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?
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.
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.
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.
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.
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.
By Joanne Molinaro, Geoffrey S. Goodman, Ronald Eppen No Comments
The legalized cannabis industry remains a budding market in the United States. As the legislative dominoes started to cascade from state-to-state across the country, entrants of all categories—operators, investors, lenders, and retailers—were willing to stand in line for their tickets. However, signs of fatigue, caused largely by the continuing murkiness of regulatory guidance and investors’ waning appetite for reading the legislative crystal ball, were already surfacing towards the end of 2018 and continued its slide downward into 2019. From March 2019, market capitalization for the 33 biggest cannabis stocks was down 45% by the end of 2019, falling from $54 billion to $30 billion and projected revenues dropped a whopping 17% as well.
Has COVID Made Things Worse?
Against this backdrop, COVID-19 arrived on the scene. Surprisingly (or perhaps not), cannabis seemed to be somewhat insulated from unprecedented disruptions to supply chains and artificial nose dives in demand. Many operators noted a sharp uptick in sales as states implemented shelter-in-place orders. Ironically, the supply chain hurdles created by the lack of federal legalization rendered operators—even multistate operators (MSOs)—uniquely equipped to handle the supply chain woes that others were struggling to contain. Meanwhile, as more and more states slapped the essential label onto both medical and adult use cannabis, operators were permitted to run business as usual (under the circumstances) and legalized cannabis started to look a little more “normal” in the most abnormal of times.
Thus, for a moment, cannabis looked like it might be a counter indicator (or recession-resilient)—while others were going down, cannabis was going up. But, after this brief surge, sales settled down and states began reporting decreases from this time last year and the outlook for the cannabis industry remains unclear.
Is This An Opportunity?
Declining demand, coupled with the issues described above, spells cash-flow problems for cannabis companies – many of which are still relative “infants” compared to their consumer goods counterparts and thus may have yet to create a “rainy day fund.” However, liquidity issues can create opportunities for those who still have cash to inject. In the last year, 13 special-purpose acquisition companies (SPACs) have listed on exchanges with an eye towards “cheap cannabis assets.”Cheap cannabis assets (or distressed cannabis assets) can offer a lowered barrier to entry into what many still believe to be a bull market. However, investors should proceed with caution. While the assets themselves may bear bargain basement price tags as the world grapples with the current recession, the cost of entry is more onerous than many realize. It is thus critical for potential investors to do their pre-due diligence on the who, what, when, where and how of acquiring distressed cannabis assets.
Where Do Distressed Cannabis Companies Go?
Ordinarily, distressed companies requiring capital restructuring look towards the US Bankruptcy Code. Deploying the broad injunctive relief afforded by the automatic stay as both a sword and shield, ailing companies can focus on lining up debtor-in-possession financing while they prospect feasible long-term exit strategies (through a reorganization, asset sale, or some combination of the two). The other major advantage of a chapter 11 is, of course, the “free and clear” order—the veritable clean slate provided by a federal court to good faith purchasers of the distressed assets that allow buyers to proceed with very few strings attached.
These federal benefits are not available to adult use and medical cannabis companies (hemp companies can file for chapter 11). Indeed, some bankruptcy courts have shut the door on not just the operators themselves, but companies that have even tangential dealings with cannabis companies. With federal legalization, that will likely change; however in the meantime, distressed cannabis companies must look to pseudo-bankruptcy proceedings that offer some of the benefits that a federal bankruptcy can.
Is A State Receivership A Good Restructuring Vehicle For Distressed Cannabis Companies?
The number one option for many distressed cannabis companies will be state receivership. Much like a chapter 11 bankruptcy, the receivership provides for a stay against actions against the company’s assets, i.e., the breathing space it needs to hatch a plan for rehabilitation or exit the game as painlessly as possible. The receiver will be empowered to run the business while ironing out its operational/cash issues or conduct an orderly sale of the assets, usually through an auction process, during which the secured lender will be afforded the right to credit bid. The costs associated with that sale may be charged to the sale proceeds. Thus, in many ways, the state receivership acts like a federal bankruptcy.
How Is A State Receivership Different From A Federal Bankruptcy?
There are two main differences that investors should be aware of between a federal bankruptcy and a state receivership.
As with anything else that’s up for sale, where there’s a will, there’s a way.First, the court appointed receiver (often handpicked by the company’s primary secured lender) will be calling most of the shots from an operational, transactional, and financial perspective. That receiver may not have the kind of operational know-how of running a cannabis company that a typical debtor-in-possession might, making any major transaction more challenging. Even if the receiver has some background in the cannabis industry, he or she will still have a steep learning curve when it comes to the company’s specific business.
Second, the laws vary from state to state on whether a receiver can sell assets free and clear of any and all liens, claims, and encumbrances without the consent or satisfaction of those claims. Accordingly, buyers of distressed cannabis assets will want to take a close look at potential successor liability risks on a state-by-state basis.
