When cannabis businesses need funding, they can’t simply get traditional loans. A number of legal and regulatory hurdles stand in the way for many operators, and the rules surrounding lending vary greatly from state to state. For investors who do lend to cannabis businesses, finding great partnerships isn’t easy – and differs in a number of key ways.
Ian Lindemann has had a front row seat as this industry has grown. He’s the Head of Cannabis Business Development at Lead Funding, a fully integrated direct lender based out of Denver with twin focuses on residential real estate and developing medical and adult use cannabis businesses. With a heavy focus on indoor cultivators, retail operations, and real estate backed lending, Lead Funding has developed a unique niche – and hasn’t had a single client default on a loan.
Today, Ian joins the podcast to discuss how Lead Funding created a highly effective model for cannabis business lending, what makes a potential partner a great fit (and the many reasons he’s had to say no to deals), and why he doesn’t think federal legalization will ultimately have a significant impact on his corner of the industry.
KEY TAKEAWAYS
- What the cannabis lending space currently looks like – and why some states are better fits than others for cannabis investing.
- How cannabis entitlements and valuations can massively alter the value of a property in states that opt into medical or adult cannabis use.
- What Lead Funding does to help operators maximize funding options and claim available tax benefits in a highly complex industry with unique legal status.
- How many applications Lead Funding receives, what their approval process looks like, and how Ian separates the wheat from the chaff in a field where many operators don’t quite yet know what they’re doing.
- How the lack of traditional banking infrastructure impacts Ian’s business – and how banking operations have improved significantly for owner-operators.
QUOTES
“We have never taken a recourse action on a cannabis loan.” – Ian Lindemann
“I have to kiss a lot of frogs to find the right folks for these deals. Often, I have to say, ‘This project is not ready yet.’” – Ian Lindemann
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TRANSCRIPT
Rick Kiley: Hello, everyone, and welcome back to The Green Repeal. Life has gotten a little bit weird lately as I’m sure you’re aware, one of the consequences being my recording this opening as a voice memo on my phone, so please excuse the quality. That said, before shelter-in-place orders became part of our lives, we recorded a great interview with Ian Lindemann from Lead Funding, a group dedicated to providing lending services to cannabis businesses. Given the current state of the economy, this interview might be very timely for some companies seeking sources of funding out there. Ian gives a great interview and somehow manages to make the topic of financial lending simple and enjoyable to chat about. We hope you’re all staying safe and enjoy this brief diversion into your regular stay-at-home routine. Enjoy!
Rick Kiley: Hello, everyone, and welcome back to The Green Repeal. It is Rick Kiley once again. I am joined by my co-host, as usual, Mr. Jeffrey Boedges.
Jeff Boedges: Hello, everyone.
Rick Kiley: Hello, Jeffrey. It’s weird you say, “Hello, everyone,” and I say, “Hello, Jeffrey.” It’s like I’m everyone responding.
Jeff Boedges: I’m talking to our fans, Rick.
Rick Kiley: Yeah. Hey, mom. How you doing? So, joining us today we have Ian Lindemann. He works at a company called Lead Funding. He is their Head of Cannabis Business Development. Welcome to The Green Repeal, Ian.
Ian Lindemann: Thanks, Rick and Jeff. A pleasure to be joining you both this morning.
Rick Kiley: Cool. We’re glad to have you. So, why don’t we just jump in? And why don’t you give us a little background on who you are and what Lead Funding does and your connection with the cannabis industry?
Ian Lindemann: Sure, absolutely. We’re a direct lender based out of Denver, Colorado. I’ve been in business about a dozen years now and really got started in the residential real estate development space but being here in Denver, we obviously had front row seats for cannabis legalization and development on both the medical and adult-use side and we’re very aware of the gap in debt financing options available to cannabis owner-operators. And after having watched on the sidelines for a while, several years back, we decided to jump in with both feet after feeling that enough states have legalized at least a medical component to the point where we thought that the genie couldn’t effectively be put back in the bottle. So, it’s been an exciting ride and been able to offer the same terms that we do for our residential real estate development program to cannabis operators without a premium. So, it’s been a great fit for the space.
Rick Kiley: Cool. So, what types of cannabis organizations are you working with? Is it people are growers, they’re retailers? Are they vertically integrated business? Is it recreational, medical, all the above? Can you give us a little breakdown on that?
Ian Lindemann: Yeah, absolutely. It is across the board. I will say that we are pretty heavily focused on working with indoor cultivation facilities, retail operations. What we do is real estate-backed lending. So, any operation where there’s going to be significant value tied up in the real estate and permanent improvements to those properties is going to be a good fit for our model. So, that kind of gets us geared towards those cultivators, retail, and vertically integrated assets.
Jeff Boedges: Is there a different legal like, I know a little bit about home financing since I’ve done it like 97 times, but there’s a humongous amount of rules and laws and regulations that manage that on a statewide basis. I imagine that’s got to be really a whole new thing to learn on the cannabis game. Yeah?
