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Pelorus has been originating cannabis transactions since 2016.
Pelorus has originated 32 transactions for a combined total of approximately $65M.
The Pelorus Fund was launched in 2018.
The Pelorus Fund wholly owns a REIT, which is technically called a Sub-REIT. This structure allows the existing Pelorus Fund to get the benefits of being a REIT without needing to create a new fund.
- 20% Tax Deduction: with a REIT ordinary dividends qualify for the new “20%” tax deduction under §199A.
- State K-1 reporting to fund investors. REIT dividends would be taxable in the state of the investors’ residence rather than being sourced to a state at the fund level.
- REITs “cleanse” UBTI for Self-Directed IRA accounts.
The Pelorus Fund was structured to be an ultra-low cost or effectively no cost Fund. This was achieved with a low asset management fee of 1% combined with the Manager sharing revenue with the Fund Members.
The Manager of the Fund has aligned its interests with the Fund Members and shares 25% of originations fees, 75% of extension/exit fees, and 50% of profits. The combination of the revenue sharing from the Fund Manager should offset more than the 1% asset management fee in most years. Additionally, there is no carry-interest split or preferred rate of return because 100% of all net revenues go to the Fund Members.
There are three main exists, private lenders, state banks and credit unions, and cannabis focused REITS. Currently, there are more than four dozen other private lenders, dozens of state FDIC insured banks and credit unions, all lending within their own states, plus nearly a dozen cannabis REITs that purchase the properties and then lease them back to the previous owner.
The Fund pays monthly dividends.
One year starting on the date each portion of capital is invested, but requests may be submitted at any time for consideration.
When extension/exit fees are harvested they are fully earned on the day they are received, which spikes the yield for any particular month and conversely when a loan is paid off and the capital is not able to be immediately redeployed into another income generating transaction it causes the yield to be dragged down.
New Fund Members’ capital is received into a non-interest bearing holding account called the admitting account. The capital is admitted into the Fund at the next loan closing, which typically occurs every 1-4 weeks.
The current average investment amount is approximately $250k, with a $100k minimum investment. Investors may inquire about reduced minimums if there are multiple accounts or the original investment is going to be increased sometime in the near future.
No, the borrowers must make their payments by wire or check from an accredited bank or credit union.
Yes, Pelorus is banking with an FDIC state bank.
Pelorus focuses on value-add transactions, meaning a portion of the loan proceeds is reinvested into the property to enhance the value of the property which are in tenant improvements or new construction. A major differentiator for Pelorus is our experience — most other private lenders have little or no experience in these types of transactions. In addition, Pelorus has refined the draw process that the borrower uses to be reimbursed for the improvements made to the property. The draw process with most lenders takes 5 – 10 days, whereas Pelorus has streamlined this process to 1 – 3 days. This is extremely important in cannabis lending because improvements must be completed to stabilize the asset, which allows for the cannabis operator to start generating income.
According to the Financial Crimes Enforcement Network (FinCEN), as of Q4 of 2019, there were 563 banks and 160 credit unions.
Yes, we are aware of credit unions and FDIC insured state banks that currently lend to cannabis-use properties.
No, Pelorus is non-plant touching and does not lend directly to any cannabis related business. Pelorus only lends to the owner of the property, and allows for cannabis-use tenants.
We have not had to file any foreclosures, but are well prepared in the event we did and if the property reverted back to us as an REO. We have detailed plans in place to get the property fully stabilized and income producing and sell the property.
The highest and best use for an alternative use would be another cannabis related business, since that is what the property is zoned, licensed and has tenant improvements for.
Pelorus uses the cannabis-use sales comp and income approach to determine the values.
Pelorus can lend nationally in any medically licensed state.
Pelorus is able to lend on all types of cannabis related business and currently has at least one in each category, but most of the portfolio includes some portion of indoor grow.
Pelorus is not associated with any illegal acts, since our borrowers are the owners of the real estate and not the actual cannabis operators (tenants). However, in the event any borrower is prosecuted for any reason, and loses the case (including upon appeal), and subsequently has its assets seized, it is important to remember the seizure consists of the borrower’s net equity. The lender (Pelorus Fund and its investors) still has due process in which any recorded liens on the property.
Yes, BUT it must be a cannabis-friendly account if you’re using a 3rd party custodian such as PENSCO they will not allow investment into our Fund yet.
We can provide a list of cannabis friendly custodians.
The Fund would syndicate the balance of the loan.
Not directly into the Pelorus Fund, but we have helped to create feeder funds for ultra-high-net-worth and institutional international investors with initial investments of more than $1M.
The largest risk is the fact that this is an emerging market, which naturally comes with certain unknowns. The vape crisis of 2019 is a good example of an unforeseeable circumstance. If a similar crisis leads to a policy change, which in turn causes a tenant to fail, it could require the borrower to replace that tenant with another cannabis related tenant. Compression or commoditization of certain cannabis related products can also change the market. But such a change would develop over time, and there should be recognizable indicators that would allow for adjustment, such as the markets pulling back in specific sectors. Regardless, unforeseen changes do occur in emerging markets, which is why all Pelorus Fund loans are secured by real estate assets and personal or corporate guarantees.
Borrowers may file bankruptcy to stall the foreclosure process, but the default interest and late fees continue to accrue until the loan is paid off.
The average loan amount is approximately $2M, with an 18 month term.
The Fund has first priority on transactions that fit the Fund’s investment criteria, but in some circumstances the Fund may do a follow-on investment in a junior position.
Yes, Fund Members can reinvest their monthly distributions without extending the lock-up period.
The Manager provides Quarterly Updates.
Currently the Fund does not have any leverage, but the Fund may utilize a warehouse line of credit in order to minimize yield drag.
Pelorus underwrites and approves all of the transactions internally. The underwriting process is complemented by SitusAMC, one of the world’s premier asset underwriters, to complete the credit memos using the credit policy developed in conjunction with SitusAMC.
New loans come directly from borrowers, brokers, asset managers, attorneys, and a vast array of networks that Pelorus has developed since 2016.
The Green Zone is the area a city has designated to allow for cannabis related businesses located within the city.
Each property within the Green Zone must also apply for a CUP, which allows for cannabis related business operations on the property.
The CUP pertains to the property, so it DOES transfer with the property in the foreclosure process. The Operator Licenses, on the other hand, are issued to the cannabis operators tenants (tenants), and therefore do not transfer.
The principals have approximately $1M invested in combination between both the Manager and the Fund.
Yes, all loans have personal and/or corporate guarantees. In the rare exception that a guarantee has been removed, the loan to value would be significantly reduced to adjust the risk.
No, the reason we are able to achieve a 15% target yield is because of the revenue sharing from the Manager and the lack of competition in the value-add lending space.
We believe our lending peers are already closely watching us and will be entering the cannabis lending space soon, but we still believe we will be able to achieve close to our 15% target for the next couple of years because we are originating the transactions today, which will take at least 18-24 months to pay off and most of our peers are not focused on the value-add transactions.
The Fund consists mainly of debt, but does have some options for warrants that may be exercised in a liquidity event in which the borrower or tenant that provided the warrants sells the company for cash or goes public.
In the event that cannabis is legalized at the federal level, the most efficient capital markets will open up and provide more liquidity to our borrowers. This will provide access to lower-cost refinance options (which already do exist). Institutional equity will enter the market, pushing up both demand and valuations. Even in this environment, Pelorus is very confident of our continued success. We have successfully competed against banks for our entire careers, and feel comfortable continuing to do so. The biggest challenge will likely come from our lending peers compressing the yields downward over time.
Four loans have been paid off for a combined total of $6,200,000.