Real Estate Sale-Leaseback Transactions Free Up Capital For Cannabis Operators

Over the past year the cannabis sector experienced its first sustained contraction in capital markets transactions and capital availability. Here are the numbers according to the Viridian Cannabis Deal Tracker. In 2019 the number of capital raises declined by 12.6% and the total capital raised fell by 17.8%.  So far in 2020, the decline has been even more significant. Through the first 8 months of 2020, the number of capital raises fell by 52.5% and the total dollars raised shrank by 72.9% compared to the same period in 2019.

What caused this sharp decline?

  • Disappointing financial results from Canadian LPs and MSOs causing Canadian/U.S. equities analysts to lower forecasts and stock ratings
  • As public stock prices began to fall, companies were forced to raise capital at increasingly dilutive levels, if at all
  • Numerous capital and M&A deals were cancelled or re-priced
  • Public cannabis companies, long the most aggressive acquirors, were weakened with falling stock prices and shrinking cash balances
  • Management cracks began to appear as inexperienced operators faced a challenging capital markets environment for the first time
  • The lack of progress on key U.S. industry legislative initiatives, particularly the SAFE Banking Act.

The Sale-Leaseback Transaction Emerges in Cannabis

As capital availability has dried up cannabis companies have looked for alternatives to generate growth capital.  Several larger, vertically integrated operators have looked to their balance sheets to free up assets, in particular the real estate underlying their cultivation, processing and manufacturing businesses.  The emergence of the “Sale-Leaseback” transaction in cannabis has arrived.

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