Ian Lindemann: Yeah, absolutely. It’s a thing where we’re state-regulated, which allows for us to play in this space and we function in every state where there’s at least a medically legal component. So, I think that’s 35 states and counting. At this point, we’re pretty heavily focused on dealing directly with THC plant-touching on our operators. But we’re obviously very familiar with you could think of us as a mortgage-backed lender. And this stays because it is a first deed of trust position on the real estate asset. But it’s a position that we’re very familiar with and it would feel similar, though very streamlined in terms of the loan application process and getting all the paperwork done compared to your traditional lending institutions.
Rick Kiley: Got it. So, you’re working now in every state that has a medical program or those are just the states where you would work?
Ian Lindemann: I would say that’s where we would work. We’ve done work all across the country working with operators, but there are some states that are better fit than others certainly. We got started here in Colorado and Pacific Northwest but had a lot of expansion and a great fit for our model in the Midwest, a lot of these emerging markets whether that’s your Michigans, your Missouris, your Illinois, your Massachusetts. But that said, I feel applications from I think I’ve at least fielded applications from every state where there’s been a legal component.
Rick Kiley: Got it. Can I just ask like, roughly, how many organizations are you lending to right now?
Ian Lindemann: I think, like, maybe about a dozen outstanding loans currently in the space but exactly I’m trying to think that’s certainly an estimate. The underwriters might be able to give you exact numbers.
Jeff Boedges: I think we’re looking for kind of a ballpark.
Rick Kiley: Yeah.
Jeff Boedges: Is it a thousand? Is it 100? Is it a dozen?
Ian Lindemann: I think I work with applications that are in several hundred per year. And so, it’s dozens of months and it’s generally about finding who’s the right fit for us in terms of the assets, the borrowing entity, their industry experience, and then making sure that our model is a good fit for that. And that’s very important for us in the long run that everybody is happy with the setup that we have.
Jeff Boedges: So, you’re more of an originator. You guys don’t hold the note. So, once you guys have created the loan, you sell it off it to another financial institution?
Ian Lindemann: That’s a great question. So, actually, we are a fully vertically integrated direct lender. So, we are handling the origination, application of the entire underwriting process making all decisions in-house and then always servicing our notes directly through our completion. That being said, as the head of our business development team, I’m handling all of our inbound new business applications, doing the networking and the outreach, helping make sure I’m steering borrowers towards the right products that are right fit for them. But then we have a full team here at our Denver office that helps service those loans and make sure that our borrowers are getting everything that they need.
Rick Kiley: Got it. So, I mean, I imagine since traditional banks, they aren’t giving out loans for the cannabis industry right now, you probably have…
Jeff Boedges: You’re giving out loans for homes.
Rick Kiley: No. They have mortgages, you know, just not to you.
Jeff Boedges: Yeah, exactly. You might miss a couple of years of payments, and all of a sudden, you’re not trustworthy.
Rick Kiley: Yeah. So, I mean, you guys must have a nice little niche. I’m curious. Are you a one of a kind operation at this moment? Are there other organizations that are lending in a similar fashion as you are? Can you give me a little sense of what the lending space is right now for cannabis?
Ian Lindemann: Sure. I can say there’s certainly other lenders in this space, but I’d say everybody has a different niche, whether it is the amounts that they’re doing, how they’re doing valuations, what leverage points they’re comfortable at doing construction loans, etcetera. So, the availability of debt financing will vary from state-to-state, but our customers tell us that certainly in the space that we operate, we have the most competitive and flexible financing programs. The way we’re structured as we lend up at 70% of the ads completed in-use cannabis value of the asset and then that is determined by an MAI cannabis in-use appraisal and our wheelhouses loan size is between $500,000 and $10 million on acquisition and construction loans as well as they can do cash out, refinance, etcetera. So, we have a pretty nice little niche in that specific lending area, whereas, you will find different lenders who specialize in larger loan amounts, smaller loan amounts, only operational assets, etcetera. So, it will vary from project-to-project.
Rick Kiley: Okay. And you said I think an acronym, MAI.
Ian Lindemann: Yeah.
Rick Kiley: I’m sorry.
Jeff Boedges: The first three letters of Mai Tai.
Rick Kiley: Yeah.
Ian Lindemann: It’s the highest certification level that an appraiser can attain. And so, these are going to be very sophisticated appraisals, end up being 100 to 150-page documents that really analyze what this asset is worth today, what is going to be worth completed at an arm’s length transaction, and then what the liquidation value of the operational asset would be, and we’re using those numbers to compute what we can lend on that project, but generally, we’re coming to 70% of a number that’s pretty close to that blind operational.
Rick Kiley: And you’re basing it not on any value beyond the real estate value itself? Or do you consider the value of the brand and let the plants let’s say like the other parts of the business?
