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Cannabis Industry Readying Major Expansion As Investors Clamor To Pour In Needed Capital

When Gov. J.B. Pritzker signed the legalization of recreational marijuana into law earlier this year, many criminal justice advocates breathed a sigh of relief that their long struggle was finally successful.

But implementation of the measure will be complex and prolonged, and involves thousands of decisions over where to cultivate the plants, how producers can expand their existing medical marijuana ventures and how zoning and lease structures will govern the many retail outlets where customers will make purchases.


If done correctly, the sale of recreational marijuana will be a big moneymaker. It has a sizable customer base willing to pay for the product, and that is already bringing in out-of-state investors eager to subsidize new operations.

“Everyone is chasing yield these days, and recreational marijuana is a great place to find yield,” WBS Equities CEO Wendy Berger said.

Berger is a board member of Chicago-based Green Thumb Industries, which promotes the safe, effective and therapeutic use of cannabis nationwide, and cultivates medical marijuana plants at facilities in Downstate Rock Island and Oglesby.

She is one of many real estate professionals that see marijuana’s business potential, but her original interest came from a more idealistic stance.

“At its very core, this is a plant-based business, and I believe in the healing powers of this plant. I am a capitalist first and foremost, but I believe we can both do good and do well.”

But real estate specialists with their eyes on balance sheets will probably take center stage in the next few months, as Berger and other experts say it is likely Illinois will see a wave of sale-leasebacks as medical marijuana growers seek out capital that will fuel the massive expansions needed to serve hundreds of thousands of new recreational customers.

“We are not talking about an incremental increase, for Illinois we’re talking about a market that could increase tenfold,” GreenAcreage Chief Investment Officer Jeffrey Lefleur said. 

His New York-based firm provides sale-leaseback financing to cannabis operators across the nation. It is seeking out possible deals throughout Illinois.

The tenfold increase he spoke of could conceivably be even greater. The number of medical marijuana users stood at about 52,000 at the end of 2018, according to a study by Freedman & Koski that guided state lawmakers as they crafted this year's legislation. The consultants estimate Illinois could soon have as many as 1 million recreational users, not including tourists who come in to sample goods still forbidden in most states.

The legislature’s decision to put strict limits on who can supply the product makes Illinois even more attractive as a cannabis investment market. In the first year, only the 21 officially sanctioned medical marijuana production facilities, one in each of the state’s 21 police districts, can serve a large number of customers.

“That gives the operators a window of opportunity to establish their brand, and build out their distribution operations,” Lefleur said. 

“The state benefited by learning from the mistakes made elsewhere.”

“The worst thing that could have happened in my mind was to end up like Oregon,” Berger said.

That state handed out more than 1,000 licenses by the summer of 2018, and production soared while demand remained steady, collapsing prices and sowing chaos throughout the market.

Cresco's cannabis facility in Lincoln, Ill.

The Illinois legislature did not ignore small entrepreneurs who might want to jump into the market. The state will soon give out 40 craft grower licenses, which anyone can apply for, but limited the size of these operations to 5K SF, according to a spokesperson from the state’s Department of Agriculture.

But established growers like Green Thumb can expand to just over 200K SF.

For those that want to expand, the capital is loosening up but is still a challenge.

Free Market Ventures was a pioneer in the state’s medical marijuana business, and in 2015 established three cultivation facilities, one in suburban Joliet, the others in Downstate Kankakee and Lincoln. After a roughly $26M investment, the Chicago-based investor sold the properties in October for $37M to Cresco Labs, the license holder that rented and handled operations at all three facilities.

“Getting these facilities open was one of the hardest deals I have ever done, because we couldn’t get institutional capital, much of which is reluctant to get involved with cannabis, and had to go out and find a lot of other investors, who ended up doing really well,” FMV founder and President Jack Buck said.

Cresco in turn monetized its new real estate by quickly selling the Kankakee and Joliet properties for $46M in a sale-leaseback to San Diego-based Innovative Industrial Properties, a publicly traded REIT that focuses on cannabis properties nationwide.  

Joe Caltabiano, a former mortgage banker and co-founder and president of Cresco, said Cresco would hang onto the operations in Lincoln as sole owner, and with the new funding from IIP, it will massively expand all three growing operations.

His ambition is to eventually expand each operation to the state-allowed maximum of about 210K SF.

“A lot of our peers don’t have the same access to capital that Cresco does, and it’s up to us to ramp up production, and keep pace with the expanding demand in this state,” he said.  

IIR officials said that as of Oct. 30, the company owned 38 properties in 13 states 100% leased to state-licensed medical-use cannabis operators, totaling about 2.8M SF.

As the prices indicate, developing a licensed cannabis operation involves a lot more than putting up a warehouse. Berger likens it to food production spaces, with costs per SF to match, as the plants need a lot of light, massive amounts of water and temperature stability throughout the year.

Specialty investors like IIP and GreenAcreage will be necessary as other operators seek out funding, mostly because cannabis will remain in an odd legal limbo for the foreseeable future.

“The business is still illegal, at least federally, and the vast majority of banks still don’t want to deal with cannabis companies,” Berger said.

She could not comment on Green Thumb's plans for a possible expansion or sale-leaseback, but expects other cultivators will soon follow Cresco’s path.

“There have already been a couple of other deals, they just didn’t get the publicity,” she said.  

GreenAcreage will soon close a roughly $22M sale-leaseback deal for a small growing facility in Downstate Freeport, currently owned by Acreage Holdings, and most of the capital will go toward a major expansion, Lefleur said.  

“We’re not trying to make a buck on a quick turnaround, we want to be a long-term capital source and landlord for the cannabis industry,” he added.

The company’s initial fund raised about $140M, but Lefleur said investors remain keen on marijuana-related operations.

“We will be raising more capital soon.”