By Michelle Jarboe
The Plain Dealer, Cleveland
WWR Article Summary (tl;dr) As voters and legislatures in more states make allowances for cannabis, hunger is growing for warehouses, greenhouses, storefronts and land. In many cities, savvy investors have purchased properties early and jacked up prices after legalization. But funding for cannabis-related commercial real estate deals is tough to find.
Brent Zimmerman and Matt Jenkins have an appetite for the unconventional, a low tolerance for boredom and strong stomachs for risk.
The Ohio natives left the New York investment world and boomeranged to the Buckeye State, where they’ve held high-level roles at hedge funds. Last year, they stepped out on a limb, forming a private real estate financing business to provide hard-to-find construction debt for buildings that house marijuana cultivation and production.
That company, REspring, is finalizing its first deal, a $6-million-plus loan on a $13.3 million project in Nevada. Jenkins and Zimmerman won’t talk about interest rates or potential returns. But it’s clear they see tremendous upside in the real estate needs of legalized pot.
As voters and legislatures in more states, including Ohio, make allowances for cannabis, hunger is growing for warehouses, greenhouses, storefronts and land. In Denver, demand — and pricing — for warehouse space shot up after large-scale cultivation started in 2009. Savvy investors in other cities have purchased properties early and jacked up prices after legalization.
But funding for cannabis-related commercial real estate deals is tough to find.
Traditional lenders won’t touch the stuff because of the conflicts between state and federal laws. At the federal level, it’s still illegal to possess, sell or consume marijuana.
Though construction debt and mortgages for landlords are, arguably, one step removed from the plant, that’s not enough distance to allow banks to treat those properties like any other building.
“You put a banker in the room, and they just throw up their hands,” said Gerard Mildner, an associate professor and academic director of the center for real estate at Portland State University in Oregon. “They can’t participate.”
That’s where Jenkins, who is 36, and Zimmerman, 38, found an opportunity.
Using some of their own cash and money raised from unidentified investors, they aim to create a national platform for construction debt. For the Nevada project, located in a business park outside Reno, the equity is coming from a fund managed by MedMen, a Los Angeles-based company that also will own and operate the facility.
Zimmerman believes there’s a multibillion dollar need for such financing — and that he and Jenkins can capture a lucrative fraction of that nationwide market from Northeast Ohio just as easily as they could from any other perch in the country.
REspring, which is in the process of establishing an office in downtown Cleveland, aspires to provide debt for other MedMen deals and is exploring additional investments through industry connections and word of mouth.
It’s difficult to put numbers on cannabis-driven demand for real estate funding. Major brokerages largely are shying away from the subject as they watch the state-by-state rollout. Marijuana industry data sources tend to focus on the need for operating capital, not space.
Anecdotally, some borrowers across the country are willing to pay interest rates of 20 percent or more on debt, since the industry is stymied by lending limitations, strict regulations and a stigma that’s still present, though diminishing as decriminalization spreads.
“You can’t get traditional debt. And you can’t get traditional equity,” said Kyle Kazan of Magu Capital, LLC, a California company that’s providing operating loans for medical marijuana ventures and paying cash for buildings, with an option to take a stake in the actual businesses.
“As an investor for over 20 years, whenever there has been a capital dislocation, I have done really well,” Kazan said. “This is the biggest capital dislocation I have ever seen.”
The founders of REspring aren’t just chasing huge returns.
It’s quickly evident that Jenkins and Zimmerman are restless. After 10-plus years of overseeing more mainstream investments, they’re looking for some mental stimulation.
“Either one of us right now could go get another job,” said Jenkins, who is winding down his work as chief financial officer and chief compliance officer at Zelman Capital in Beachwood. “That business is stale. It’s crowded. That industry just isn’t interesting to us anymore.”
A Pleasantville native, Jenkins spent more than seven years on the East Coast before a mix of nostalgia and prohibitive New York City housing costs brought him back to Ohio. He and his wife, a pipeline engineer, live in Sharon Township in Medina County.