Ian Lindemann: That’s a great question. So, it’s a cannabis in-use valuation. So, we are looking at the real property and at the end of the day, that’s going to be your land, your vertical construction, the permanent improvements that you’re making to that building in terms of often heavy investments into the mechanical, electrical plumbing with these state-of-the-art HVAC units, electrical upgrades, etcetera, that go into these facilities. But when we say the cannabis in use valuation, it is taking into account the entitlements that have been tied to that property and that has had a really positive impact on the appraised value tier. I mean, for example, states like Michigan, where the economy had been struggling for the better part of a decade, we’ve seen people buying properties that then get green zoned where they’re buying the property for $70,000. It gets green zoned. They get the right permits attached to the property and all of a sudden that warehouse they bought for $70,000 is appraising for over a million dollars. And so, there’s a lot of value to be generated through the cannabis valuations and entitlements there.
Jeff Boedges: So, the entitlements are what comes along with the permit. So, you’re entitled to produce. Is that correct or am I missing something?
Rick Kiley: Like a zoning?
Ian Lindemann: Yeah, green zone area in a community where they’ve opted into either a medical or recreational adult-use component. That’s a long way towards making sure that those are significantly more valuable assets than something that would be outside of that zone.
Rick Kiley: Got it.
Jeff Boedges: So, these operators, they’re bringing you in pretty early in the process then because we’ve talked to a lot of folks and a lot of seed-to-sale folks and I know that they, in order for them to get the permit, they actually have to have the real estate set. They have to have basically the green light from the community and they also have to have a specific location kind of picked out. So, they must be bringing you in pretty early then, yeah?
Ian Lindemann: I would say most often that’s the case and I’d also say that that will vary from state-to-state. Certain states that we work in there, they can get pre-qualified for the license without having to have married themselves specifically to a location and they come to us saying, “Hey, here’s a couple of locations we’re looking at,” and we can help steer them in the right direction to where they’re getting the best value, etcetera. And I feel like we’ve built a lot of very quality partnerships with both builders and architects. I’d say we’re kind of the three members of the team that are brought in initially to help develop what that asset’s going to look like and establish what that budget is going to be and how we can most effectively end up with a state-of-the-art asset that’s going to be a great fit for our borrowers.
Jeff Boedges: That’s cool. I like the fact that you guys have that three-legged stool going. I think it must help you guys from a competitive standpoint.
Ian Lindemann: It’s mutually beneficial because we are at the end of the day investing in that asset. So, when we know that we’re working with architects, builders, etcetera, that are going to deliver state-of-the-art assets that’s great for our customer, it’s good for us, and it’s good for the builders and architects that they know that they’re going to be able to fund the project and that we’re working with well-qualified borrowers who are going to be able to see the project all the way through.
Rick Kiley: Got it. So, are you operating as a fund? Do you have investors? How are you basically providing these loans to these organizations?
Ian Lindemann: Yeah. I mean, and that’s part of what makes us unique. Most of the operators that come across our desk can tell me horror stories of going out trying to search for financing. And so, many people who claim to be a direct lender are really at the end of the day, a loan broker or somebody who’s shopping around their deal and going to be adding on points here and there, as it gets passed from hand-to-hand. Whereas we’re really a vertically-integrated direct lender in the truest sense that we’re lending all of our own capital, making those underwriting decisions in-house. So, it really streamlines that process. Whereas, Jeff alluded to some of the difficulties that go into dealing with a bank to secure a loan, many months-long process that a lot of gray areas and you never really know where you stand, we’re able to make lending decisions in two to three weeks from having a completed application. It’s really just limited by getting that MAI cannabis and use appraisal completed. So, being able to lend our own capital is something that makes it really a streamlined process.
Rick Kiley: Got it. And so, do you offer different products to these folks? I mean, you said you’re kind of pretty flexible in your approach. I don’t know if that’s in the repayment terms or whatnot but is it one sort of standard offering?
Jeff Boedges: Everybody’s just 30-year fixed, I’m pretty sure.
Rick Kiley: Yeah, yeah. Can you talk to us about that?
Ian Lindemann: That’s a good question. There is some variance here. As far as the product goes, it’s pretty standardized. It’s really just term length that is going to vary. These are one to three-year interest-only loan so you’re just making interest payments throughout the term of the note and that’s been a really good fit and it’s high margin area where they can put capital to work, get the operation cash flow positive. The rate is a standardized 12% simple annual interest and I know that from dealing with hundreds of applicants every month that I can tell you, you can tell how much somebody’s been shopping for a cannabis loan based on their response to that number because I get a wide range of responses. Yeah.
Rick Kiley: My response is, “Whoa.”
Jeff Boedges: My response is, “Sign me up to work for you.”
Rick Kiley: Yeah. Mine is, “Are you sure you don’t want some investors?”
