy or appreciate. Because quite frankly, that’s their level of familiarity with the industry. For us at Union Electric, we want to hit the end of the market with exactly what they want and that is high-potency, affordable flower with a brand that really stands for something and has values.
Union Electric is positioned as an advocate for the legal cannabis industry as a whole. We look at the stakeholders and the work that needs to be done across the board. The idea of just being one member of the value chain and not trying to ultimately uplift and elevate everyone in that value chain, it’s just not going to work in cannabis. We’ve seen a lot of people trying to go at this alone and I think the pandemic, if anything, showed that you’re only as good as your partners. We truly believe that the investment in our partners, in the local communities and everyone that’s really touching this industry is critical to ultimately building success for one company because a rising tide raises all ships.
Green: How did you settle on the name Union Electric?
Goldstein: One of the things that we wanted to do was focus the brand on who we see as the core consumer, which is somebody that is working hard, like a shift worker punching in and punching out and putting in the long hours on a daily basis and using cannabis as a critical part of their personal wellness and relief. There are elements of that which we certainly want to tap into. The “Union” represents our stakeholder approach, which is, all of us are in this together and our tagline “roll together” represents that. The “Electric” part is what we’ve seen cannabis sort of representing culturally, and for people more broadly. This is an exciting product that’s going to change a lot of people’s lives and, and I just don’t think there’s anything else in our lifetimes that we’re necessarily going to be able to work on from a consumer-packaged goods perspective, that’s going to change as many people’s lives. It’s electric. That’s how we came up with the name.
The coloring and a lot of the brand elements that we focused on were about providing transparency and simplicity to the marketplace: big font and bold colors. There are little nuances with our packaging, like providing a window just so people can see the flower on our bags. We look at the details and made sure that we’re ultimately out of the way of the consumer and what they want, but providing that vehicle that they’re really comfortable with.
Green: You have an asset-light business model, focusing on brand and partnerships. How did you come to that model?
Goldstein: I think everyone who’s operating and working in cannabis right now is looking at strategy and what the model is that’s going to work for them. We’re ultimately going to find out what works, which is why this industry is so fun and exciting. Our specific approach is really under the assumption that vertical integration in a market that’s maturing as quickly as California is going to be hard, if not impossible – it’s just too competitive. There are too many things going on in order to be successful in California. You have to be really good at cultivation, really good at manufacturing, really good at distribution, and then ultimately, you have to be able to tell a story of that process to ensure sell-through and that you really resonate with the consumer.
I think the big, missed opportunities that we’re seeing are that a lot of great cultivators are not marketers or storytellers. They really do need people that are there to help amplify and provide transparency to their stories. There are amazing stories out there of sacrifice and what cultivators have done to create a new strain. We all enjoy Gelato. What’s the process to make that happen or to create any other new strain? It’s fascinating. It’s too hard for a lot of these cultivators to go out and tell that story themselves. So, we act as a sales and marketing layer on top of the supply chain to provide visibility, transparency and trust with the consumer so that they know who grew their product, how it was grown, when it was cultivated and that they can build a real strong relationship with that cultivator as well.
It’s also hard to be a brand that’s using 19 different suppliers, selling the same genetics and expecting the same results. As an example, we’ve gotten Fatso from one of our partners, Natura. We’ve also gotten Fatso from Kind Op Corp (fka POSIBL). We renamed one of the strains – by adding a number on the end – just so that the consumer knew that we’re not saying that this is the same product, because it’s not. It’s from a different farmer and there’s going to be differences. While it does create a little bit more complexity for the consumer, we ultimately believe that every consumer has a right and will expect to know that type of information in the future.
Green: You launched Union Electric one day after the COVID lockdowns began in California. How did you navigate that landscape?
OpenNest Labs Logo
Goldstein: A lot of praying to the cannabis gods! It was really an incredibly challenging and difficult time. We were all concerned about the impacts of the virus. There were moments where we didn’t even know if dispensaries would be open, particularly in states that just legalized. You went from something being completely illegal to an essential business in 12 months. As a team, we were just trying to hold on to our hats and focus on product and partnerships.
Fortunately, with a brand like ours and the price point that we’re operating at, we just needed to consistently be on the shelves and available, and to be present with the bud tenders. So, we focused on that and shoring up our supply chain and just trying to wait it out. COVID forced a lot of cannabis companies to make a lot of decisions quickly and I think in some ways, because we have not been in the market for 24 months under one paradigm, we were pretty quick to be able to adjust and keep the team super lean to fit the emerging and rapidly changing environment. We learned a lot. We focused on partnerships and we leaned into the model that we set out to build which is being asset-light and focusing on the sell-through.
Green: I understand you have a 2% giveback program. Tell me about that.
Goldstein: The 2% giveback program was something that we wanted to put on the bag from day one. It’s on every bag that we made and put out into the market. We’ve seen a lot of cannabis companies come in and invest tens and hundreds of millions of dollars in infrastructure. Then, month 24 they realize “oh, crap, I gotta figure out what I’m going to do to get back and actually tap into the issues that are most important to cannabis consumers.” These are issues like social equity, equitable development of the industry, and ensuring that cannabis companies and its owners are active, responsible members of society.
What we’re going to focus on with our giveback program is working with our supply chain partners. We highlight the local communities, because when you look at the landscape in California, two thirds of its municipalities still don’t allow cannabis operations. We’re in a heart and minds battle still, even here in California, just proving that the operators here are not criminals and that they’re not going to bring negativity to local communities.
