Real estate investment trusts (REITs) are companies that own or finance income-producing real estate. The Pelorus Fund, managed by Pelorus Equity Group, is a private mortgage REIT specializing in value-added cannabis commercial real estate loans, meaning that a portion of their loans are pre-budgeted improvements. approved increasing the value of the property. These improvements can be for construction from scratch, leasehold improvements, and land development law works for cannabis consumer properties.
Ganjapreneur spoke with Pelorus President Rob Sechrist about the company’s operations in the cannabis industry. “Our specialty has been value-added lending and we are one of the most experienced in the country before entering the cannabis lending business,” he said. “Previously, in the non-cannabis bridging lending space where we originally came from, we were able to achieve low double-digit returns for our investors, which is exceptional for a transaction. of senior secured real estate debt.”
Value Added is a specialized loan, which requires accurately assessing the fully stabilized value of the property for how much a project will ultimately be worth when completed, thus lenders need to have accurate information about commercial real estate construction. The nuances of the developing cannabis industry make this task even more complex: the lender must underwrite based on the future value of the property with a dynamic view of many moving parts in the construction process and apply that to the industry cannabis, which has proven itself. higher rate of return than traditional competitors in the non-cannabis market.
The Pelorus Fund is primarily made up of retail investors, but the Fund recently received a quality rating from Egan Jones which allowed institutions such as major banks, credit unions and insurance companies to participate. to a $50 million debenture offering, paving the way for institutional investors and bringing their total assets under management to $265 million. The bond lowers the Fund’s cost of capital, allowing the company to offer fully stabilized lower-cost loans to cannabis borrowers in addition to the value-added loan portfolio on the balance sheet.
The company elected to have the bonds unsecured, which means that as long as bondholders are paid, they cannot call the bonds due. This is true regardless of the evolution of the value of the real estate portfolio (as was the case in 2009). Bondholders receive a 7% coupon, which is accretive to equity investors in the Fund. These complex structures are the basis of the unique REIT that Pelorus has built. Rob credits the company’s success to his partners, co-founder Dan Leimel and managing director Travis Goad, who have combined 65 years of hard-earned experience in the real estate and lending industries.
Prior to taking out a loan, Pelorus collects property information such as location, purchase price, tenant information, and property improvements. Then they will order a third party feasibility review to verify each line item requested from the borrower at the standard market price. Their proprietary data analytics, collected in-house from tracking some 2,000 projects, is also applied to the projections. This data fluctuates but provides a basic view of market trends. They also mine third-party data to better understand labor markets. Finally, they assess the saturation of cannabis businesses in the region to understand if another facility is needed, revealing the value of building industrial cannabis consumption facilities in this region. Pelorus was the first to create such a database. They are also the first value-added lender to use a cannabis industry appraisal.
“Most of the borrowers in this industry have never had value-added loans, they’ve never done the types of development that require a type of construction loan,” Rob said. “So we had to explain to them that one part we use cannabis valuation and the other part we don’t. and we lend on the fully completed and stabilized value.
Once there is a clear understanding of the scope of the project, Pelorus can underwrite transactions much faster than traditional lenders. This speed is one of the advantages of borrowing from the Fund – the other is their deep understanding of value-added loans combined with their knowledge of the cannabis industry. Origination rates may be higher than traditional lenders, but Rob believes they more than make up for this in the speed of funding approved budget draws, completing the project and maintaining cash flow. Many lenders don’t understand the true value of a cannabis business in specific markets, which is why they don’t provide large enough loans. Pelorus writes loans that match value, reducing any possibility of construction stoppages that can strain budgets. Providing loans that cover an entire project eliminates the need for additional fundraising. Raising private equity funds often requires business owners to give up their stake in their business, which Rob says is a much higher cost than Pelorus’ fees.
Of course, there are multiple pitfalls to ensuring that projects run smoothly and spend funds efficiently. Pelorus writes commitments into contracts that solidify milestones and serve as a way to track the project. In addition to covenants, Pelorus will review documents, search for canceled checks and match each item on the invoice before releasing funds to a borrower. Additionally, they send an inspector to the project site to take photos for a report showing the percentage complete for each line item. Every step of this protocol protects investors and their assets.
The scope of a project can sometimes change so significantly that the borrower will need to raise more capital. If the necessary funds exceed the emergency budget of the project, it is stipulated in the contract that the borrower must add the additional capital to the budget himself. If the borrower is unable to do so, Pelorus will consider possible alternatives but may be forced to stop advancing drawdowns for the loan. In the worst case scenario, they may need to legally file foreclosure, which begins the process of selling the property at auction. But if the borrower isn’t a bad actor, the Pelorus team tries to help resolve any issues creating a knot in the project before cutting the loan and filing for foreclosure.
In one case, they had funded the construction of a licensed cannabis facility on unincorporated county land, but the company ran into trouble when anti-cannabis officials used their power to block the process. ‘authorisation. The problems interrupted groundbreaking work and significantly increased the cost of the project. In this case, the team has suggested ways to subdivide the land and alter building plans to make the most of the permit debacle and perhaps even boost projected profits once the facility is in operation. The team uses quick thinking as well as valuable multi-sector experience to serve the borrower and investor.
Pelorus Equity Group is one of the premier value-added lenders in commercial cannabis real estate and they continue to restructure and evolve alongside the developing cannabis industry. Rob teased that in 2022 they plan to continue building unique tax structures that are beneficial to their portfolio.