Ian Lindemann: Yeah. No, that’s fair. And I understand that response because it was the same vein but, I mean, when you shop around that significantly cheaper than your traditional hard money, asset lending. And by what we’re really being compared to here at the end of the day is what it costs to sell pre-operational equity in your company to try to fund getting these operations off the ground. And that can be four times as expensive at the end of the day compared to putting that money to work. And I can say, we’ve done 700 million in origination in the history of the company. We’ve never taken a recourse action on a cannabis loan. So, this is something but we’re working very hard to make sure that this is a program that’s going to work well for our borrowers and set them up for long-term success. And we have no interest in being a loan-owned operation or putting our borrowers in a position where they’re not in a great position to be able to pay back this loan.
Jeff Boedges: Right. And it doesn’t vary at all. So, no matter what the prime lending rate is, you guys are at 12.
Ian Lindemann: Yep, that is the case. So, then the case for the history of the business. And as I mentioned, this is the same rate that we’re charging to our real estate development customers whether they’re doing fix and flips or multi-unit developments, etcetera. And when you do the math equation and put the numbers in for your business model to say, okay, a lot of these, especially in the emerging markets, we’re seeing 80% gross rent, gross profit margins in the operational assets, when you can get access to the money for 12% and put it to work and get 80% return, it’s a pretty easy equation to figure out whether or not that’s a good investment for you.
Rick Kiley: Can these organizations, I just thought of this because I know there are so many tax problems with these cannabis companies because if they do touch the plant, it’s a technically illegal business and basically, they can’t write off any of these expenses. Is the interest on your loans a write-off?
Ian Lindemann: That is a good question and I believe they can write it off because the way we structure our loans is most of the time what we’re doing we’re lending directly to a real estate holding company who then bring it back to an operating entity who are co-owned. So, like I mentioned, we’re dealing directly with owner-operators. We’re not dealing with landlords or somebody that’s a sale-leaseback but since those costs are incurred by the real estate holding company who is not technically the cannabis operator, there are some tax benefits there. But once again, you should speak to your – I’m not qualified to be giving tax advice.
Rick Kiley: No, that’s fine.
Rick Kiley: I mean, I’m not licensed but I’ll definitely give advice.
Jeff Boedges: No. We have a great graphics department here that can create any kind of license you want.
Rick Kiley: Yeah, sure. You know, driver’s.
Ian Lindemann: We have partners all across and that’s another value add that we believe we have for your traditional lender is just trying to say, “Okay, let’s get this filled out. Lend you the money, pay me every month, and that’s all I want to know about your project.” And we really get very hands-on and working with our partners that we’re working with here to make sure that they’re dealing with the right folks in every aspect of the business and that means I have great relationships with accountants. We’re going to be able to help make sure that you’re maximizing any options you have available to you, as you’re working within the constraints of 2ADE, etcetera. So, it’s something that we try to make sure that we’re as helpful as possible by gearing people to the right folks to answer those questions.
Jeff Boedges: How big is the company? It sounds like you guys have got a lot of things going on. How many people are working there?
Ian Lindemann: Yeah. We have eight. It varies between eight and ten full-time employees. So, it is a small operation, but we work very hard and everybody kind of has their own lane on what they’re doing and really excel that specifically what they do, whether that’s the underwriting process, construction management, business development, all those loan doc preparation and handling is all something that we’re pretty streamlined.
Rick Kiley: Yeah. Now, you said that no one has defaulted yet, right, or missed a payment even which is amazing but do you have recourse? Like what recourse could you take if they did? You get to go in…
Jeff Boedges: Moose and Rocco.
Rick Kiley: Yeah. Did they get to go in there and take the plants? You probably can’t ding their credit. Can you or can you?
Ian Lindemann: So, we are in the first lien position on any of these assets. So, come the worst-case scenario, which I mentioned, we’re in the business of finding solutions here. We’re not in the asset ownership business. That is our worst-case scenario. So, we’re working very hard to make sure that that’s not the case and that really comes down to our due diligence process to make sure we’re working with the right people. But at the end of the day, they don’t have a crystal ball, can’t guarantee that the worst-case scenario isn’t going to unfold. So, these are fully guaranteed loans. So, they do require personal recourse as an element there, but our first step is would be taking possession of an asset. Normally, if that were to happen, everybody is aware of this in advance, so the operator would have a chance to move that asset on their own. If that couldn’t take place, then we would have to take possession of the asset and look to resell it. Generally, at the leverage points that we’re dealing with here, it would be highly unlikely that we wouldn’t be able to move that asset to cover the cost of the outstanding balance of the loan.
But, yeah, so they are fully guaranteed notes, but everybody has a lot of skin in the game to make sure that these projects are seen all the way through. And that’s why I think that’s a big part of why we have 100% success rate with this lending program.
Rick Kiley: But let me ask a question. You said these were interest-only loans for one to three years. At the end of that period of time, is the principal repaid in full in one lump sum?