As we scale in California and scale to other states, the giveback program for us is a platform and a medium to work with our supply chain partners to make sure that we’re giving back and investing every step of the way. As founders and operators, it’s how we show that we are being mindful of the importance of equitable development of the industry. Ultimately, prosperity is going to come if everyone is getting a piece of the pie.
Green: What are you most interested in learning about?
Goldstein: I’m a student of history (I was a history major) and I was very fortunate to be part of a big evolution of technology development starting in 2011 working at Google and other tech companies. In some ways, this is the second generational industry that I’ve been a part of, and I have a lot of regrets about how the first one developed – not that I necessarily was the chief decision maker. The idea that large tech companies would always act responsibly (i.e. “Don’t be evil”) didn’t really pan out. I think it was an ignorant thought process as a person in my young 20s.
What I’m most interested in learning is: Can the cannabis industry develop consciously? Can you keep the greed and the things that bring industries down at bay? How can I, as an operator, be the best facilitator of that future? I’m always thinking how I can continue to bring in the people around us and around me as the CEO of Union Electric to ensure that we’re always focused on that.
Green: Great, that concludes the interview. Thank you, Max.
Goldstein: Thanks Aaron.
From Union Electric: Union Electric Cannabis will be offering their first Regulation CF crowdfund raise in an effort to give everyday consumers a stake in one of California’s fast growing cannabis brands. Due to the ever-evolving legal status of cannabis in the US, there have been very few opportunities for individuals to invest early on in American cannabis brands. This decision to give everyday cannabis smokers access to investing in their favorite cannabis brand (for as little as $100) is a natural manifestation of Union Electric’s mission: Collective power and championing accessibility for the plant. You can learn more about their raise by visiting https://republic.co/union-electric
Bespoke Financial was the first licensed FinTech lender focused on the legal cannabis industry. Founded in June of 2018, Bespoke offers four types of lending products: Invoice financing, inventory financing, purchase money financing and a general line of credit. With just over two years of originating loans to clients, they have benefitted from being a first mover in the cannabis lending space.
George Mancheril is the founder and CEO of Bespoke Financial. He has over fourteen years of experience in finance, with a special focus on asset-based lending, off balance sheet financing of commercial assets and structured credit. Following a stint with Goldman Sachs, he worked at Guggenheim Partners Investment Management’s Structured Credit Group in Los Angeles where he worked on structuring esoteric asset financing for a variety of commercial assets including airplanes, container leases and receivables.
Since 2018, Mancheril and his team at Bespoke Financial have deployed over $120 million in principal advances without any defaults and across eleven states. We sat down with Mancheril and asked him about the history of his business, how it’s been received so far and how the past few years of financial activity in the cannabis sector might shape the future.
Cannabis Industry Journal: What is Bespoke Financial in a nutshell?
George Mancheril: Bespoke Financial is the first licensed FinTech lender focused on the legal cannabis industry. Bespoke offers legal cannabis businesses revolving lines of credit that address the top problem in the industry – lack of access to non-dilutive, scalable financing to capitalize on growth opportunities and improve profitability. Due to the federal illegality of cannabis, traditional banking institutions cannot work with our clients even though these operators are working within the legal regulatory framework of their state. Bespoke solves this problem for businesses across the cannabis supply chain along with ancillary companies affected by the lack of access to traditional capital markets.
CIJ: How does your company help cannabis businesses?
George Mancheril, Founder & CEO of Bespoke Financial
Mancheril: Bespoke Financial offers 4 lending products – all are structured as a revolving line of credit but each allows our clients to access capital in a unique way based on their specific needs. Our Invoice Financing product, allows businesses to borrow capital against their Accounts Receivables in order to manage general business expenses, particularly if the borrower’s business growth is slowed due to a long cashflow conversion cycle. Inventory Financing and Purchase Money Financing allow our clients to finance payments to their vendors, which helps our clients achieve economies of scale by increasing their purchasing power. Lastly our general Line of Credit allows for the most flexibility for our clients to utilize our financing by either financing payments made directly to vendors or drawing funds into the client’s bank account to manage business expenses.
CIJ: I know the company is only a few years old, but can you tell me about your company’s success so far?
Mancheril: [Clarification, Bespoke was founded in June 2018 so we’ve been around for 3 years but we now have over 2 years of originating loans to clients.] Bespoke Financial has benefitted by being a first mover in the cannabis lending space as the first licensed lender specifically addressing the financing needs of cannabis operators, starting in early 2019. Over the past 2 years we have developed and refined our proprietary underwriting model to identify over 50 active clients spanning the entire cannabis supply chain. Since inception, Bespoke has deployed over $120 million in principal advances without any defaults to date and expanded our geographic footprint across 11 states. Our growth and success highlights our company’s expertise in structuring financing solutions which address the unique capital needs of cannabis companies.
CIJ: Can you discuss how the recent M&A activity, current and recent market trends, as well as the pandemic has affected your company’s growth?
Mancheril: The cannabis industry overcame a variety of challenges presented by the COVID-19 pandemic, ending the year with record sales in both new and existing markets. The support from state and local governments, evidenced by the industry’s essential business designation and the easing of regulations, coupled with increasing consumer adoption of cannabis combined to increase the industry’s demand for capital throughout the pandemic. Bespoke was well positioned to partner with cannabis companies across the supply chain and was proud to help our clients thrive during this pivotal period.
