WHAT IS ALTA REAL ESTATE’S INVESTMENT THESIS?
MORTGAGES & SALE-LEASEBACKS
Alta Real Estate acquires downstream real estate properties at fair market values based on recent market comps and third-party appraisals. The fund avoids paying any cannabis premiums on these assets and leases the properties to licensed, creditworthy cannabis operators. The fund's standard collateral packages consists of:
Alta’s GP must execute these transactions with the following general restrictions:
3 months’ security deposit;
12 months’ estimated NNN expenses;
Personal and/or corporate guarantees; and,
Other collateral to be determined on a case by case basis.
FOR ASSET-BACKED CREDIT FACILITIES
Alta Real Estate lends capital to licensed cannabis companies across the U.S. that are secured with well-priced real estate, avoiding any cannabis premiums on the collateral. Loan proceeds must be used for growth initiatives like construction, working capital, and debt refinancing. The fund seeks collateral packages consisting of:
For each acquisition, Alta must own at least 51% of the asset and have at least a 3-year lease agreement yielding a minimum 8% annual cap rate.
No single acquisition can represent more than 40% of the fund’s capital.
Any investment opportunities that would diverge from these restrictions require approval from the fund’s investment committee.
Alta’s GP must execute transactions with the following general restrictions:
A maximum LTV of 70%;
3 months’ Debt Service Reserve Account;
Personal and/or corporate guarantees; and,
Other collateral to be determined on a case by case basis.
Loan term must be under 10 years;
No single loan can represent more than 40% of the fund’s capital.
Any lending opportunities that would diverge from these restrictions require approval from the fund’s credit committee.
WHAT IS THE TARGET RETURN TO INVESTORS FOR THE ALTA FUNDS?
Alta Real Estate targets 12.0% unlevered, annual cash-on-cash returns with 3.0% annual increases. Our model includes additional potential upside from i) mortgaging portfolio assets and using the proceeds to pay dividends to our investors, and ii) selling portfolio assets back to the tenant or to a third party at a premium. Our base case financial model generates an IRR of 24%.
DO ALTA’S HIGHER EXPECTED RETURNS IMPLY A HIGHER RISK?
No, all transactions are structured with strong downside protection and are backed by real estate, resulting in a low risk profile. The expected returns reflect current market conditions. The cannabis industry is growing at a 14% CAGR with sales, public support and use rates at an all-time high. However, cannabis is not yet federally legal and therefore lacks access to traditional financing. Even companies with the strongest financials and operating histories are excluded from bank loans, mortgages and institutional capital. Lack of capital combined with the industry’s unprecedented secular growth supports Alta’s financing terms and its subsequent outsized returns.
HOW LONG HAVE THE GENERAL PARTNERS BEEN MANAGING INVESTMENTS IN THE US CANNABIS INDUSTRY?
HOW MUCH DO THE GENERAL PARTNERS INVEST IN THE FUNDS?
The GP contributes 2% of all investor capital commitments into the funds.
IS IT LEGAL TO INVEST IN ALTA IF CANNABIS IS NOT YET FEDERALLY LEGAL?
For portfolio properties, Alta's tenants are licensed companies that operate in full compliance with state laws, and precedence shows that landlords are not subject to increased risk if they are not interest holders in the cannabis license. For the credit facilities, the borrower is the real estate owner, not the actual operating company, and therefore Alta never lends money directly to a licensed cannabis entity. Our investments are considered ancillary and are not plant touching, allowing us to avoid the legal scrutiny faced by cannabis operators. In the event that an Alta tenant or borrower engages in illegal activity and has their assets seized, such seizure consists only of the tenant’s or borrower’s net equity; the Alta fund(s) would still have due process in which any recorded liens must be paid in full as well as all collateral executed in the lender’s benefit. We always recommend consulting legal counsel prior to investing to understand all potential risks.
SINCE CANNABIS IS NOT FEDERALLY LEGAL, DO LENDERS, BORROWERS OR TENANTS PAY ALTA IN CASH?
No. All payments are made to Alta via wire transfers or certified checks.
WHAT WILL HAPPEN TO RETURNS IF THE GOVERNMENT LEGALIZES CANNABIS AT THE FEDERAL LEVEL?
Upon federal legalization, we do expect cap rates to compress to market rates; however, legalization would also provide the opportunity to mortgage our portfolio assets, which would transform our unlevered returns into levered returns. We could use the mortgage proceeds to pay dividends to investors or stretch our equity by investing in new properties and credit facilities.
WHAT IS THE MINIMUM INVESTMENT AMOUNT?
The minimum investment amount is US $1,000,000.
WHAT FEES DO I PAY AS AN INVESTOR?
Alta Real Estate investors pay an annual management fee of 1.3% which is split into:
After the investors receive a 20% preferred pre-tax return (including repayment of all management fees), there is a carried interest waterfall structure which is split between the LP and GP depending on the investment yield. Carried interest is capped at 1.4% to the GP.
0.65% fixed management fee over committed capital, and
0.65% management fee over invested capital
WHAT IS THE LOCK UP OR INVESTMENT PERIOD?