Zimmerman, originally from Bellevue, returned to Ohio in 2005 and lives in downtown Cleveland with his wife, who is an attorney, and their 2-year-old son. He closed a hedge fund he co-owned a year ago to focus on REspring and unrelated real estate investments, including a rental townhouse project downtown and a pizzeria-brewery and apartments in Ohio City.
“These aren’t eight-hour days,” he said, seeming to relish the hectic schedule the pair is keeping. “These are never-ending marathons. Every once in a while, we get a nap.”
The seeds of REspring germinated two years ago, when Zimmerman and Jenkins were part of a group advocating for legalized medical marijuana in Ohio. From the start, Zimmerman saw dollar signs. The treatment potential of the plant wasn’t a major factor, though he’s since grown to believe that cannabis can significantly improve the lives of people who are suffering.
Jenkins, who describes himself as a libertarian, said his interest was evenly financial and sociopolitical. “Legalizing it is a much more responsible way to treat it,” he said.
The Ohio General Assembly passed legislation for a medical marijuana program in the state last year, and Gov. John Kasich signed off in June. Recreational use remains illegal. The law also prohibits smoking or growing marijuana at home. Once the program gets running, people with certain medical conditions will be able to buy cannabis oil, tinctures, edibles and other products at state-licensed dispensaries.
The legislature’s move preempted the ballot effort that Jenkins and Zimmerman were part of, an initiative led by the national Marijuana Policy Project. But the duo had formed key relationships, including one with future partner Adam Bierman of MedMen.
To fund construction now, operators rely on local financiers, wealthy individuals or their own pocketbooks. MedMen has found debt for buildings on a one-off basis, but Bierman, the company’s chief executive officer, said the process is cumbersome and inefficient.
“In Ohio, I’ve got to go to a different debt provider than I do in California or Maryland,” he said. “Who wants to go through a process that’s this arduous every time?”
If Zimmerman and Jenkins can replicate their first deal and REspring grows, Bierman said, “we would love to have a preferred relationship turn into a pretty automatic one.”
Of course, there are other players plunging into the pot pool. The first publicly traded cannabis real estate investment trust made its debut on the New York Stock Exchange late last year. The Internet is flooded with pitches about marijuana being the next great real estate play.
“This is so different than what we expected when I was in college 30 years ago. It isn’t stoners and hippies making money out of this game. It’s MBA types,” said Mildner, the Portland State University professor who has been monitoring the industry’s growth.
But, West Coast investor Kazan notes, “there’s just a lot of people talking. There’s not a lot of people doing. There’s talk, there’s offers, there’s this, there’s that.”
Twenty-eight states and the District of Columbia have legalized some level of marijuana use, most of it medical. Other states have decriminalized possession of small amounts of pot. It isn’t clear how President Donald Trump’s administration will treat cannabis. While Trump has championed state’s rights, Attorney General Jeff Sessions is a longtime opponent of legalization and decriminalization.
“Until we change federal law, there’s no certainty,” said Tom Haren, an attorney who is working with cannabis-industry clients at Seeley, Savidge, Ebert & Gourash Co. in Westlake.
“Your risk tolerance has to be sky-high,” he said of investing in the business. “But with that risk comes an opportunity for an enormous reward. This can be a very profitable industry … but anyone who tells you it’s not a risky industry is lying to you, and it’s unfortunate.”
Jenkins and Zimmerman aren’t worried.
Their business model is predicated on medical marijuana. Their debt-repayment timelines, at three years or less, are relatively short. If a deal fails, they’ll end up with the assets, including a new industrial building that could be re-leased or sold. And though they expect that traditional banks eventually will start lending on marijuana assets, as the legal landscape changes, the partners believe they have a significant head start.
“We’re talking about a situation here, an industry that is approaching $20 billion, that is projected to be larger than the coffee industry within five years,” Zimmerman said. “That puts a lot of people to work with a lot of jobs. Federal legality is the biggest risk. We’re cognizant of it. We’re comfortable with it. And we’re getting paid for it.”