Jeeter was able to grow sales over 1,000% within the first year of working with Bespoke
Coming into 2021, the cannabis industry and investors shared a very positive outlook for the future based on the previous year’s experience and expectations of material easing of federal regulation. While M&A activity in the industry has increased over the past 6 months, the overall consensus has been that both the frequency of exit opportunities and the corresponding valuations will continue to increase as federal decriminalization opens new sources of capital and materially changes investors’ valuation assumptions. In general, we’ve seen cannabis companies focused on both capitalizing on the increasing opportunity presented by the industry’s organic growth and maximizing the benefits of future regulation changes by utilizing the resources and capital currently available to increase revenue, expand into new markets, and work towards profitability. All of these factors have further compounded the industry’s demand for financing and we expect to see continued growth in our lending activity in line with the industry’s growth.
CIJ: Who has been your most successful client?
Mancheril: We have a handful of cases studies and client success stories here on our website. One of the most exciting growth stories we have seen has been our client DreamFields whose in-house brand, Jeeter, is now the #1 pre-roll brand in the state of California. Prior to working with Bespoke, the brand was not ranked in the top 25 but was able to grow sales over 1,000% within the first year of working with us and achieve the #1 spot in their product category.
If you are interested in adding a new delivery option for your cannabis dispensary, choosing a third-party service is a great move. Generally speaking, the most significant selling points of third-party delivery services are overhead cost and convenience.
Not only will third-party delivery services run your entire courier operation under a single platform, but they will also streamline your sales process with the latest technology. In addition, working with a third-party vendor will help you avoid financial risk with workers’ compensation and auto insurance expenses.
Please consider the following points to build a successful partnership with a third-party cannabis delivery service.
Research Your Local Market Regulations
Before you can outsource a delivery option for your cannabis dispensary, you need to research if it’s legal to do so in your given market. Whether medical or adult-use, each state has unique regulations for delivery services. In addition, individual counties and municipalities within these states also have their own rules concerning cannabis delivery on a more granular level.
As an illustration, Denver, CO, has had an adult-use cannabis market since 2013, but the city just passed legislation approving delivery services. So, starting in late summer 2021, third-party vendors will be the only businesses allowed to deliver cannabis in Denver legally. As can be seen, just because cannabis is legal in a particular state doesn’t mean delivery is always an option.
How Do I Vet a Potential Delivery Partner?
You must be discerning when starting a partnership with a third-party cannabis delivery service. As these delivery companies will be representing your brand in the field, you want to make the best choice possible. Luckily, there are some specific parameters you can follow in vetting a potential delivery partner.
License: Perhaps the most critical part of vetting a delivery partner is ensuring they have the appropriate license. Especially in hotbeds like California, countless unlicensed cannabis businesses are in operation, including delivery services. Therefore, asking to see their paperwork should be the very first step in vetting.
App & User Experience (UX): Taking a good look at the User Experience (UX) provided by a third-party vendor’s app or website is a great way to vet them. In the end, delivery services are all about convenience. If their ordering software is robust and offers flexibility and great reporting, they will likely provide you the springboard to retain your repeat buyers.
Payment processing can be a challenge in retail
OSHA Certification: Another critical factor to consider when vetting a delivery partner is OSHA training. Those companies who have taken steps to train their employees on safety protocol appropriately will likely make good partners.
How Does Online Ordering Work with My System?
Payment processes for cannabis dispensaries are incredibly complex. Moreover, since cannabis is still federally illegal, major credit cards and banks do not accept charges from dispensaries. Because of such complexities, the prospect of accommodating deliveries might prove to be a challenge.
Enter Scarlet Express. Third-party cannabis companies like Scarlet Express can integrate with your established system to seamlessly add delivery payments. They even offer customizable software that integrates with your menu provider and POS system while also importing essential brand elements like logos and colors.
If you are a small cannabis dispensary that has never developed online ordering, certain third-party vendors can also help you build out an eCommerce page on your website.
What About Compliance & Seed-to-Sale Tracking?
Compliance is one of the essential elements of running a successful cannabis business. However, compliance regulations can get tough to follow when you begin dealing with third-party delivery companies, namely because cannabis products change hands several times before they are finally sold to the consumer.
A plant tagged with a barcode and date for tracking
The state has thoroughly vetted any third-party delivery service that has received a license. Therefore, not only are they up-to-speed on compliance protocol for your given market, but they are also trained on the appropriate seed-to-sale software. With these controls in place, you can trust they assume legal responsibility for cannabis products after leaving the dispensary.
To operate compliantly, third-party delivery services time-stamp their orders, which can then be tracked through GPS in the delivery car. Finally, all cannabis products are stored within a secure lock box that is only opened at the time of delivery.
Adding a delivery option for your cannabis dispensary is a great way to entrench yourself with your clients. Working with a third-party delivery service is a painless way to expand your business.
When considering a partnership with a cannabis delivery service, be sure to thoroughly vet them and make sure they share your goals and vision. In doing so, you will ensure an invaluable partnership that will continue long into the future.
The cannabis industry in the United States represents about a $50 billion asset class making it one of the largest new asset classes in the country. Commercial real estate lending is a key enabler for companies seeking to expand and scale. Pelorus Equity Group is one of the largest commercial lenders in cannabis with over $170 million deployed since its first cannabis transaction in 2016.
Since 1991, Pelorus principals have participated in more than $1 billion of real estate investment transactions using both debt and equity solutions. Pelorus offers a range of transactional solutions addressing the diverse needs of cannabis related business operators. While most cannabis private equity lenders focus on real estate acquisition and refinancing, Pelorus has leveraged its experience in more than 5,000 transactions of varying size and complexity to offer value-add loans, a rarity in the industry.