Ian Lindemann: Yes, absolutely. And so, when we’re doing a build-out, I’d say the two and three-year notes are significantly more popular, and for good reason when you’re not dealing with an operational asset that’s going to be cashflow positive on day one. But once you get these, generally, the construction projects will vary whether it’s a retail or indoor cultivation, but six to eight months, and then you’ve got four months until you get ready to harvest, etcetera. They’ve been able to market and the restrictions to market entry, the high prices on wholesale, especially in emerging markets, etcetera, have really dictated that they’ve been able to put themselves in a very strong position to repay these loans on time. In the case that they decide they can always – we’ve always been able to offer renewals to any of our customers, should they say, “Hey, I’m making money on being able to keep this money put to work. I’d rather continue to carry that and take out another note and keep putting the money to work.”
Rick Kiley: I mean, as anyone said, let’s say you originated a million-dollar loan, has anyone said like, “Okay, in terms of, can I pay you half of that back now and then put interest on the other half.” Like does that happen?
Ian Lindemann: Great question. So, there is no prepayment penalties on our loan, so they can pay off any portion of the principal at any point and it would save them on any future interest payments, whether that was in partial or install. And so, yeah, that would absolutely be an option for them at the close of their term to say, “Okay, I would like to repay,” assuming they’re in good standing, “I’d really like to repay half of the note and take out a new option on the balance or the unpaid balance there.
Jeff Boedges: How many people are coming to you? And then basically, what’s your percentage approval rate? I’m just kind of curious because we’ve been speaking to a lot of people, not just on the podcast, but in general about our business and through our business, our primary business. And there are a lot of people out there who, frankly, just don’t really have, they don’t really know what they’re doing yet. So, I would imagine that they will come to you and you’re like, “Okay, I got to really be careful to separate the wheat from the chaff here.” So, what kind of percentages are you guys seeing on your application to approval rate? If you don’t mind sharing? And if you can’t, that’s fine, too.
Ian Lindemann: That is a great question and that’s one of the – it can be one of the tough parts of the job but it’s something we take very seriously of is getting that initial application in. I spend generally about a 30-minute initial phone call reviewing the projects with them, going over the status of what the asset looks like today, what’s it going to look like as completed as well, their personal financial situation. And oftentimes I have to say this project isn’t ready yet and you’re not in a position to be successful at this moment. And I try to line up or lay out a plan for how they can get from where they stand today to a position where they would be better set up for success. So, it’s hard to say what the exact number is on what the percentages of approval are but there I see I have to get a lot of frogs to find the right vote for these deals. And it’s just something where it really comes down to I look at what does the asset look like today, as I mentioned? And then what is it going to look like as completed? And what’s the budget to get from point A to point B? And then what we’re looking for initially is to see with the amount that we could lend on that project plus the liquidity that the borrowing entity is bringing to the table, do they have sufficient resources to see the project all the way through?
And assuming they check that box, then that’s when it gets a little more contextual and I really start to dive into what kind of industry experience are they bringing to the table? What kind of business wherewithal do they have? Running a state-of-the-art 3,000-square-foot cultivation facility is rocket science and so you have to know what you’re doing. And you can’t just say, “Well, it seems like I’ve been successful in business and other places,” and therefore, I think I’m going to be successful here. We need to see that you’re bringing the right team together to be able to execute this project and that’s where at the end of the day where we’re able to find borrowers who we know are going to be set up for long term success and where our program is going to be a great fit for their project in terms of helping leverage that experience that they’re bringing to the table to build that business.
Jeff Boedges: So, the fact that Rick grew a couple of plants in his closet in college is not going to help him to secure a loan?
Ian Lindemann: He’s in a better position than some of the people who I talked to on a daily basis but at the end of the day, we’re generally looking to make sure that the team is being put together in a way that you have the right experience. And that all comes back to us working with the right architects and putting these people who have the right cultivation business experience together with the architects to be able to draw what that vision is for this facility and make sure we’re designing something that specifically says the model in which they like to grow because it really can vary from business to business, and it’s not a cookie-cutter solution at the end of the day.
Rick Kiley: Got it. Are you able to tell us some of the companies or brands or folks that you’re you’ve lent to? Do you have any favorites?
Ian Lindemann: I’d love to. I wouldn’t want to plug one of the borrowers without getting their approval, though, so let me think here. I can tell you that we funded deals and states across the country and look at hundreds and hundreds of prospective deals funded, startup businesses, expansions, long-term season players and these market players, multi-state operators, you name it. There’s different situations in which our lending model can be the right solution for their debt financing needs. Sorry. I can’t give specific names.
Rick Kiley: So, no. You’re saying no.
Jeff Boedges: That was a polite move.
Ian Lindemann: Starts with an MBA and everybody get a, you know, so I want to make sure I’m respectful of everybody that we’re working with and in the future, I’ll make sure to get some plans to help give them some free advertising.
