Tag Archives: land

July 1, 2021

A Q&A with Rob Sechrist, President of Pelorus Equity Group and Manager of the Pelorus Fund

By Aaron Green

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.

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.

Green: Great Rob, that concludes the interview.

Sechrist: Thanks Aaron.

April 21, 2021

Clean Green Farming is Good for Cannabis

By Khalid Al-Naser

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At Raw Garden, we have a ‘Farming First’ philosophy because we understand that the process of farming is the process of managing the plant’s life and the management of the land those plants grow on – this is when the plantgets its chance to thrive but requires that it is properly nurtured in order to provide resources such as high-quality terpenes and cannabinoids.

Our cannabis plants are sun-grown in Santa Barbara county soil just like other California crops. From the seed to the shelf, we are vertically integrated and maintain quality control at every step in the process. We grow our own seeds, farm and harvest our own plants, and process our own products while employing sustainable and regenerative farming practices – only organic and natural fertilizers, soil amendments and pest control methods are used on thefarm.

As farmers we have a responsibility to care for the land and the soil to ensure it is fertile and healthy well into the future. We take care of the soil and it takes care of our plants. The result is premium quality products that our customers love and trust. Our success and commitment to quality is proof that the economics of clean, sustainable operations are achievable. We’re farmers and scientists on a mission to make clean, high quality cannabis that is affordable and accessible.

A few of the sustainable agriculture practices we employ at Raw Garden include:

Clean Green Certification – Since our inception, we have been certified and licensed members of Clean Green, the #1 globally-recognized organic and sustainable cannabis certification program. The program was created in 2004 as a way to standardize legal cannabis products and the result was a program to help farms and brands obtain organic-like certification based on the USDA National Organic program. Clean Green-certified growers and processors regularly win awards for their high-quality products, including our award-winning extracts.

Water Conservation – Our farm team waters at the right time of day to reduce evaporative water loss; we also use drip irrigation and mulch to reduce water waste and runoff. Last year, we used about 8,000 gallons of water per acre on average, which is significantly less than standard outdoor grown crops.

Natural Fertilizer and Pest Control – We apply only organic fertilizers and foliar feeds and we spray only organic pathogen-free inoculants to keep our plants healthy and disease-free, which consistently results in high yields. To naturally deter pests, we recruit beneficial predatory insects like ladybugs and parasitic wasps, in addition to botanical oils and diatomaceous earth.

Precision Agriculture (PA) and Site-Specific Crop Management (SSCM) – We utilize technology to manage crops and increase farm efficiency, such as machine learning for fertilizer optimization and digital sensors in the field to monitor crops.

Soil Health and Terroir – Like grapes for wine, cannabis plants grown in the soil have terroir that affects the flower’s qualities, characteristics, terpene profile, aroma and taste, based on temperature, climate, soil composition and topography, as well as other environmental influences. Micro-climates matter – the same strain of cannabis grown along the coast likely has a different taste and potency than one grown inland. We grow in Santa Barbara wine country for the combination of fertile soil, hot sun, and cool nights which yield an incredibly diverse, potent and flavorful crop of cannabis flowers. Between growing seasons, we employ regenerative agriculture by planting cover crops including oat, beans, peas and buckwheat to add nitrogen and organic matter naturally back in the soil. This method of cover crops also helps reduce pests and soil-borne diseases in preparation for the next growing season. We know that an ideal environment in combination with healthy soil and good land management results in healthier, more vigorous plants, which translates to higher-quality products.

As farmers, it is our responsibility to care of the land with good management decisions today so that we grow the best quality products while better preserving the land for the future. It takes careful planning, knowledge of the land, a commitment to sustainable practices and a desire to put farming first.

December 17, 2018

Seven Steps To Avoid the Green Rush Blues: Investigate Water Supplies Before Planting Cannabis

By Amy M. Steinfeld

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A clean, reliable water supply lies at the heart of every successful cannabis farm. It’s no surprise that the stakes for finding land with ideal growing conditions, including adequate water, are high. But new buyers (and lessees) caught up in the green rush often gloss over water rights or are unaware of California’s byzantine rules governing the irrigation of cannabis.

Water rights are complex. Water regulations applicable to cannabis cultivation are even more complex. And our new climate reality convolutes things further. Longer droughts, more volatile weather, political uncertainties, increased groundwater regulation and water quality concerns are exacerbating tensions over local and statewide water supplies. In many areas of California, landowners can no longer rely on local water districts to meet their needs.

A robust investigation of the property must consider water supplies. Because a property’s water supply is dependent on water rights, local ordinances, state regulations, politics and hydrology, it’s important to consult a water lawyer (and in some instances a hydrologist) before closing. A bit of foresight can prevent a grower from being left high and dry.

The following checklist provides a roadmap to conduct water rights’ due diligence. While many of these details are California-specific, this type of due diligence applies throughout the West.