We spoke with Rob Sechrist, president of Pelorus Equity Group and manager of the Pelorus Fund. Rob joined Pelorus in 2010 after several years in the California real estate market. In 2018, Pelorus launched the Pelorus Fund where Rob is currently the manager. The Fund converted to an REIT in 2020.
Aaron Green: How did you get involved in the cannabis industry?
Rob Sechrist: Pelorus is a value-add bridge lender. We’ve been lending for a long time, originally in the non-cannabis space. We’ve done 5000 transactions for over a billion dollars – more than a lot of banks.
In 2014, our local congressman Dana Rohrabacher passed the Rohrabacher-Blumenauer Amendment that defunded the Department of Justice from prosecuting any cannabis related business in a medically licensed state. We were a supporter of that legislation and once that passed, we took a serious look at utilizing our expertise in being a value-add lender and applying it to the largest asset class of real estate that is newly coming about today. That cannabis related asset class is about $50 billion.
Rob Sechrist, president of Pelorus Equity Group and manager of the Pelorus Fund
We decided that we had the expertise to move into this space and to build these facilities out for our borrowers so that the cannabis use tenants would have a fully stabilized facility and make it operate. After the amendment passed in 2014, by 2016 we had originated our first transaction. Since that time, we’ve originated 51 transactions in the cannabis space for over $177 million so far. It wasn’t that big of a pivot when you’re just providing the value-add loan.
“Value-add” in the loan business means that a portion of the loan amount, let’s just say is a million dollars, maybe 250,000 of that, is a pre-approved budget to go back into the property. In cannabis property those are typically tenant improvements and/or equipment to fully stabilize that tenant. So, we’re the first fully dedicated lender in the nation exclusively to cannabis and we’ve done more transactions than anybody else in the nation.
Green: What are some challenges of cannabis lending compared to traditional lending?
Sechrist: The number one challenge in cannabis is that you must disclose to your investors that you’re originating the loans to cannabis use tenants. Many people have concerns that lending indirectly might be federally illegal. If you did not disclose that to your investors when you form that capital stack to fund these transactions, you’re going to run into issues. So, you would need to create a vehicle where you disclose to your investors that you’re intending to lend into cannabis and it’s still federally illegal. Doing one-off stand-alone transactions deal by deal is not sustainable if you’re going to be a large lender.
There are other challenges. Because cannabis is still federally illegal, it gives insurers and other third parties the ability to deny a claim, or certain lender protections. Some examples include errors and omissions insurance, title insurance, property insurance, etc. and all of them say in those policies that if you’re doing something federally illegal, then the policy is null and void. So, you must think your way through very carefully all the things that could potentially be an issue. You also have to disclose to those third parties and find a way to get them to acknowledge it to make sure you have the coverage if you ever have to make a claim. That’s a very difficult process.
Green: How has the investor profile in cannabis lending changed over time?
Sechrist: Our fund was structured to allow for institutional capital from the inception. We were able to do that because we are completely non-plant touching. Our fund only lends to the owners of commercial real estate. We do not lend to any cannabis licensed operator directly whatsoever. Our borrowers – the owners of the properties – would then have a lease agreement with the cannabis use tenant. Even if it’s an owner-operator, those are separate entities. That’s how we’ve distinguished ourselves.
Pelorus Equity Group, Inc. Logo
Regarding the investor profile, the first $100 million plus we raised was primarily from retail investors who were individuals writing checks up to a million dollars. Once we had three years of audited track record and our fund was $100 million, we then pivoted over to family offices and institutional investors and pension funds. We’re now working primarily with those types of investors.
The reason that we started with retail investors is that it’s very easy for me to explain our model to a single decision maker and answer their questions. Once I move into family offices or institutional investors, the opportunity goes to a credit committee where I’m relying on some other party to educate the investor about our investment. It’s enormously challenging at that point if it’s not me doing the talking. I know the answers, but I’m having to rely on somebody else to answer questions. We’ve tried to educate everybody we speak with and craft our documentation in such a way that even when it’s not myself answering the questions directly, people can understand how we thread the needle through some of the legal hurdles.
Green: How do you prioritize deal flow, and what are the qualities of a successful loan applicant?
Sechrist: We typically maintain a pipeline of around $150 million in transactions at any one time.
Applicants must have real estate. We’re not doing business loans or operator loans directly to tenants or business operations. So, that’s the starting point. We want a real estate piece of collateral where we feel more than comfortable with the loan-to-value and ratios and the loan to cost and other figures, that we feel that this transaction is going to be a success for our borrower and ultimately the tenant.
Next, we will only work with very experienced operators who have a proven track record where this is not their first transaction. Ideally, we are working someone who is looking to expand their operations and who is ready to either move from being a tenant of their previous facility and buying their next facility.
The next aspect that we’re looking for is the strength of the borrower’s guarantor. They must be able to qualify to support that transaction. Many of our transactions are millions or 10s of millions of dollars. You must have a sponsor that can support that size of a transaction.
Green: What sort of value-adds should a cannabis property owner look for in their lender?
Sechrist: Most people that are looking for loans are only familiar with getting loans for themselves on their owner-occupied house. Most loans have points, they have a rate and a term, loan-to-value and things like that.
