One of the main bottlenecks to the growth of the cannabis industry is access to capital. Several businesses in the space have bemoaned the unleveled playing field regarding access to money to grow their businesses.
Partly because of the lack of legislative frameworks to support the cannabis industry, businesses can’t borrow at the favorable rates at which traditional banks lend to non-cannabis businesses. For years, this has been the bane of the sector.
These challenges mean a lot needs to be done if the cannabis market is to achieve the $70.6 billion in monetary value by 2028, as projected by experts.
Businesses and individuals are keeping their fingers crossed and placing their hopes on the passing of the SAFE Banking Act of 2021, currently before the U.S. Senate. Many believe the Act will fix the financial transactions and legislation issues that could hinder the industry’s ability to harness its full potential in the long run.
Rainbow Realty Low-Cost Financing
Photo: Flower One — Las Vegas
On the capital access front, a few companies are doing their best to lend to cannabis-related businesses. One company that stands out from the pack is Rainbow Realty Group LLC.
Rainbow is a real estate owner, lender and investment firm focused on the U.S. cannabis industry. The New York-based company is providing the needed capital access and support cannabis tenants and borrowers have been yearning for.
It is serving as a savior for businesses at a time when public equity markets within the cannabis industry have dried up and even the largest and most experienced operators are looking for new ways to fund their business expansion.
For some time now, access to investment capital has significantly decreased because of market conditions resulting from a grow-at-all-costs approach many operators chose to implement. This has left most operators struggling to find capital to expand their operations.
And, as traditional financing is not an option, Rainbow is building a pipeline of deals with operators that help them at a time when growth is essential to capitalize on market opportunities.
The company’s investments provide operators with capital via sale-leaseback transactions and senior secure mortgage facilities, giving the cannabis companies the ability to leverage their existing assets at market rates with flexible structures customized for specific operator needs.
Rainbow’s team proudly has over 60 years of real estate development and management experience, with 10 years of experience working in the cannabis market. The company currently owns real estate interests in California, New Jersey, Nevada, Colorado, Iowa, Oregon and Michigan.
Not Enough Capital
Photo: Holistic Industries — San Francisco
Kyle Shenfeld, president of Rainbow Realty Group, speaking in an exclusive with Benzinga, observed that there aren’t enough competitors to meet the industry’s demand.
“New states are coming online, meaning new opportunities and more operators need capital, but you’re not seeing federal regulation change — which means institutional investors aren’t coming in and banks aren’t really coming in. So, even though there are some competitors, the demand really does outweigh the supply.”
Shenfeld was a real estate attorney at Herrick Feinstein, LLP, from 2013 to 2016. He subsequently joined Gould Investors and in 2018, he co-founded Rainbow Realty Group with its CEO, Matt Gould. As president, Shenfeld heads Rainbow’s origination and fundraising efforts.
The company provides two products to customers: sale-leaseback, which purchases existing real estate and then leases it back to the cannabis companies, and mortgage financing, secured by real estate or an operating property, which allows operators to retain ownership of their real estate.
Shenfeld added, “For example, a company has an option to buy the property, but they don’t want to put up all the money, so we loan them most of the money to buy it, or they’re almost done with their construction and we loan them some of the money to finish it.”
The sale-leaseback is more long-term — a 10- or 15-year lease with options — while the mortgage is a short-term product, a 2- to a 4-year term with prepayment flexibility.
Two key things set Rainbow apart from others in the industry. Other companies underwrite cannabis value versus traditional real estate value and therefore give credit for large improvement budgets that are not core-real estate. Rainbow, on the other hand, lends based on reusable (non-cannabis) real estate value and therefore is more downside protected.
“We analyze the downside, meaning we underwrite the non-cannabis or typical real estate value of a given building. As a result, we lend or purchase at a lower price per foot than our competitors would. We are able to do this by keeping rates down and having flexibility, meaning we can do leasebacks or mortgages, and our mortgages can be prepaid,” Shenfeld stated.
Sharing a brief comment about the SAFE Act and what the cannabis industry stands to gain, he said “Even if SAFE Act passes, it is unlikely to solve the problem. I predict SAFE Act will allow banks to act as custodians — holders of money — but not financiers — lenders of money.”
Rainbow’s Products and Reputation
Photo: Glorious — Orion Township
RRG prides itself on being honest with its customers, something that is really rare in the cannabis industry.
“The cannabis companies we work with really appreciate the honesty. We honor our word on deal terms and we don’t commit to deals we cannot fund. The industry is filled with people committing to deals and then calling guys like us to co-invest with them. There’s a lot of syndication,” Shenfeld added.
Rainbow, which started its business with funding support from mostly friends and family, recently completed a $47 million fundraise. Of that total, over $16 million was raised from the Gould/Shenfeld family. The company is currently raising a 2nd fund with a goal of $100 million.
Rainbow Realty Group, with its affiliate companies, is a close-knit family business offering experience in various fields of investment. The company draws expertise from a number of general partners with proven track records managing development and property management companies. Rainbow is affiliated with the following successful companies.
Gould Investors LP
Gould Investors is a master limited partnership that owns and operates a diversified portfolio of real estate assets located throughout the United States. Unlike many other real estate investors, Gould is focused on long-term value more than short-term IRR returns. Gould Investors is the largest investor in Rainbow, and several of its members sit on Rainbow’s Investment Committee. Matt Gould, CEO of Gould Investors, is also CEO and CIO of Rainbow.
BRT Apartments Corp.
BRT Apartments Corp. (formerly known as BRT Realty Trust) is a real estate investment trust (REIT) trading on the New York Stock Exchange (NYSE: BRT). It focuses on investing directly and through joint ventures acquiring existing multifamily properties, and to a limited extent, ground-up development of multifamily apartments.
BRT Apartments has a 24-year history of being a high-temperature mezzanine lender. Since 1983, Gould has been the largest investor and manager of BRT Apartments (and its predecessor, BRT Realty Trust).
One Liberty Properties, Inc.
One Liberty Properties (NYSE: OLP) acquires, owns and manages a diversified portfolio of net-leased assets in the United States. Under a net lease, the tenant is responsible for real estate taxes, insurance and ordinary maintenance and repairs.
One Liberty Properties owns 121 properties in 31 states, approximately 60% of which are industrial properties and the balance is primarily retail.
Majestic Property Management Corp.
Majestic Property Management Corp. is a privately-held real estate organization specializing in managing, contracting and leasing properties.
The cannabis industry, Shenfeld noted, is an incredibly growing industry with a lot of opportunities on the private side.
He observed that there are several ways to make huge returns in the industry, but “on the flip side — 280E tax is still in effect — and it’s really hard for these companies to actually make net cash flow bottom line after taxes.”
While some people may be overly cautious to take risks in the cannabis space, Rainbow offers exposure to the industry with a lower-risk profile. Due to demand, Rainbow is now raising its second fund. For inquiries, please contact [email protected]
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