Step 1: Identify Available Water Supplies and Consider Potential Limitations On Irrigation, Including Potential Future Changes

Conduct a site visit to identify existing water infrastructure, natural water features and existing or potential water service options. Next, determine if the property is served by a public water supplier. If that’s the case, the California State Water Resources Control Board (“State Water Board”) does not require any specific documentation to irrigate cannabis, but the water supply must be disclosed in the CalCannabis license application.

Groundwater is generally the best supply for cannabis, but the era of unregulated groundwater pumping is over. Many groundwater basins in California are now governed by the Sustainable Groundwater Management Act (“SGMA”), which requires water agencies to halt overdraft and restore balanced levels of groundwater pumping from certain basins. As a result, SGMA may result in future pumping cutbacks or pumping assessments. It’s imperative to identify the local groundwater basin via the Department of Water Resources’ Bulletin 118, and determine whether the groundwater basin is adjudicated or governed by a groundwater sustainability agency. Growers should also test the local water supply’s pH and salt levels because cannabis plants are finicky and water treatment can be cost prohibitive. If a new well is needed, growers should consult with their local county before drilling a new well. In some areas, moratoriums and restrictions on drilling new wells are on the rise.

As a rule of thumb, cannabis cultivators should avoid using surface water to irrigate cannabis. Surface diversions are subject to the California Department of Fish and Wildlife’s permitting authority. And under the interim State Water Board Cannabis Policy, commercial cannabis cultivators cannot divert anysurface water during the dry season (April 1 through Oct. 31), even if they have a riparian right that can be used to irrigate other crops. During the dry season, cultivators may only irrigate using water that has been stored off-stream. And even during the wet season, cannabis cultivators must comply with instream flow requirements and check in with the state daily to ensure adequate water supplies are available. Cannabis cultivators are also required to install measuring devices and track surface water diversions daily. And buyer beware, a groundwater well that extracts water from a subterranean stream may be considered a surface-water diversion. So be especially cautious if the well is located close to a creek or river.Develop a water use plan to optimize water efficiency

Step 2: Identify Water Supplies Used On the Property, Including the Basis of Right, and Quantify Historical Use

Review information on historic and existing water use. This may include past water bills and assessments. If there is a well on the property, the seller or lessor may have metering data, electrical records and crop data that can establish historic groundwater use. Cultivators must submit a well log to CalCannabis as part of the cannabis cultivation application. If surface water is available, the purchaser should review the State Water Board eWRIMs database for water rights permits, licenses, stock pond registrations and certificates, decisions and orders. The purchaser should also identify surface water diversion structures and review annual filings to determine compliance with all terms and conditions of the water right. Lastly, the purchaser should request all documents and contracts pertaining to water rights.

Realistically estimate water demand for irrigation and other on-site purposes.Step 3: Confirm Ownership of Right and Assess Any Limitations On Water Right

Determine whether the right has been abandoned, lost to prescription or forfeited. Evaluate the seniority of the water right, availability of the right, adequacy of place of use, purpose of use (must include irrigation), season of use, and quantity of any permitted or licensed post-1914 right. Determine whether historical diversions pursuant to an appropriative right support the full amount of the claimed right, and whether any changes to the water right are needed to support the proposed new use. Cultivators in California who plan to utilize surface water also need to file for a “Cannabis Small Irrigation Use Registration” to store water during the wet season for use during the dry season.

Step 4: Reconcile Water Demand With Available Supply

Realistically estimate water demand for irrigation and other on-site purposes. Develop a water use plan to optimize water efficiency (drip irrigation, rainwater harvesting, water monitoring, hoop structures) regardless of supply sufficiency. Many counties, such as Santa Barbara County, require that cannabis growers meet certain irrigation efficiency standards. Determine whether available supplies can meet all proposed demands, including plans for full buildout. If not, consider whether additional supplies are available for use on the property.

Step 5: Determine Water Supply Compliance Obligations

The rights associated with water supplies are defined by their source, the time frame during which supplies can be taken, the quantity of water to which the right attaches, and any limitations on the purpose of use of the water supply. There may also be reporting requirements associated with taking and using the supply—these can include requirements to report the quantity of water used as well as information regarding the end use of the water. Failure to timely report can have serious consequences. Cannabis cultivators are also subject to additional water quality regulations and restrictions, including waste discharge requirements pursuant to the State Water Board’s Cannabis General Order.

Step 6: Negotiate Deal and Draft Conveyance Documents

After obtaining an understanding of the water supply associated with the property, the property conveyance documents may be drafted to incorporate the transfer of rights associated with the property’s water supplies. These may include the assignment of contracts pursuant to which water supplies are obtained, the transfer of permits or licenses as to the water supplies, or the transfer of water rights arising out of a judgment or decree.

Step 7: Consider Unused Water Supply Assets That Could Be Monetized

To the extent the water supply rights associated with the property exceed the cannabis plants’ water demand, it may be possible to monetize unused or excess water supply assets through transfer of the rights to a third party.

If you have any questions about water rights related to cannabis cultivation it’s always in your best interest to contact an experienced water attorney early on in the process.