Rick Kiley: That’s cool. Do you want to plug a brand that don’t like, that you’re trying to like really disrupt the relationship with?
Ian Lindemann: No, no, no.
Rick Kiley: All right.
Ian Lindemann: Luckily, it’s generally all positive experiences. At the end of the day, I do have to be the bearer of bad news on occasion to say, “Hey, unfortunately, your model isn’t a fit for our lending program but I always try to be as you do so much networking in the space that I need people from every walk, and I can hopefully, my goal is always to try to be able to point them in the right direction and say, “Hey, I can’t help you but here’s somebody you could call that I think would be a good fit for you, etcetera.” And that’s why I always encourage folks if they are interested to start down the application path because it’s just another arrow in their quiver of options that they have when they’re trying to figure out what the right solutions for their model are.
Rick Kiley: Got it. So, I mean, a few questions about just the unique legal status I think affects everyone in the cannabis industry. I’m curious how it affects yours. And I guess, you know, in one sense the fact that there’s no traditional banking lenders out there offering, as Jeff said, alluded to earlier 30-year fixed notes on these spaces that created the opportunity for you, but for instance, does the lack of traditional banking impact your business? Are these guys paying you back with just like sacks of cash? How are you being repaid?
Ian Lindemann: That’s a very fair question. When we first got in this space, that was something that we were very much trying to get our grip on before we got comfortable with really entering the space because these are monitor transactions and etcetera. So, the thing that we’ve been really impressed by is the progress that’s been made over the last several years in terms of banking options for owner-operators. And while they can’t go there for a loan, at most of these institutions, the amount of credit unions and state-regulated banks that are taking depositors has really skyrocketed so we don’t have any issues with our lenders having access to this kind of a banking institution, all of our loan payments are made through wires. So, no suitcases or duffel bags of cash involved in the business. At the end of the day, these are bankable borrowers, but folks who obviously don’t have access to lending through these more traditional institutions as the regulatory environment stands today.
Rick Kiley: Well, there goes my Netflix series idea.
Jeff Boedges: I think it’s still there. We can take some poetic license.
Rick Kiley: Okay. So, beyond sort of the banking aspect, anything else in the world of sort of just the strange legal status of cannabis that uniquely affects your business, creates challenges or anything like that?
Ian Lindemann: Sure. I mean, local and state regulations are frequently changed, to be honest, and we have to be diligent about keeping up with these changes to ensure compliance. So, Lead Funding we’re regularly convening with counsel to ensure that our business model is compliant in every state where we’re operating and that our operators are also compliant. And that’s something that’s very important to us and it’s somewhat painstaking and is involved in every single loan origination but it’s something that is very important to making sure that we’re staying on the right side of any issues or gray areas but legally come with the territory of dealing within the cannabis space.
Rick Kiley: Got it. Nothing with people just like forgetting meetings?
Ian Lindemann: No, no, no.
Rick Kiley: Eating a lot of Doritos, all crusted with nacho cheese powder.
Ian Lindemann: You’d be shocked. I mean, really, we deal with borrowers who come from every walk of life, whether with Wall Street background, the people who have been doing like extravagant cultivations in their basements for decades but the resounding theme is that these are all folks who know what it takes to run a successful business operation at the end of the day, and are good lending partners with that on our end.
Rick Kiley: That’s great to hear.
Jeff Boedges: And so, one of the things I liked about your model is the 70% model, because that means they’ve got to kick in 30%. As you said, everybody has skin in the game. Where are these guys getting their 30%? I mean, Wall Street guys, I guess kind of makes sense but what about the – I guess, the extravagant grower, that’s where he’s getting his 30% too.
Rick Kiley: Yeah. He’s got a few sacks.
Jeff Boedges: He’s got a duffel bag full of money.
Ian Lindemann: It’s something that really this is every single applicant will have a different path to how they arrived to where they are today. And the 70%, 30% is not necessarily exactly how it works because we’re lending 70% of the as-completed in-use value of the project. And oftentimes, that final value is greater than the sum of its parts, which is to say, if I buy an asset for a million dollars and then I spent $1.5 million on the buildout, it’s not worth $2.5 million when it’s done, but it’s worth closer to $3 million. And so, when we’re lending 70%, it’s covering more than 70% of the hard costs. So, that’s another thing that’s a good fit for our borrowers. So, they’re not having to necessarily come up with a full 30% but they are going to need some financial wherewithal in terms of the liquidity that their borrowing entity has and their personal net worth that is going to substantiate that they are somebody who’s going to be able to execute this size project.
