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Ep044: Returns on an Alternative Investment Class with Hayden Kelly
In today’s episode of the IC-Disc podcast, I have a great guest today, Hayden Kelly from Chicago. He is with Chicago Atlantic and they have a really interesting cannabis fund for accredited investors.
They've identified a market inefficiency because endowments, institutions, and non-profits are usually prohibited from investing in cannabis. Additionally, these cannabis companies are typically not bankable for traditional debt. So Chicago Atlantic has a really interesting debt model for accredited investors, with great collateral coverage and attractive loan-to-value ratios.
Hayden is a really interesting guy, and even if you're not investing, he has a really interesting update on the state of the cannabis business, especially east of the Mississippi. In fact, Hayden shares some background on cannabis legalization history and why states east of the Mississippi are more financially attractive. I hope you enjoy the episode.
SHOW HIGHLIGHTS
TRANSCRIPT
(AI transcript provided as supporting material and may contain errors)
Dave Spray
Hey, this is Dave. Welcome to another episode of the podcast. I had a great guest today, Hayden Kelly. He's with Chicago Atlantic and they have a really interesting Anibus fund for accredited investors. They've identified a market inefficiency because endowments institutions nonprofits are usually prohibited from investing in cannabis But additionally, these companies are not really bankable for traditional debt. So they have a really interesting debt model for accredited investors that has some really attractive returns with unbelievable collateral coverage and loan to value ratios. So Hayden is a really interesting guy And, even if you're not investing, he has a really interesting update on the state of the cannabis business, especially east of the Mississippi, as it relates to cannabis from a purely financial aspect. Hope you enjoy Well. Good morning, hayden. Welcome to the podcast.
Hayden Kelly
Thanks, david, appreciate you having me?
Dave Spray
Yeah, my pleasure. So what were you calling into? from today Are?
Hayden Kelly
you in Chicago. Despite the background, i'm actually in Miami, our offices are based out of Chicago. We have an office in Miami as well, but I made the move down to South Florida a little over eight months ago.
Dave Spray
OK, now are you so eight months ago? Sorry, are you a native of Chicago then, or how'd you end up in Chicago?
Hayden Kelly
Yeah, born and raised in Delaware. Actually, i spent two years in Chicago. I went to the University of Delaware, made the move to Chicago just in the beginning of 2020. I enjoyed the city. It's a great city. We just have a lot of clientele through South Florida and decided to make the move here for convenience. Whether that's a great place to be.
Dave Spray
OK, well, super. So let's talk about Chicago Atlantic real estate finance. So if I've got like a couple of single family homes that I want to rent out, are you getting the guys I call to get that financed? There's a little more to it than that.
Hayden Kelly
Yeah, no, absolutely, it's a little bit different. So we do operate as a REIT. Our public vehicle is a publicly traded mortgage. Right now, what I specialize in and where I work with is our private funds, which is very similar to the REIT the extent of the industries in which we invest in the collateral we we obtain as collateral towards loans. We make direct loans, and Chicago Atlantic as a whole is credit oriented. We're an investment platform that focuses on making loans to industries that for maybe some reason, banks won't lend to. Maybe it's one industry that we've really specialized in over the last four years is the US medical and recreational cannabis industry. So, ok, we started making loans in 2019. We have a public REIT on Nasdaq, we have a private credit fund, we have an equity fund and a variety of vehicles and our goals to get outsized returns to investors with very limited downside risk, and we're an industry where there's very limited competition.
Dave Spray
OK, i'd love to just dive into that cannabis industry. You know, kind of the last I looked at it, geez, four or five years ago, it seemed like because of the of us being a listed drug. Is it listed? What's the correct technical term? It is still a scheduled substance. Scheduled substance, yeah. So it created this hodgepodge thing where they couldn't use credit cards, they couldn't have a bank account, everything was in cash. Is that evolved in the business or is that still the case?
