Q&A: CohnReznick asks IIP CEO how cannabis operators can make the REIT’s radar

Growing a cannabis company takes capital – a lot of it. That’s why we’ve been sharing some insights into what capital sources look for when providing financing to cannabis companies. In this two-part series, Andrew Lines, MAI, and a valuation partner at CohnReznick, talks with Paul Smithers, CEO of NYSE-listed Innovative Industrial Partners (IIP). In the first part, Paul explains how IIP’s sale-leaseback program has evolved and where he sees it going. In this second part of the series, we ask him how cannabis operators can set themselves up for success.


Drew: What separates your company from more traditional asset-based lenders?


Paul: We are 100% sale-leaseback. How we differentiate ourselves from a typical banking institution is our loan-to-value. In this kind of market, we’re told a bank or other traditional financial institution may want 50% to 60% LTV. When we look at an asset, we may go up as much as 100% of what the grower has into the property. It can be two to three years from when these growers get start to when they really start seeing any cash flow. So it’s important for them to maximize the cash at the beginning, and that’s what we provide.


Drew: What are some of the big challenges you see these companies having across the cannabis landscape?


Paul: Companies that don’t have proper financial statements really never get off the ground with us. We also look at what the capital stack looks like. Have you been able to raise capital before coming to us? Those are probably the two biggest issues we look at. When we underwrite a new tenant, we take a lot of time to do it because we know we are going to be in partnership with them as they continue to grow.


Drew: So when you think about the tenants that you’re looking to bring into the fold, what makes them attractive?


Paul: What we really focus on is the management team. We are attracted to a team that is, first of all, well-capitalized. Secondly, we like to see a team that has a combination of both business acumen and agricultural acumen. Ideally, this is a second, third, or fourth opportunity in a new state for the grower; it gives some credibility if they are a multi-state operator. But that is not to say that we don’t also look at startups. And then we’ll also look at whether the state is welcoming to a medical cannabis program. We favor states where just a few licenses are being granted, and the most qualified applicants get the licenses. So we look at states that are well-regulated, have a good patient base, and they have a regulatory arm in the government that is willing to work with the program. New York is a good example. They had a slow start in their patient count, but the Department of Health was very proactive in the state. We also look at growers’ compliance. As part of our underwriting process, we look at: Do you have a compliance team in place? How are you going to make sure that when you grow this facility it is compliant with all the state regulations? And we stay on top of it. We have regular conversations both with our insurers, who have their own set of inspections, and the compliance teams of the growers.


Drew: How are state and local municipal regulations and zoning laws affecting cultivation center planning?


Paul: I can’t say we’re seeing any trend, because it really goes down to the local politics. We have assets that are in the middle of industrial centers and we have assets that are in the middle of cornfields. It’s a very complicated process for a grower to make an application for a license. A good applicant will have gone to the local mayor, the local police, the local Chamber of Commerce, and will make sure they have support from the community before making the license application. Many communities, especially here in California, are very welcoming to cannabis cultivation facilities both for the jobs and the tax revenue they will support.


Drew: Are you seeing any trends nationally with cultivation centers with regards to using technology to enhance agribusiness?


Paul: The trend is to automate. The industry is unique in that it demands inventory literally from a sapling and cutting all the way to package and sale. When you have that type of inventory demand, it calls for significant automation and technology. For example, there are facilities where the tray will move from room to room on a conveyor belt. But there is still a lot of hand touching that is required for this product.


Drew: Anything else you want to add about where the industry is going?


Paul: We’re seeing a lot of M&A and consolidation. You can see some of these big deals that are coming across, and that is only going to make real estate more important and critical for these larger organizations. I think that the cannabis facilities will begin to scale up and will be bigger and bigger.


Key takeaways:

  • Cannabis operators looking to get on the radar of capital sources like IIP need to get their houses in order, from the management team to rigorous financial and compliance reporting.
  • Automation will be a critical success factor for growth-oriented cannabis cultivators.


Whether operational or preoperational, access to capital is one of the biggest issues and potential impediments to growth for cannabis businesses at all stages of the business lifecycle. If you’re ready to delve into other operational and strategic issues, contact CohnReznick’s cannabis team.