CREJ - page 22

Page 22 —
COLORADO REAL ESTATE JOURNAL
— September 16-October 6, 2015
Finance
I
t seems like many investors
are enamored with the bur-
geoning marijuana indus-
try and are jumping in headfirst
before checking the facts. On the
surface, the returns look amazing.
Why wouldn’t someone go buy
an industrial building and lease
it for four times what they could
to a normal tenant? Should an
investor take the plunge to invest
in this new industry? Will the
appreciation and rents continue?
Will the political landscape change
and have a major impact on the
industry?
Before jumping on the marijua-
na bandwagon, here are five tips
every investor needs to consider.
First, is the property general
purpose? The industry is rapidly
evolving and as prices increase,
buyers are looking at unconven-
tional properties for marijuana
cultivation. For example, three
years ago the primary properties
for cultivation/manufacturing
were plainvanilla industrial build-
ings. As demand for these proper-
ties increased, buyers have begun
migrating to other lower-cost
alternatives, for example, Class
C and D office and even older
motels. The question an investor
has to ask himself is: As the indus-
try evolves and/or if the grow-
ing methodology changes (i.e.,
outdoor, greenhouses, etc.), what
could you repurpose the property
for? I joke that they could reuse the
motel with a “tropical theme” for
future guests if the property were
repurposed.
Second, can the high rents last?
Unfortunately high rents that
property owners are getting today
are unsustainable. As more com-
petition enters and pushes down
the wholesale costs, tenants will
be unable to sustain the above-
market rents. Furthermore as rents
rise, it is more economical to seek
out lower-cost options outside the
metro area (like Pueblo or Colo-
rado Springs) where buildings
are valued considerably less than
in Denver. Marijuana is an easily
transported product, so location
is not as critical on the wholesale
side. This trend will continue and
rents ultimately will come down
significantly.
Third, can the building prices
continue their torrid pace? The
answer is a
resounding
no. There are
no
market
fundamentals
to support the
prices being
paid for many
i n d u s t r i a l
prope r t i e s .
I’ve seen some
trading at over
$200 a foot for
a marijuana
b u i l d i n g .
For a normal
tenant the cap rate would have
to be less than 1 percent for the
transaction to make sense. This
means that investors are placing
a higher value on an industrial
building with a noncredit tenant
as opposed to amajor credit, retail-
anchored center.
Fourth, will all the property
improvementsmade by the tenant
substantially increase the value of
the property? Most marijuana ten-
ants (or landlords) spend substan-
tial dollars upgrading the building
to accommodate the new tenant.
This includes security, electrical,
lighting, climate control, space
reconfiguration (grow rooms, dry-
ing rooms, for example), etc., to
accommodate their specific use.
Unfortunately the vast majority
of these updates are not beneficial
to future tenants and many are
actually detrimental to a future
repurposing of the property. For
example, I recently inspected a
3,000-square-foot light-industrial
building that originally had a
small office area and then a ware-
house, which was very functional
for the area. The buildingwas con-
verted to all small rooms with no
windows (for growing) with low
ceilings (10 feet) so that a mezza-
nine could be built. Unfortunately
in the building location (heavy
industrial/warehouse area), this
newly configured property would
be nearly impossible to rent with
the updated configuration. How
many office users are looking for a
building in an industrial area, with
no other office users, with small
offices and zero windows; sounds
more like a jail than a functional
office building. The tenant also
considerably upgraded the power.
The increase in power is 10 times
more than a typical user could
ever use in this size property. I saw
a study in Nevada said that mari-
juana buildings use more electric-
ity per foot than anything ever
built in Southern Nevada. In a
nutshell, the improvements made
by the tenant did not increase the
value of the property; they actu-
ally decreased the value to a gen-
eral purpose user since the newly
reconfigured space is dysfunction-
al and the average user would
likely never need the improve-
ments (think security, immense
HVAC, power, grow light infra-
structure, etc.).
Finally, the industry is changing
rapidly. What do these changes
mean to property owners? First,
market forces will reshape the
industry. Larger players already
are entering the market, driving
down prices along with, in gen-
eral, more market entrants and
grows coming on line. Many of
these new entrants are staking out
claims in much lower-priced pro-
duction areas (outside of metro,
greenhouses, etc.), which will fur-
ther their cost advantage. Along
with general market forces there
are also a number of unknowns in
the political landscape. For exam-
ple, presidential contender Chris
Christie has vowed to “end Colo-
rado’s pot party” if elected. Anew
administration could substantially
alter the current marijuana land-
scape through enforcement (or
lack of enforcement) of various
laws. In the marijuana industry
change is not a matter of if, it is
more a question of when and how
suddenly.
Withtheitemsmentionedabove,
should you invest in marijuana?
