How to set up a real estate fund for industrial cannabis dev?

Question

Hi BP community I just set up my account and was hoping I could get some feedback on setting up an industrial value-add fund specific to cannabis land & infrastructure development. My company plans to develop 10 industrial subdivisions/business parks through the US over the course of the next 5 years. We are currently in early stages of our first two projects in MA that are projected to deliver over 800,000sf of turnkey cultivation, processing and manufacturing space to be leased out. Each of these projects costs in the neighborhood of $90,000,000. Anyone here have any experience with setting up and managing a fund and can offer some advice/direction?

Thanks in advance!

John

Thanks in advance!

John

Daniel McNulty · Answer

@John Marchefka

Setting up and managing a fund is a much more intensive process than can likely be covered in a forum. One of the most expensive and important pieces will be the legal structuring of a fund and each deal. Arguably, the most important item of all will be a successful track record that speaks to your expertise in this type of development project. Your ability to prove prior exits is equally important. No one wants to invest in something that does not have an exit strategy.

If I were to make a short list:

1. Line up well known, reliable service providers. This will satisfy most investors operational diligence process. This means reputable, accountants, legal, banking / lending and any others relevant to developing this venture.

2. Hire an experienced securities attorney in the RE development space to help you put together the offering documents of the partnership / LLC that will be created to facilitate these transactions.

3. Put together your pitchbook that should justify why your team should be trusted to purchase, develop, improve and ultimately sell 900M worth of real estate. Be sure to address your approach to mitigating important risks to investors such as legal and regulatory risk from the cannabis space, but also the collateral coverage in the event one or more deals go belly up.

John Marchefka · Answer

Daniel,

@Daniel McNulty thank you for your response. Yes, this is big endeavor but originally we were trying to raise equity in our company as opposed to setting up a fund structure to finance these projects. Our strategy was to get one up and running (through entitlements) then leverage equity created once entitlements were in place and roll into next project and so on and so forth...

What we learned was that given the large capital requirements for these infrastructure projects, the investors we are getting introduced to are going to require a GP & LP structure.

To your point about sponsor track record, we were hoping to partner with/hire a qualified CFO that has successful RE fund management experience and LP reporting experience. I personally have a lot of development experience including over 100mw's of operational solar and a pipeline of over 600 more but I act/acted as a co-developer and my partner/co-development companies always took care of the financing. In your experience, is hiring/partnering with a qualified and experienced manager enough to overcome the fact that is is my first fund?

Daniel McNulty · Answer

@John Marchefka

It sounds like you have most bases covered for your development projects. You probably do not need any more additions to your team, assuming your hedge fund hire can perform CFO duties. He / She should already have a very strong understanding of the remaining items I detail below. If they do not, I would question the validity of their background. All that being said, the following services are specific to operating a fund. Most of the services detailed below ensure best in class investor rights and transparency. You may struggle to find investors if you have not address the items below.

1. A securities attorney. Someone will need to create the legal structure for your partnership and develop the offering documents. It is generally a fairly nuanced process. I would directly ask your current attorney if he / she has performed this in the past. Traditionally there are many more rights / powers detailed in this kind of partnership than a SPV created to purchase a single property. If the attorney has this experience, problem solved. If not, hire someone to complete the offering. You don't need them full time, just to get you up and running.  Happy to recommend a few firms / attorneys if its helpful.

2. A large regional or national accounting firm to audit the fund / partnership. Any competent investor will demand annual audited financial statements. That will likely mean that each project will need audited as well. Depending on the size / complication, this may add considerable costs. However, it is an essential service any competent investor will demand.

3. Hire a 3rd party fund administrator. This service is essentially an outsourced monthly accounting service for the fund / partnership. It generally includes all LP reporting services, cash receipt and distribution services for LPs and often even includes GP accounting. Most administrators are willing to include other ad hoc services and accounting. The ad hoc services can be a valuable service if you have such a large fund / project and only a single accountant / CFO on staff. This service can support them. This is regarded as an essential service by most investors. It serves a similar purpose as the annual audit but on a monthly or quarterly basis. Happy to provide some recommendations if you need.

From the limited info shared on this forum, that should cover most bases, but with limited knowledge of your offering, I cant say for sure.

Feel free to PM and we can setup a time to chat in greater detail.

John Marchefka · Answer

@Daniel McNulty thanks again for your response.

When you say service providers I want to understand where our gaps may be.  We are currently working with leading nationally recognized civil engineers, architects and EPC's on site development work and a regionally renowned construction firm. We have an experienced corporate attorney in the environmental and pharmaceutical industries on our founders team but are currently lacking a fund specific RE attorney & CFO (but have we have a connection with an experienced hedge fund manager who has expressed interest in joining our team and we are currently interviewing interim candidates on toptal). 'To use a sports analogy - what positions am I missing/not considering for us to be set up for our best chances at success in your opinion?

Daniel McNulty · Answer

@John Marchefka

With no insight into the actual details, I would say its about 50/50 as to whether experience is enough to overcome everything else. The fund management and LP reporting experience can be adequately managed through a good fund administrator. Think of them as the property manager for the GP / LP structure. With a nationally recognized CPA firm, annual audits and a reputable fund administrator, you would meet the minimum requirements for many investors.

A strong CFO will not only bring financing expertise, but also strong risk management through adequate internal controls. However, nothing is free, so there is always a trade off in the hiring process of service providers and internal personnel.

If it were me, it would probably depend on the risk / reward trade off you are offering. A new fund manager, new service providers and new employees, etc, all else being equal is a higher risk venture. Compensate investors with lower fees, attractive liquidity terms, total transparency into the fund, and better return profiles and you'll have your best shot.

Everyone has to start somewhere, so anything is possible.

Jaysen Medhurst · Answer

Your biggest issue, @John Marchefka, is going to be finding a bank that will do business with you. Since cannabis is still illegal at the federal level each bank has different rules. In MA, some of the local banks might be willing to work with you, but will they have the heft, experience and appetite to underwrite $90MM? That may be a very tall order for a local bank.

Big banks are kind of all over the map as far as what they'll do in what jurisdictions.

How to set up a real estate fund for industrial cannabis dev?

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