Hayden Kelly
So a few are still the case, still scheduled. You have an industry that is, for that reason, unbankable. So the big banks, the insurance companies, the endowments, the pensions, the institutions of the world that are typically the big check writers, the big investors in any traditional industry, are shut out from investing due to that lack of federal legalization, where the federal government has said you know, at states, you decide what you want to do. There's 22 states with recreational programs, meaning anyone over the age of 21 can consume cannabis and purchase it like alcohol, and then 38 with some sort of medical program where, if it's chronic pain, sleep apnea, etc. You can acquire cannabis with a note from a doctor and a prescription to be filled at a dispensary. Now your point on the card is completely right No credit card processing in dispensaries, and now what they do have is ATM obviously withdrawals, which is easy for cash transactions, but also you have debit card processing in a good chunk of dispensaries.
What we've seen, though, is a big misconception on operators. Everyone thinks operators can't get bank accounts. They're paying us off through amortization payments for our loans and cash and trash bags account. The reality is there's probably anywhere from two to six state chartered banks. These are local banks that will take deposits, open up bank accounts for operators That's how we get comfortable potentially making loans And we require operators that bank accounts for at least a year and a half before we would consider a loan. So to that extent there are bank accounts in the space, but there definitely are a lot of regulatory hurdles at the operators' face.
Dave Spray
Okay. So I suppose I think it was Zig Ziglar that said every obstacle contains the seed of an equal or greater opportunity. So it kind of sounds like that's how you guys are looking at this. Instead of seeing all the obstacles right You can't use credit cards, can't get big institutional investing you're choosing to see the opportunity in it. it sounds like Absolutely, david.
Hayden Kelly
So I'll give you just a little bit of a background for us. It started a little over four years ago For one of our founders, tony Cappell. He worked at a traditional lending shop in Chicago called Stonegate And, being in Illinois, you had a super robust medical program. So when it flips recreational, all those patients were already consuming. You had a wholly new addressable market that was interested in cannabis. Maybe they were using it on the black market side and wanted to now try it from dispensaries etc. So when that state flipped recreational, you had what are now the billion dollar publicly traded companies like GTI, presco, barano, spinning out of the state And they were actually coming into the offices of the Stone Gates and the other credit shops of the world and saying listen, guys, the banks won't give us a loan.
We'll give you whatever you need to get comfortable. You can take our real estate as collateral. We'll pledge you all of our assets. We'll even personally guarantee the loan. You can charge us 20%. We'll give you a little piece of the company, just give us debt.
Because of that point in time there are equity valuations of skyrocketed. They didn't want to sell any more equity in their company, so what they wanted was debt. They were willing to pay an arm and a leg for it. But unfortunately, even Stonegate was a shop that said listen, we can't do it. We have leverage from a bank. We have a few institutional investors who are not comfortable with cannabis. We can't make these loans. And being the head of credit, which was where Tony sat, he said why not make these loans when you have very limited competition, an industry that is growing 20% year over year? You can charge whatever you want And it's way more secure than anything else we're doing. And that's pretty much how Chicago Land it came to be. He got together with two of his classmates at the University of Chicago. They did their executive MBAs together at Booze And it's solid to just really understand the industry travel state by state. And that's at that point is when we launched the fund.
Dave Spray
Oh, wow. That's really cool, and can you share approximate like size of the cannabis portfolio that you guys have or any kind of metrics?
Hayden Kelly
Yes, so between our public reach, our two private funds and LP call investments that would lead underwriter on and lead collateral agent on. we've deployed a little over 1.8 billion into cannabis, or the largest vendor in the space.
Dave Spray
Wow, and so help me understand, like, is that like a couple dozen clients, or is that tens of thousands, or is that something in the middle, you know kind of what's? could you maybe kind of walk me through just like a typical you know sort of deal structure, as much as you're able to, you know, without giving away your secret sauce.
Hayden Kelly
No, absolutely. Well, it's closer to the earlier part, which is that I've done about 60 loans. Okay, we have some very large loans, one to a company called Verano Holdings who is a billion dollar publicly traded operator. That's a $350 million line of credit.