Two years after the close of all capital commitments.
HOW LONG DOES IT TAKE FOR INVESTORS TO START GENERATING RETURNS ON INVESTED CAPITAL?
The fund operates on a capital-call basis, so investors don't send committments until the GP is ready to close on a transaction. This means investors start generating returns immediately once an acquisition or a loan is closed and payments begin.
HOW OFTEN DOES THE FUND PAY DISTRIBUTIONS?
Investors receive distributions from each transaction on a semi-annual basis, paid every six months from each transaction's commencement date. For example, if a lease begins in January, investors would receive distributions from this lease every January and July. This allows for frequent distributions. to investors due to each lease or loan starting in various months.
IS THE FUND LEVERAGED?
Not at this time but we are open to such possibility in the future.
WHO MAKES ALL INVESTMENT DECISIONS?
The General Partner makes all investment decisions. The investment thesis is written in the Limited Partnership agreements, which all investors agree to upon confirmation of their capital commitments. If an investment opportunity diverges from the fund’s investment thesis, the General Partner must seek approval from the fund’s investment or credit committee.
HOW ARE THE INVESTMENT AND CREDIT COMMITTEES FORMED?
The investment committee is comprised of 2 GP members and 3 LP members, and all affirmative actions require 4 votes for approval. The 3 LP members for each committee will be elected amongst the investors with the highest capital commitments into that fund.
HOW MANY TRANSACTIONS HAVE THE ALTA FUNDS COMPLETED AS OF 2Q2020?
Alta Real Estate has closed six transactions, having looked at 200+ cannabis opportunities.
Due to our extreme discipline and rigorous diligence process, we will only pursue the best investment opportunities with the most creditworthy operators.
DOES ALTA ONLY TRANSACT WITH CALIFORNIA CANNABIS OPERATORS?
No, Alta evaluates transactions in all states where cannabis has been legalized for medical or adult use. Our primary target markets include cities with friendly regulators, high commercial property values and states where the cannabis economy is burgeoning, which provides additional confidence in the strength of our borrowers’ and tenants’ businesses.
HOW DOES THE GP SOURCE NEW DEALS?
Alta has an exclusive first look right and advertisement agreement with CannaMLS, a platform for selling cannabis real estate that receives over 50 new listings per week.
In addition to the relationship with CannaMLS, Alta has also developed a robust network of experienced brokers that consistently refer opportunities for our consideration.
WHAT ARE THE COMPS/VALUATION METHODS WE USE WHEN ACQUIRING A PROPERTY OR MEASURING OUR COLLATERAL UNDER A LOAN?
We use recent, local, non-cannabis sale comps in addition to third-party appraisals for property valuations. All of our assets must be well-priced and avoid green zone premiums to ensure adequate downside protection for investors.
WHAT IS A GREEN ZONE?
A green zone is the area within a municipal boundary that has been designated to allow for commercial cannabis businesses to operate. Green zones tend to be limited in size and the properties within those zones are often subject to additional zoning restrictions, like a minimum distance “buffer” from a school or park, making the best properties within a green zone more valuable to cannabis operators. Alta avoids paying a green zone premium by evaluating the value of the property as if it were not inside a cannabis green zone. If the fund needs to sell or lease the property to a non-cannabis operator in the future, there would be no significant value loss on the asset.
HOW LONG DOES IT TAKE TO EXECUTE REAL ESTATE COLLATERAL?
Typically, between 1 and 6 months.
WHAT IS THE ALTERNATIVE USE FOR THESE PROPERTIES IN CASE OF DEFAULT?
Since the fund targets downstream assets (mainly retail and industrial), the properties can be leveraged and then sold or leased to non-cannabis companies, if ever necessary. The redevelopment value of a "last mile" portfolio like ours is especially secure with the recent uptick in e-commerce sales as a result of the COVID pandemic. Alta looks at the true value of the commercial real estate, removing any cannabis premium or “green-zone” premium.
WHAT IS A FINANCIAL INTEREST HOLDER? IS ALTA OR ALTA INVESTORS CONSIDERED A FINANCIAL INTEREST HOLDER?
States that include disclosure requirements for individuals and entities that have interests in a licensed cannabis company will often differentiate between having a direct equity interest, which would make them an owner in the cannabis company, and having some other financial interest in the company, classifying them as a “financial interest holder” instead. Financial interest holders include individuals or companies that make loans to cannabis entities or who take a percentage of profits or revenue from the cannabis entity.
Landlords that charge a predetermined, fair market value lease rate to cannabis tenants are exempt from being classified as a financial interest holder, so Alta Real Estate and its investors’ identities do not need to be disclosed.
WHAT ARE THE POTENTIAL RISKS FOR A FOREIGN INVESTOR IN WHOSE COUNTRY CANNABIS HAS NOT BEEN LEGALIZED?
Our legal team has structured the funds to ensure that the fund does not participate in plant touching enterprises. Alta Real Estate will acquire real estate assets and lease them to licensed cannabis operators, but will have no ownership interest or control in the plant touching business. As always, we recommend you seek counsel regarding all legal and tax concerns prior to investing.