How Lenders Are Underwriting Cannabis Deals

There is huge demand to fund cannabis deals, but lenders are focused on protecting against the downside. Cannabis-use assets receive significant rental premiums, but a lot of the rent boost is because cannabis remains illegal at the federal level. To protect against the higher risk, lenders are underwriting cannabis real estate as standard-use and with standard market rents.

“Lenders are seeing that Cannabis deals are great cash-flowing assets when leased on the upside, but there is a lot of risk on the downside in the case that the government shuts down the use. Lenders are looking at the property’s real estate attributes and underwriting the property without the premium rents for cannabis use,” Gary Mozer a principal and co-founder at George Smith Partners, tells GlobeSt.com. “The lenders know that in the worst-case scenario, they have to kick the tenant out and lease it up to a non-cannabis user. So, lenders are stressing their underwriting to their downside scenario, not only for NOI but also for the cost to re-tenant, the carry costs and any capital expenditures. Excess cashflow can be used to amortize the loan or create reserves for re-tenanting.”