“We wanted to make sure that when we underwrite the transaction, that every single piece of capital is necessary to get that facility all the way to where that tenant can start generating their first crops and make their lease payments.”When you move into construction loans or value-add lending, there are other elements that are more important than the pricing of the loan. The number one thing is to get that property fully stabilized and built as quickly as possible. Cannabis tenants are generating 10 to 15 times more revenue per month than non-cannabis tenants.
If you go to a bank and borrow money it may be a third of what it costs to borrow from us, but they process draws maybe once a month. So, if you’re having to advance the money for improvements of the property, and then the bank reimburses once a month, at a certain point you’re not going to be able to advance any more money until you get reimbursed. The project comes to a stop. So, in your mind, you might have saved an enormous amount on the pricing of the rate, but it’s costing you dearly in revenue and opportunity costs. We typically process 50 to 100 draws post-closing on transactions, and we get that facility built and the money reimbursed to all the contractors on a multiple-times-a-week basis. It’s happening in real flow all the time.
A typical problem for a tenant is that the tenant improvements are orders of magnitude higher than a non-cannabis tenant – anywhere from $150 to $250 per square foot. In addition, the equipment is often enormously expensive as well. It’s tough to put money into a buildout for a building that you may not own. Our vision at Pelorus was, let’s not force these tenants – the cannabis operators – to raise equity at the worst possible time when they’re not generating revenue through the facility. Let’s shift that capital balance for those tenant improvements and equipment from the from the tenant to the owner of the building, which is where it’s secured and adds value to that building anyway. Our vision was to shift that money from the balance sheet of the tenant over to the owner of the real estate so the tenant didn’t have to sell equity to come up with that money. Then the tenant is paying for the improvements in the lease rate and the borrower is paying for improvements in the note rate. And so we’ve shifted tenant improvements from being an equity component to now it’s just priced in the debt. This way you know what the terms are and you know what your total exposure is there.
We wanted to make sure that when we underwrite the transaction, that every single piece of capital is necessary to get that facility all the way to where that tenant can start generating their first crops and make their lease payments. Most of our peers in the space don’t look at it that way. They just do the acquisition or the refinance. They don’t do anything for the tenant improvements. They don’t do anything for the equipment. The tenant is left out there to either raise that equity or the borrower – the owner of the real estate – is having to come up with that additional capital on their own. We think you’re set up for failure in that circumstance. So, we blend all that into one capital stack. It’s important that the tenants can get all the way up to being able to cash flow and support that facility and be fully stabilized so they can refinance into a lower cost bank or credit union transaction.
Green: What federal policies and trends are you monitoring?
Sechrist: First, I think that it’s important to remind people that the Rohrabacher-Blumenauer Amendment has protected everybody from any prosecution. So, there’s no jeopardy out there that exists. The second thing I like to tell people is there are 695 banks on FinCEN’s website of cannabis Tier 1 depositors, and of those, we’re tracking numerous FDIC insured state banks and credit unions that are lending directly. We’ve been paid off by banks.
So, there’s this massive misconception that there’s no banking at all and that everything is happening by cash. The only cash buildup that happens is at the retail dispensary level because credit cards aren’t allowed for retail sales at the dispensaries. Out of the 2,000 transactions that we’ve either processed or reviewed, not one has ever not had banking set up. So, it is a big misnomer that there’s no depositor relations for Tier 1 banking, which is plant touching.
Tier 2/3 depositors are ancillary, which is what we are at Pelorus. There are 100 private lenders and dozens and dozens of state and federal credit unions or state banks and credit unions, not federal, that are FDIC insured and lending. Those banks are difficult to get loans from because they only want to do urban environments. They want to do fully stabilized companies and they want to use alternative views and the facility has to have seasoning for cash flow. It’s difficult to qualify for them. So, banking and lending exists out there, and most people are not aware of that.
Green: What are you most interested in learning about? This could be either in cannabis or in your personal life.
Sechrist: My two passions are snowboarding and racetrack driving. I just came back from the Mille Miglia race in Italy, and I do a lot of driving on the racetracks. I’m always looking to learn from those experiences.
In the cannabis sector, social equity programs are happening across the nation and cannabis licenses are being issued to operators. We would like to help participate in some system of educating these applicants that win the awards. Lending to an owner of a property who just won a license but has no experience is going to be problematic. Somebody needs to be thinking that out and making sure that these people that win have enough experience and education to set them up for success. Cannabis is one of the most complicated businesses ever, and they’ve got this license as their ticket, but they need to know how to make sure they’re going to be successful.
Cannabis has always had it tough when it comes to marketing. Part of it is simple logistics. A DTC playbook, heavily contingent on growing a brand’s audience and pushing folks to purchase products through digital marketing, isn’t a possibility for them. Despite its mainstream acceptance, most large ad platforms like Facebook and Instagram won’t touch it because of its tenuous legality. Banner ads don’t convert and only end up on specific platforms like Pornhub or Weedmaps anyway.
PlugPlay, a California cannabis brand, stays relevant with creative posts like these on Instagram
And because the legal status changes on a state-by-state basis, it’s extremely difficult for a brand to span across multiple markets. Just think: why would someone living in Florida care about a cool cannabis brand in Detroit if they weren’t in that industry or have ties to that state? This also makes influencer marketing tough because people aren’t finding the coolest people in their respective states to follow. They’re just finding people they think are interesting.
That leaves budtenders – point of sale experts – that hold a huge position of educating and steering folks towards products. Most folks are newer to cannabis – or cannabis has grown up a ton since their past casual experience with it. Budtenders offer an informative, hyper-local solution with extremely limited reach to a narrow market.
