New REIT to Provide Real Estate Capital to Cannabis Industry

Cannabis cultivators and dispensary owners on the hunt for capital to grow operations and expand their footprints now have another option.

Inception REIT, a recently launched subsidiary of cannabis investment giant Inception Cos., plans to raise capital to provide debt and equity funding to both medical and recreational pot businesses — most of which don’t have access to federal banking.

“It’s been a week since we put our name out there publicly and the amount of interest and inbound financing requests has been overwhelming,” Inception REIT Managing Partner and CEO Richard Acosta said. “For us, we obviously tackle the real estate problem. It’s also one of the initial hurdles for anyone going into the space. If you want to be a cultivator, manufacturer [or] retailer you need to control real estate in a certain way — particularly by buying it.”

Having worked in the private equity and real estate space at companies like lifestyle hospitality management firm SBE and global real estate private equity giant Colony Capital, Acosta is well-versed in the challenges facing marijuana businesses looking to expand their physical footprint.

Using the crowdfunding model, I-REIT aims to raise $50M from both institutional and individual accredited investors to help support cannabis-zoned real estate projects.

“What we’re doing here is marrying real estate, underwriting and investment expertise into this industry,” Acosta said. “It’s been historically a cash business, so [many] of these operators have real estate on the balance sheet we can lend against.”

The fundraising effort is being sponsored by Inception Cos., which has invested in several U.S. cannabis companies throughout the years, including leading marijuana dispensary provider Medmen and medical cannabis wholesaler The Pharm.

MedMen, often referred to as the Starbucks or Apple Store of cannabis opened its 13th location in Venice, a neighborhood in Los Angeles, in July. The retailer, which has locations throughout California, New York and Nevada, is led by former BlackRock executive Chris Leary and recently raised $100M to continue its expansion. It plans to open another location in Florida and has been licensed to open 25 pot dispensaries in the state.

“If entrepreneurs in the cannabis industry will be able to access capital and loans similar to firms in practically every other industry, that will be a huge boon to businesses and to consumers alike. At present, the current situation requires business owners in the cannabis space to operate in incredibly risky territory: the federal government considers them outlaws, banks won’t even touch their money and they’re forced to deal only in cash,” Consumer Choice Center Deputy Director Yaël Ossowski said.

Consumer Choice is a Washington, D.C.-based organization that lobbies to affect local and federal regulations with bearing on issues such as free trade in Europe and electronic cigarettes.

“Even where cannabis is legal under state law, this means consumers are still encouraged to turn to the black market rather than the new legitimate market for cannabis,” Ossowski said. “If firms in the cannabis industry are able to access capital fast and easily, through legal means, that means they will be able to grow their operations, hire more employees, make investments and consumers will be better off for it.”

While medical marijuana is now legal across 29 states, and recreational use is legal in Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington and the District of Columbia — the federal government still considers marjiuana to be illegal.

That divergence of state and federal laws has created a gray area that continues to limit cannabis companies’ access to capital.

“All of the hurdles in the industry eminate from one simple fact — the fact that cannabis is a Schedule 1 drug,” Acosta said.

Schedule 1 drugs are considered highly addictive and dangerous, with little to no medical value, according to the United States Drug Enforcement Administration. Other drugs in this category include heroin and meth.

One of the greatest frustrations for the industry is the lack of a regulatory playbook for local municipalities when it comes to pot businesses. Strict zoning and landlord unwillingness to sell or lease assets is only exacerbating headwinds in the space.

“It [also] complicates relationships with the IRS — you’re not able to deduct operating expenses as a cannabis business, which materially impacts tax liability at the end of the year,” Acosta said.

I-REIT plans to leverage Inception Cos.' expertise in the cannabis space to navigate operational challenges and regulatory hurdles to present real estate financing opportunities to established state-licensed businesses.

“Even though 92% of states already have cannabis access laws, institutional capital is still not widely available. We couldn’t be more thrilled to introduce a dedicated platform for what most people don’t realize is a real estate intensive industry,” Inception Cos. co-founder Omar Mangalji said in a statement.

Inception REIT is not the first cannabis-focused REIT to hit the market.

Innovative Industrial Properties, an owner and operator of industrial assets particularly sanctioned for cannabis facility use, launched its initial public offering in December 2016. Since its IPO, during which time the company raised $67M at about $20 a share, the company’s stock has nearly doubled — up 92% to $38.39/share as of Thursday’s close.

IIPR owned five assets totaling 617K SF in New York, Maryland, Arizona and Minnesota as of December 2017, according to an annual Securities and Exchange Commission filing. The company recently announced plans to sell common and preferred shares in an effort to raise another $100M.

As the cannabis industry matures and pot businesses become more established, Acosta is optimistic about its future.

“At some point we will get close and march toward federal legalization one day, like tobacco and alcohol,” Acosta said.