Can Anyone Buy Or Invest In Distressed Cannabis Assets?
Busy entrepreneurs often skip steps in their business development process, particularly in the cannabis space. Since this is a new industry, there isn’t a long history of marketing/advertising efforts to look back on; the standards are still being developed. But more often, businesses simply may not have a budget large enough to pay an agency, and they may not feel confident executing these efforts on their own.
Fortunately, you can do a lot independently to get your name out there. This three-part series will give you a quick primer on branding – what it is, why it’s important and how to do it. But first, we need to discuss the differences between branding, marketing and advertising so that you know what kind of tools you have at your disposal.
What is Branding?
Branding should be considered a prerequisite to marketing and advertising.
Branding is simply thinking about your company from the inside-out. It’s asking yourself questions about the kind of person your brand would be, down to its beliefs, personality and sense of style. Ultimately, we do this to build a deep emotional connection with potential customers. When you know who you are and put yourself out in the world, you’re signaling to them that you are a good match for each other.
When you have a brand that consistently forms emotional relationships with customers, that bond converts to both income and long-term company value, making your spending on marketing and advertising go further. It gives you a competitive advantage over companies with weak or non-existent branding (and in the U.S. cannabis industry, there are plenty of those). Moreover, it’s a key factor that venture capitalists and friendly Fortune 500s look for in potential investments.
So, what should you be asking yourself when it comes to branding? Start with exploring the fundamentals. Decide on the philosophical, emotional and visual characteristics of your brand.
As far as the philosophical questions go, it’s important to codify your mission, brand values, customer promise, core competency and future vision to build a strategic brand. Think about what you’re offering, how it will change lives, and what unique qualities will help you make it all happen.
The Four Ps: Product, Price, Place and Promotion.The philosophical characteristics help you decide who you are. Your emotional characteristics are the ones that connect you with the world. These would include your creation story, your brand personality and tone of voice. How does your brand see and respond to the world? Why? People love consistency. Having a consistent presentation makes your brand feel more authentic; in turn, people are more receptive to you.
The visual qualities are how the world should see you. These assets should include your color palette, fonts, imagery and logo. Making decisions about your brand’s appearance may feel subjective and overwhelming to people, but it doesn’t have to be. Basically, evaluate these ideas and assets in terms of how your audience is likely to respond to these elements. For example, how does your happy-go-lucky audience feel about a logo that is lime green versus corporate blue? Which color best reflects your brand sensibility? You know who you are; the visual characteristics are how you plan to show it.
As a discipline, marketing traditionally involves making strategic decisions about the four Ps: Product, Price, Place and Promotion. These decisions become significantly easier once you have defined your brand.
Essentially, marketing addresses the way your brand lives in the world. It tells potential customers what you sell, and why they should choose your brand. It involves making thoughtful decisions and having a strategy for decisions such as product names and your corporate culture.
You also need to think about your pricing strategy and how that manifests in front of customers. For example, are you a high-end product with a premium price or the Walmart of weed? What’s your customer service strategy? Are your budtenders in flannel or lab coats?By now, you know who your brand is and how you want to present it to the world. Now you need to get consumers to see it that way. That’s where advertising comes into play.
Marketing also involves decisions about collateral—namely, your product packaging, brochures, signs and trade show booths. It also impacts your brand’s in-person presence. That could include experiences like events your company attends, trade shows where you have a booth or table, sensory experiences or even AR/VR experiences with your product.
By now, you know who your brand is and how you want to present it to the world. Now you need to get consumers to see it that way. That’s where advertising comes into play.
Generally, advertising relates to paid campaigns that are carefully written and designed to tell potential customers where, when, why and how to connect with your brand and buy your products and services.
Fortunately, you have the tools to thrive by putting in the work to get to know your brand.These campaigns are often launched within the space of owned media, such as television commercials, radio and print ads and billboards. There are tons of digital and social media options. Your job is to find the ones that your customers interact with and decide what you want to say about yourself. For example, what kind of sites would you want to place ads on? What state of mind are customers in when they go to those sites? And what message do you want them to get from you in that moment?
Normally, answering these questions would be daunting. But since you’ve already decided who your brand is, you may already know what colors you want to use for this ad. You’ve already considered what your mission is. You know how your brand should appear to the world. And since you’ve unlocked these truths, you’ll be able to develop campaigns that feel genuine, unique, and memorable.
Connecting with consumers and making them remember you isn’t optional. It’s what will ultimately decide whether your business survives or not. Fortunately, you have the tools to thrive by putting in the work to get to know your brand. It’s tough, and it may not come easily at first. But we don’t start a business because it’s easy. We accept the risks and frustrations because we love what we do. Tell everyone why they should too.
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