But the future shows promise. A new wave of platform marketing has emerged with new formats and lots of room to cultivate and grow for cannabis brands. With a little understanding of what’s driving the success of social media newcomers and evolving mainstays, cannabis companies can potentially find new avenues for marketing and brand-building success.
Going Native
There’s currently a lot of opportunity through the larger cannabis retail and native ordering apps – ones like Weedmaps, Leafly and others that have widespread brand recognition within the cannabis community and a growing array of social media-like features. These are places that already segment according to markets, with a built-in, educated audience open to creative approaches to branding and marketing.
These types of apps are also becoming the norm more and more. Especially since the pandemic, dispensaries are doing most of their volume through online orders and pickup. As a result, making sure you show up, look great and convey your unique position on these platforms is incredibly important.
Listening and Learning
Whether it’s Clubhouse or other upcoming rivals on the horizon, audio platforms are great because they can serve as a means to have an honest, direct and enlightening conversation about cannabis. This is great news for budtenders who can help a brand expand their reach by facilitating these sorts of conversational consumer relationships. As the cannabis market matures rapidly, people will need a safe place to normalize consumption, talk about dosage or about how normal consumers (not just stereotypical potheads, but every day, “constructive members of society”), are able to use cannabis effectively in their day-to-day lives.
A lot of other visually-based platforms are about curation or presentation of an ideal life and less about learning or sharing – a place where audio platforms can shine.
Old is New
In some cases, it’s not about just using new platforms but finding better ways to utilize old ones. For example, legal or not, a lot of folks are about discretion when it comes to their cannabis. They want to get questions answered and learn about brands and products via peers and experts, but they don’t want their bosses or grandparents knowing that they’re hitting a pen between meetings or before brunch.
That’s why time-based content platforms – Snapchat, Instagram, WhatsApp and others – that offer individuals and brands some measure of safety, as well as controlled messaging, will help continue to normalize cannabis.
Another non-cannabis example worth emulating is Psilodelic, a psilocybin gummy brand that’s super low-dose and decently branded, using Instagram in a creative way. Purposefully making their accounts private and going without a public hub, the only way to buy the product is to follow and DM them. “Hacking” the platform in this way means they have to shut down and open up new accounts all the time, but they’ve done an amazing job offering a product that, similarly to cannabis, is sometimes inaccessible, and have done it in a way that’s simple and feels more elite. That’s creative entrepreneurship.
In the end, using these changing platforms means approaching them as tools to foster a better relationship with people. The brands that succeed will have dead-simple instructions and information that really helps to empower folks to look at cannabis in a different way. Then, as we finally reach legalization, these brands will find themselves better equipped to step into the mainstream, confident in the meaningful relationships they’ve already cultivated.
Testing cannabis and cannabis derived products for microbiological contamination should be a straightforward conversation for testing labs and producers. However, a patchwork of regulations and a wide variety of perspectives on what we should, or should not, be looking for has left much of the cannabis industry searching for reliable answers.
Organizations like the AOAC are taking the first crack at creating standardization in the field but there is still a long way to go. In this conversation, we would like to discuss the general requirements that almost all states share and where we see the industry headed as jurisdictions start to conform to the recommendations of national organizations like AOAC.
We sat down with Anna Klavins and Jessa Youngblood, two cannabis testing experts at Hardy Diagnostics, to get their thoughts on microbiology testing in the current state of the cannabis industry.
Q: What are the biggest challenges facing cannabis testing labs when it comes to microbiology?
The CompactDry Yeast and Mold Rapid plate provides fast results.
Anna Klavins & Jessa Youngblood:For microbiology testing, it comes down to a lack of standardization and approved methods for cannabis. In the US, cannabis regulation is written on a state-by-state level. As a result, the rules that govern every aspect of bringing these materials to market is as unique and varied as the jurisdiction writing them. When we are speaking specifically about microbiology, the question always comes back to yeast and mold testing. For some, the challenge will often be centered on the four main Aspergillus species of concern – A. terreus, A. niger, A. fumigatus, and A. flavus. For others, it will be the challenges of total count testing with yeast, mold, and bacteria. These issues become even more troublesome by the lack of recognized standard methodology. Typically, we expect the FDA, USP, or some other agency to provide the guidelines for industry – the rules that define what is safe for consumption. Without federal guidance, however, we are often in a situation where labs are required to figure out how to perform these tests on their own. This becomes a very real hurdle for many programs.
Q: Why is it important to use two different technologies to achieve confirmation?
Dichloran Rose Bengal Chloramphenicol (DRBC) Agar is recommended for the enumeration of yeasts and molds.
Klavins & Youngblood: The push for this approach was borne out of the discussions happening within the industry. Scientists and specialists from across disciplines started getting together and creating groups to start to hash out problems which had arisen due to a lack of standardization. In regards to cannabis testing, implementing a single method for obtaining microbiology results could be unreliable. When clients compared results across labs, the inconsistencies became even more problematic and began to erode trust in the industry. As groups discussed the best way to prove the efficacy of their testing protocol, it quickly became apparent that relying on a single testing method was going to be inadequate. When labs use two different technologies for microbiology testing, they are able to eliminate the likelihood of false positives or false negatives, whichever the case may be. In essence, the cannabis testing laboratories would be best off looking into algorithms of detecting organisms of interest. This is the type of laboratory testing modeled in other industries and these models are starting make their way into the cannabis testing space. This approach is common in many food and pharma applications and makes sense for the fledgling cannabis market as well.
