I am a newbie but have been geeking out on NNN property. I came across a 12% cap rate property but it's a Marijuana grower. Big tenant with good industry credibility.
What are the risks here?
Would I be able to find hard money?
I could only scrape together about $100k but this is a $14MM list price. Thanks all!
@David DeLancey Hard / Private money is probably going to be the way to go as pot is still illegal at the federal level. That means that most lenders won't go anywhere near it.
One of the risks is that the feds raid the place and confiscate the property. I don't know how realistic that threat is, but I wouldn't ignore it.
With $100K down on a $14M property, you're at 0.07% down, so I don't thin you're anywhere close to being in the game for this one - and that's ignoring closing costs.
On to the next deal.
@Charlie MacPherson thank you for the feedback! I'm like a dog on a bone and am going to go hunting for hard money.
@David DeLancey Hard money lenders rate vary and it is very rarely under 12%. And when it is lower it is usually for experienced investors with a long track record. Plus they only lend for 6-24 months typically.
Hard money lender's standards are looser than banks but generally only lend on sure things which can mean different things. 65% ltv for a newbie, 90+% of Arv for someone they have a lot of experience with. Either way they want something that is worth far more than thier investment in case of default.
I did a lot of research on leasing to marijuana growers and it is risky. You need special leases as standard ones usually say for legal purposes only. You need clauses in there incase the government shuts them down. Make sure the rent doesn't specify any type of % of gross sales, profit sharing etc. as then you could be considered a partner and increases the likelihood of confiscation and arrest. You have to verify the zoning with the city/county/municipality, make sure they are not in violation already.
Next check to see if there is a corporate or personal guarantee. If they get shut down, and even if the property isn't confiscated how are going to pay $150k+ per month?
Bank's are governed by federal law. Most will not deal with any company that is tangentially related to marijuana. So it'll be difficult to deposit checks, and forget about cash.
Hard money lenders won't lend you 99.3% on this deal. They are taking all the risk, to the point they would buy it themselves if they liked it
You shouldn't buy this deal even if someone lent you the money as at best you'll make $12k a year while risking bankruptcy. It'll be hard to sell as well which reduces potential appreciation.
You can make more money using bank leverage on a single family home. Even with 20% down on a 4-500k house you can earn 15% or more plus appreciation and depreciation.
With multifamily or mixed use even more.
I hate to be negative but this deal is ok if you own $100m of real estate already and can afford the risk, not for someone starting out or even mid level, including myself.
@Ken Naim thank you for your response. This was really helpful and thoughtful insight. I think I saw a 12% cap rate in a sea of 5 caps and got a bit crazy.
Would you even stay away from this as a syndicator if you lay out all of the risks to investors? Given the risk I think I could offer people a 15% pref return but still make a great return. I work as a CPA and am familiar with the administration of it all but have never actually syndicated a deal myself.
@David DeLancey yes 12 caps will get anyones attention but then you have to think why is it being offered at a 12 cap. Is it truly mispriced or will noone buy it without a big discount.
As a syndication it might work but youd need to collect about $5m from investors willing to take this risk, not easy in general, especially without a track record. Then you need to get a decent loan for the balance, very hard in the cannabis industry.
I love the ambition but I recommend starting a bit smaller to start. Get the experience, make small mistakes that you can recover from and build a track record then you're ready to tackle these large complex deals.
If this deal were to go pear shaped and it could for so many reasons that would be outside of your control, it would a huge set back financially and emotionally.
If it was a good NNN like a Chase, Cvs or Walgreens deal buyers would be bidding it up to a 5 cap. Offer $9m for ot and it might be worth the risk.
@David DeLancey - I've been working with cannabis companies on their accounting and tax compliance since 2014. I would consider growers risky tenants. With that said, and considering you're a CPA who might already be aware of some of the risks, you could work out a deal with the tenants to get the down payment from them. There are some HML/alternative lenders out there that will lend on cannabis related properties. Hopefully, the tenants have a good banking relationship or you'll be dealing with lots of cash issues...
I see these deals come across from time to time, they get snatched up by a cash buyer who likes to gamble. I think the trend is moving in the right direction but TX just banned Delta 8, so who knows anymore?