So, unfortunately, if you come to me and you just are somebody who really knows what they’re doing in this space, but you don’t have any real, you’re not a very strong traditional borrower, you maybe have a really poor credit score, you’re probably not going to be somebody who on their own is going to be a good fit. But that’s a two-way street because the same thing I said earlier, whereas somebody can come to me and you could be, on paper, one of the strongest borrowers of all time, and we turn deals or deals away because they don’t have the right team in place to be able to execute the vision of the project or they misrepresent things on their application. And it’s a relationship-based model so it’s so important for us at the end of the day. We’re meeting with these folks, we’re going out to every location to walk the site location, take the time to break bread with the borrowers and their architects and construction managers and really getting a good feel for the team to make sure that this is the right combination of factors that to make sure that we’re going to be able to work closely together to get this whole thing done successfully.
Rick Kiley: Got it. I’m just amazed that they can pay back the balance so quickly. Like when you describe your product, for someone who’s going to like go and buy and rehab a property and then flip it and sell it like it totally makes sense to me because they’re getting a bunch of money in and it sort of fits that timeline. Just the fact that the sales kick up so quickly and they’re able to repay you that big balance.
Jeff Boedges: But they may also be financing through new equity partners. They may be financing by flipping that loan into something more traditional. They could do it a bunch of different ways. It doesn’t all have to be, I mean, yes, they have to pay back these guys in lump sum, but where they get their dough can come a hundred different ways.
Ian Lindemann: You’re right. It is that there’s multiple factors here. A, that in some of these states the $4,000 a pound. There’s shortages. We’re watching all these things very closely and we have to stay very in tune with the local markets to make sure that when we look at the performance on the business and to their model, that everything’s realistic, then we often have to tell people, “Hey, we need to get more conservative with these numbers on rates of investment.” We have to get a little more aggressive on what we think, you know. Construction projects have a couple of guarantees, and that’s what they’ll take longer and cost more than you expect. And so, we need to make sure that we have the right contingencies built-in but generally, we’re able to look at these in a pretty conservative manner and say, “Okay, within three years, you’re going to be able to easily pay back this loan,” and that’s been the case for our borrowers when we’ve been able to execute that vision.
Rick Kiley: Right. I mean, I’m curious, because it seems like do you feel like you’re arriving at this a little bit of just like the right time? You know, you mentioned this idea of the green zoning. I’m curious how much of your success do you feel is driven by the fact that this sort of converting a property into something that is legally able to produce and maybe sell cannabis product, and that’s that proper zoning just increases the value of that property inherently by going through that. Is that a major part of why you think your business is thriving right now? Or is it a smaller component?
Ian Lindemann: I would say it’s a medium-sized component, and it will vary. Like I said, in an established market like Colorado or an Oregon, that’s going to play less after we’re much more mature but we’re still finding very good deals there all the time but in states where the Missouris and the Michigans of the world where that becomes a much larger component because it is taking assets that have potentially fallen out of use and finding a way to restore it and inject money into local economies that are in sore need of it. And so, we’re obviously often dealing with local governments who are very much in favor of trying to bring some much-needed tax revenues and prosperity back to their community. So, it’s been a fun thing to be a part of in those areas as well.
Rick Kiley: Got it. Cool. So, I’m just curious, as we’re going to get sort of towards the end here, federal legalization. I mean, we talked about that a lot in this podcast. We’re of the belief that we’re moving towards federal legalization. I’m curious, you’re the first person I’ve talked to that makes me wonder if federal legalization would help or hurt their business. And I’m curious what your perceptions of that are. Because, I mean, if big banks started getting into lending and creating competition, I imagine that rate of return that you’re able to command may get lower. It may get lower for everybody so who cares? But do you think that the volume would just increase and offset it? Like, well, how do you feel about how federal legalization would impact your business?
Ian Lindemann: That’s a great question. We agree with you. So, we believe federal legalization is coming. And whether that’s one year, two years, three years, five years to target, hard to project at the moment, but as far as it goes with impacting our model, it would be somewhat more muted than you might anticipate for a couple of reasons. Lending institutions, commercial banking, etcetera, they’re inherently risk-averse. So, any changes are by definition slow with them in terms of them getting involved in this space but on that same token, there’s a positive element to our business as more traditional lending and affordable options become available. One of the hesitations that we have, even though we know their business model supported, as Jeff mentioned, is that you folks look at this short term note and they say, “Wow, I’m just nervous that I’m going to be able to repay this back in three years.” And knowing that they’ll have options that when they have a stabilized asset that they could refinance out to a more traditional lending program is going to be something that makes them much more comfortable with getting involved in the first place.
So, there’s going to be increased volume, and increased comfortability and that comes back to the fact that your traditional banks, they don’t like lending on construction projects, because there’s inherently more risk and that’s really where we specialize in the same thing that we’re doing on the real estate development side. We’re taking an asset that is going to see a big increase in its current value and we’re financing the repair and refurbishment of that and then those folks are either able to resell or refinance and hold the asset after the completion of that project. So, it’s the same as ours. There’s obviously traditional lending available in the real estate space or residential real estate space now, but our program is obviously still very successful because of the fact that we can have a niche where traditional banks don’t tend to like to be.