About Anna Klavins
Anna Klavins earned a Molecular and Cellular Biology B.S. degree from Cal Poly San Luis Obispo while playing for the Cal Poly Division I NCAA women’s tennis team. Since joining Hardy Diagnostics in mid-2016, she has gained experience in FDA submissions [510(k)] for class II microbiology in vitro devices. She has worked on 15 projects which led to a microbiology device becoming FDA cleared. She has recently begun participating in the AOAC Performance Tested Methods program.
About Jessa Youngblood
Jessa Youngblood is the Food, Beverage and Cannabis Market Coordinator for Hardy Diagnostics. A specialist in the field of cannabis microbiology for regulatory compliance, she is seated with the AOAC CASP committee working on standard methods for microbiological testing in cannabis and hemp. She also sits on the NCIA Scientific Advisory Council as well as the ASTM Cannabis Council.
Cannabis hit major milestones in the first half of 2021. Adult use cannabis is legal in five more states, bringing the total to 16 plus Washington D.C. In addition, two pieces of federal cannabis legislation were recently revived by Congress. Even with these developments, the cannabis industry faces an uphill climb to navigate state and local regulations levied on its sales, operations, taxes and advertising.
Advertising regulations present big hurdles for cannabis businesses to overcome. With cannabis illegal at the federal level, traditional advertising avenues like broadcast and radio are limited to the states where it is legal. Still, many networks won’t touch cannabis ads. Major tech companies like Google, YouTube and Facebook largely bar cannabis businesses from online marketing. With cannabis advertising laws that vary state to state, companies face a hodgepodge of regulations with little consistency.
So, how are brands working within this messy regulatory framework? They’re turning to out-of-home (OOH) advertising. Here’s what to know about legally advertising cannabis products and brands through outdoor media.
A state-by-state patchwork of regulations
Medicinal cannabis has been legal in California for more than two decades, and adult use cannabis is going on five years. Yet, debate rages on over how visible cannabis advertisements should be in daily life. This isn’t just happening in The Golden State. Other states like Colorado and Oregon with established legal cannabis industries continue to grapple with how to regulate cannabis advertising in print and outdoor formats. Not to mention that states just getting into the legalization arena are playing catch up to get rules and regulations in place.
With the right partner, cannabis companies can navigate the nation’s mélange of advertising regulations to share their products, services and marketplaces. The best online OOH buying platforms are even equipped with cannabis filters that seamlessly identify cannabis-compliant OOH ad inventory.
Growing and innovating with out-of-home advertising
This dispensary ad appeared on Variety.com
While it’s the oldest form of advertising, OOH is a far cry from an old-fashioned advertising avenue. It’s a hot, dynamic form of communication that is poised for big growth alongside the cannabis industry. Sure, OOH includes more traditional highway-side billboards. But it also spans eye-catching digital billboards, taxi-top advertisements, building wallscapes, and digital vehicle charging stations – all of which are accessible through OOH buying platforms.
Such platforms make it easy for cannabis brands to effectively target consumers compliantly. Brands like Cookies, Eaze, MedMen and MONOGRAM have launched laugh-inducing, Instagrammable, and thought-provoking campaigns to build brand awareness. The Northern-California brand Cookies has mastered the art of cross-product branding, building an entire clothing line around its brand. Real California Milk even got in on the fun with a dispensary-inspired pop up and an OOH media buy. With OOH, cannabis businesses have effectively connected adult consumers with their latest products, promotional offers and physical storefronts, but also sparked conversations about cannabis legalization and decriminalization.
What to consider when leveraging OOH for cannabis advertising
If you work in the cannabis industry, are an agency partner or a small-business owner managing the advertising process, here are some things to keep in mind when planning your OOH ads.
Know the rules of where you plan to advertise. This is a fast-moving space. New markets are coming online. Regulations are being established and challenged. It’s crucial to find industry partners who provide reliable, up-to-date information on the status of advertising rules in the markets you’re in so you stay compliant and don’t jeopardize your business license.
Both Ivyside and Weedmaps are featured on this page
Get into the practicalities. What do local cannabis advertising rules mean for your brand? Are there regulations that impact more than the location of an OOH campaign? Rules on creative artwork or words that are banned? A guide to regulations is likely laid out at the state level (see the states of Illinois and Massachusetts), but will ultimately be governed by local municipalities (see the City of San Diego). There are workarounds here. Just because you can’t show people engaging in cannabis consumption, cannabis leaves or products, it doesn’t mean your creativity is limited. Look no further than Weedmaps. The company launched its Weed Facts campaign across hundreds of billboards in half a dozen or more markets to highlight the many benefits of cannabis. One read: “States that legalized marijuana had 25% fewer opioid deaths.”
Determine specific goals for your campaign. What do you want to achieve with an OOH campaign? Are you looking to build brand awareness? Share a new product? Drive foot traffic to a physical location or prompt customers to visit your website? Are you advocating for change? Laying out your goals will drive your creative and the locations in which you launch your campaign. Speaking of launching, with OOH – especially digital outdoor ads – your creative can be up and running in 48 hours. Outdoor ads are customizable and with location tools, verbiage and design, can be directed to a specific cross-section of the market.
Measure Success. Barring state and local regulations, the OOH possibilities for furthering and promoting your brand are almost endless. Once your campaign is launched, the right OOH buying platform will enable you to track goals and success. With the ability to track and isolate OOH, you’ll be able to attribute conversions, measure your return on investment, compare performance by unit and optimize your campaign.