For the time being there could be
money to be made as the indus-
try is in a transition phase. The
million-dollar question is not only
when this large change will occur
but also what it will look like (full
outdoor growing, enforcement of
federal laws, etc.). The marijuana
industry is currently a game of
musical chairs with a number of
moving pieces. In marijuana real
estate the objective of the game is
to be close to the end of the game,
but not be the last person with a
chair (i.e., dysfunctional marijuana
building) when the industry tran-
sitions and the music stops.
s
Glen Weinberg
Chief operating
officer, Fairview
Commercial Lending,
Denver
LLC for the refinance of a 15-unit
apartment complex at 1411-1415
Vine St. inDenver. The seven-year,
fixed-rate loan is at 3.81 percent;
• A $955,000 recourse loan with
DU Capital LLC for the refinance
of a 12-unit apartment complex at
2358 S. UniversityBlvd. inDenver.
The seven-year, fixed-rate loan is
at 3.74 percent;
• An $878,250 recourse loan
withBaronReal Estate LLC for the
purchase of an eight-unit apart-
ment complex at 1861-1863 Clark-
son St. in Denver. The seven-year,
fixed-rate loan is at 4.17 percent;
• An $810,000 recourse loan
with Monica Cavender for the
refinance of a six-unit retail com-
plex at 1101-1115 S. Pearl St. in
Denver. The five-year, fixed-rate
loan is at 4.54 percent;
• A $750,000 recourse loan with
1232 Gaylord LLC for the refi-
nance of a five-unit apartment
complex at 1232 Gaylord St. in
Denver. The MTA adjustable-rate
loan had a start rate of 3.42 per-
cent;
• A $600,000 recourse loan with
970 Downing LLC for the refi-
nance of a 10-unit apartment com-
plex at 970Downing St. inDenver.
The seven-year, fixed-rate loan is
at 3.96 percent;
• A $553,000 recourse loan with
234 Logan LLC for the refinance
of a 12-unit apartment complex at
234 Logan St. inDenver. TheMTA
adjustable rate loan had a start
rate of 2.91 percent; and
• A $525,000 nonrecourse loan
with Brown Siblings LLC for the
refinance of a 29-unit apartment
complex at 206-210 E. 10thAve. in
Denver. The seven-year, fixed-rate
loan is at 3.59 percent.
Other News
n
Peter Wessel,
a senior direc-
tor in
Love Funding’s
Denver
office, recently secured $6.25 mil-
lion in refinancing for four mar-
ket-rate apartment communities
in Denver.
The properties are:
• The 24-unit Nobles Apart-
ments on SouthAlbion Street
• The 12-unit 4101 E. Iowa Ave.
apartments;
• The 23-unit 1520 S. Albion St.
apartments; and
• The 12-unit 156 W. Ellsworth
Ave. apartments.
Johnson Properties Manage-
ment Co.
manages the properties.
All four properties share the same
ownership group.
Wessel secured financing
through the
U.S. Department of
Housing and Urban Develop-
ment’s
223(f) loan insurance pro-
gram.
The program helps preserve
moderate income workforce
housing by insuring against
default loans used to purchase
or refinance existing apartment
properties. The nonrecourse loans
can be locked for up to 35 years
under the program.
s
For Company Profiles, Contact
Information & Links, Please Visit
Commercial Real Estate
Lenders
Directory
COMMERCIAL REAL ESTATE LENDERS DIRECTORY
If you would like to include your firm in this directory,
please contact Jon Stern at 303-623-1148 or
.
@
Academy Bank
Arbor Commercial Mortgage, LLC
Bank of Colorado
Bank of the West
Berkadia Commercial
Mortgage, LLC
Bloomfield Capital Partners, LLC
Capital Source
CBRE|Capital Markets
Chase Commercial Term Lending
Colorado Business Bank
Colorado Lending Source
Commerce Bank
Commercial Federal Bank
Essex Financial Group
Fairview Commercial Lending
FirstBank Holding Company
Front Range Bank
Grandbridge Real Estate Capital LLC
Hunt Mortgage Group
JCR Capital
Johnson Capital
JVSC-CBRE Capital Markets
KeyBank N.A., Key Commercial
Mortgage Inc.
Merchants Mortgage and Trust Corp.
Midland States Bank
Montegra Capital Resources,
Private Lender
Mutual of Omaha Bank
NorthMarq Capital, Inc.
RNB Lending Group
TCF Bank
Terrix Financial Corporation
Trans Lending Corporation
U.S. Bank – Commercial Real Estate
U.S. Bank SBA Division
Vectra Bank Colorado, N.A.
Wells Fargo SBA Lending
Wells Fargo N.A. – Commercial
Real Estate Group
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