Rick Kiley: Got it.
Jeff Boedges: Cool.
Rick Kiley: All right. So, then let’s put your name up on the big board here with your prognostication of when you think federal legalization is coming. We asked everybody this question who appears on The Green Repeal.
Jeff Boedges: The pool is up to like $80, by the way.
Rick Kiley: Yeah. Everyone’s chipping in $5.
Ian Lindemann: I’m a known poor, particularly, after a recent election with everything going on, I said I’m getting out of the prognostication business. I have no idea what’s going on anymore.
Jeff Boedges: Well, if there’s really nothing. There’s nothing to lose here.
Ian Lindemann: That being said, I think we’re talking on about a three-year timeline to get everything done but who knows? It could be a wild hair on an election political decision that comes up within the next year. It is hard to say but I think we’re mostly realistically on about a three-year timeline.
Rick Kiley: Three years.
Jeff Boedges: Cool. We got you down on the three-year box.
Ian Lindemann: I know I’ve listened to a handful and so I’ve heard a couple but I’m kind of curious like what the consensus you guys have.
Rick Kiley: Yeah. There are a few people in the camp of very, very soon. There are several people that are in your camp, I’d say the three to five-year range.
Jeff Boedges: I think that’s the popular range right now.
Rick Kiley: Yeah. And I think there’s only been like one person that said never. You know, one person is just like, “No, never.” Medically, maybe, but recreationally never. I was like, “Okay.” So, we’re not inviting that person back.
Jeff Boedges: Well, that person…
Ian Lindemann: …comes from.
Jeff Boedges: Well, he brought up a good point. There’s a lot of conservative states out there that really don’t ever want to do it. And so, we have to kind of with federal legalization, there’s that battle that will be fought on the state versus federal level. It may end up being federally legal, but it also may mean that some certain states say, “Yeah, not here.” It’s never going to happen.
Ian Lindemann: I mean, I feel like that’s always there, right? We have things that are legal and some things that are not legal in other states all the time and that state laws vary from place to place. So, I’d have to think that there’s not enough traction and a limited number of states I put in that camp. Certainly, where we are today, I mean, yeah, 35 states that already have a medically legal component and growing. I can see there not being federal legalization, with certain states choosing not to participate and choosing to make it within their own borders and that’s, I guess, I suppose within their rights to do so.
Rick Kiley: Well, we still have some dry counties out there in terms of alcohol within certain states so, yeah, I suppose.
Jeff Boedges: We refer to those as boring states.
Rick Kiley: Yeah.
Ian Lindemann: I remember that and all sorts of places. I remember when I was in college, visiting with friends in Lubbock, Texas. Of all places, you couldn’t find a drink in the county and I was like, “That is a pretty bizarre thing. I was not mentally prepared for it.” It’s a college town.
Rick Kiley: Well, well.
Jeff Boedges: Yeah. Well, nothing against Lubbock people. Please don’t send hate mail. Yeah, we love Lubbock.
Ian Lindemann: No, no, no, I think they changed the rules honestly so good for Lubbock.
Rick Kiley: Yeah. Awesome.
Jeff Boedges: Well, good for us. Let’s all meet up in Lubbock and we’ll toast a Buddy Holly.
Ian Lindemann: Well, that’s great, guys. I really appreciate the opportunity to get on and have a chance to discuss debt financing options for cultivators and how that has a role.
Rick Kiley: It was a lot more enjoyable conversation about debt financing than you would have thought.
Jeff Boedges: Absolutely. I think you guys are putting the fun back in debt funds.
Ian Lindemann: I’m like, “Oh, man, their listeners are going to be bleeding from their ears,” but no, I really enjoyed this. This is fun.
Rick Kiley: Great. And if we do have anybody who’s looking to originate a loan in the cannabis industry and they wanted to contact you, reach out, find out more, where would the best place for them be to do that?
Ian Lindemann: A great place to jump off would be going to LeadFunding.com/Cannabis. You can obviously find the tab on the main page but I think it kind of will get you right to what you’re looking for and/or you could reach out to me directly at ian@leadfunding.com. Always happy to run through different lending scenarios and help make sure we’re pointing prospective borrowers in the right direction.
Rick Kiley: Great. Awesome, Ian. Really good talking to you today. Enjoy your day, enjoy your weekend, and good luck with everything.
Jeff Boedges: Watch out for those dogs.
Ian Lindemann: Absolutely. Well, Rick, Jeff, thank you both for your time and look forward to staying in touch here. Thank you. Thank you both.
Rick Kiley: All right. Cheers.
Jeff Boedges: Bye.
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Rick Kiley: Thanks for listening. If you enjoyed today’s episode of The Green Repeal, hit the subscribe button so future episodes are automatically downloaded directly to your device. And if you want access to today’s show notes, including links to all the resources mentioned, visit SOHOExp.com/GreenRepeal.
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