As regulations at the local, state and federal levels change and evolve, OOH advertising will remain the tried-and-true standard for cannabis companies to get word out about their brand, market their products and drive traffic to their websites and storefronts.
Hazards and Controls of Extraction with Liquified Petroleum Gases (LPG)
Alex Hearding, Chief Risk Management Officer, NCRMA
This presentation delves into how to identify the common hazards of extracting with LPG (butane and propane), understanding the where to find guidelines and standards for safe extraction practices and an introduction to best practices for: selecting equipment, extraction room construction, and filling LPG extraction equipment.
TechTalk: Environmental Monitoring in Cannabis Production and Processing
Tim Cser, Senior Technology Specialist, MilliporeSigma
Slow is Smooth & Smooth is Fast! Understanding the Kinetics & Thermodynamics of Cannabis Extraction
Dr. Markus Roggen, Founder & CEO, Complex Biotech Discovery Ventures (CBDV)
In this session, Dr. Roggen discusses how his lab undertook extensive experimental studies on the extraction behavior of various solvents. They analyzed thousands of real-world extractions, from various producers and for different instruments to build a machine learning algorithm that can optimize extraction processes autonomously.
TechTalk: A New Tool for Operational Compliance in the Cannabis Industry
Tony Martinez, Senior Vice President & General Manager, AuditPro
The Quest to Discover the Limits of CO2 Extraction
Jeremy Diehl, Co-Founder & CTO, Green Mill Supercritical
Learn why cannabis and hemp extraction is as much art as science, and how modifying and manipulating extraction methodologies and conditions can result in more refined products and significant cost savings.
TechTalk: Breaking the Limits with Solvent Recovery
Jürgen Heyder, Business Development Manager for Rotary Evaporation, Heidolph Instruments
The Future of Cannabis Concentrates: Developments in Hydrocarbon Extraction & Manufacturing
Michelle Sprawls, Laboratory Director, CULTA
Learn what closed loop hydrocarbon extraction is, what products you can make with this type of extraction method and what the advancements are for manufacturing and new techniques
Process Scale UP in the Cannabis/Hemp Industry
Darwin Millard, Committee Vice Chair, ASTM International
Darwin Millard provides real-world examples of the consequences of improper process scale up and the significance of equipment specifications, certifications and inspections, and the importance of vendor qualifications and the true cost of improper design specifications.
Clean, ecologically sound production methods are the ideal for any cultivation or farming activity. Taking from the earth only what is needed to grow the crop and leaving behind little in the way of chemicals and land/water loss is the goal; with cannabis grow facilities, it can also be a reality.
This type of production does require some capital investment into state-of-the-art equipment and facilities, with standards that are equal to or even surpass current EPA and USDA regulations. While cannabis growing does not yet have access to the organic certification, that doesn’t mean growers can’t abide by and even go beyond the rules, to grow clean, healthy and environmentally sound cannabis.
There are a few essential elements required to make this kind of operation a reality.
Ecologically advanced use of power
For any indoor facility, one of the key elements is lighting. Using as energy efficient a system as possible is key. The best option at the moment is LEC lighting, which provides a spectrum of light that is very close to natural. This makes checking on plant progress more realistic and, with the inclusion of UV-B in the spectrum, can improve yields as well. In addition, the LEC bulbs have a long life—up to 2 years—which means lower maintenance costs as well.
The demand for high-quality, organically grown cannabis continues to increase
Another aspect of growing that tends to use a lot of power is the cooling system. A standard HVAC system will be power intensive, so alternative ones like water chilled climate control systems are just as effective and 30% more power efficient. These systems are also able to reuse wasted power by feeding it back into the system, creating an additional 10% energy reduction. In addition, when the outdoor air temperature dips below 45 degrees, a water chilled system can switch to using the outside air, creating 60—70% in energy savings.
Efficient management of water resources
Cultivators depend heavily on water to ensure that the plants are hydrated and able to absorb the nutrients they need to grow and thrive. The result for many however is an excessive waste of water. This is a problem when a grow facility is leveraging municipal water resources. A water meter helps to manage and track usage but to ensure that it is used as efficiently as possible, a “top feeding” method of usage ensures minimal water waste (5% or less).
Effective waste management
Wastewater is a byproduct of any water intensive cultivation method but there again, managing the systems to ensure that what water isn’t reused and becomes “gray water” is still as clean as possible is the ideal. A high-quality filtration system keeps sediment, chlorine and other harmful elements out of the water supply — and out of the municipal sewage system. Further, by using organic matter throughout the growing process, the wastewater that is produced will meet every federal standard for organic food production.
All plant waste in a grow facility—for example: stems and fan leaves—is disposed of according to state and local laws. With cannabis plants, that requires a certain level of security, including locked dumpsters that are only unlocked and placed outside when the removal trucks arrive on site.
Organic farming practices
Using OMRI (Organic Materials Review Institute) listed soil is an essential part of clean, environmentally friendly growing. To ensure the proper nutrients are available for each harvest, once a crop is gathered, the soil is transferred to a local landscape company to compost and reuse.
Pesticides need to obviously be avoided and all fertilizers need to be USDA approved as organic and all nutrients need to be certified by OMRI to ensure they don’t contain any synthetic materials.
Considering all of these aspects is essential to creating an ecologically friendly grow facility with tremendous yields that are clean and safe for the end consumer, as well as minimizing the impact to the earth.
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