We have 30 million in our REIT, 30 million in our private fund. Verano is probably, in my opinion and you can look at it anywhere is probably one of the top five operators in the world today. Well, we will go in. We will do a loan anywhere from 10 to 30 million in size. We like to structure the loans as delayed drawl term loans, where we lend It's very accretive, so the operator is either building something or buying something. So we can structure the note to be delayed drawl term, which says we'll maybe give you the first tranche of 10 million upfront Once you get a permit to build your new cultivation or you're awarded the license, maybe we'll unlock the second member of that loan. So not putting all the cash up front is great from a downside protection standpoint. We like to lend anywhere less than two times and two and a half times senior debt to EBITDA.
Dave Spray
When in traditional businesses.
Hayden Kelly
You typically see people lending maybe at five, six, seven times senior debt to EBITDA. So very low leverage. The loans amortize. We prefer our operators to be amortizing monthly. So that is actually paying down the principal of the loan rather than just paying its interest. For the big balloon to a maturity, that loan principal amount is getting smaller and smaller every single month.
And then one thing that we've done since early on, and we're very happy we did, was focus on floating rate loans. So where you've seen these increased rates and this inflation hedge and it affecting big credit shops, big publicly traded mortgage rates, it hasn't affected us, not in a negative way but in a positive way. Where our cost of capital right now is the best of expectations. We don't use leverage So we're not relying on a bank to ultimately lend to us. That rate would have gone up Where when we make a loan to a borrower, the rates based on crime. As capital becomes more expensive to borrow and crime rate goes up, our loan gets more expensive, making the return for investors higher. So we have a portfolio right now in one of our private funds that has 37 loans. The gross on levered yield on that vehicle is over 18%, which is phenomenal and it continues to rise.
Dave Spray
Yeah, and especially given the well collateralized nature of the loans.
Hayden Kelly
That's something we haven't even touched on yet, which is the most important part. A typical loan when there's real estate coverage, we're getting a mortgage or deed of trust. So the operators and where we're lending is primarily on the East Coast, where all agopolis exist. You have indoor warehouses, 15,000 square foot grow operations where the operator has various grow rooms and they're growing cannabis indoors. That's how they can control climate and ultimately grow in a state like New Jersey, pennsylvania, west Virginia, ohio, because you can't do it outside like you can in California and Oregon. We're getting all asset UCC one lean. So the company's assets, the receivables, cash on hands, security, interest on their inventory, equipment, lights, receivables, etc. But the real hammer, david, is we're actually getting what is called a stock pledge of the subsidiary that owns a license.
One thing that I did not get the touch on it, which is super important, is there's two types of markets in cannabis. You have unlimited license models and you have limited license models, where some of the early adopters the California's, the Oregon's, the Washington's of the world said cannabis is great, let's issue as many licenses as we can, people love it, we're generating great tax revenue. But what happened was, over time, too much competition entered the state. When that competition entered the state, it created, at first phenomenal, a lot of cannabis coming online, a lot of people consuming it. But over the years you've seen a decline in wholesale cost. You've seen an increase in competition. You have operators that it's very difficult to be profitable and they're not making any money. What that's done at the state level is the states are now losing out on tax revenue because they're charging excise tax And the way to optimize your excise tax is to keep wholesale prices high.
So the new states that have been adopting the Pennsylvanians, the Ohio's, the West Virginia's, the Florida's, the Illinois's of the world. They said we're going to issue limited amount of licenses, where maybe they issue 20, 30, 50 licenses. Doing so creates oligopolies. Doing so keeps wholesale prices high, limited competition, very easy to regulate. And with that not only do you have a market where cannabis is trading at 2,000 or even $2,800 a pound in some states, you also have now created this license that is very valuable. You can sell the license, you can transfer the license. Now what is the most important thing with our loans is when we focus on these east coast operators We're getting. That license is collateral. The Pennsylvania licenses are valued anywhere between 15 and 25 million dollars. You saw a license itself for over 90 million dollars. So it's a very attractive piece of collateral on our loans and with the licenses, the real estate, the leans, even personal guarantees. When we consider LTB's of the enterprise value of these companies, we typically say under 25% of an additional lending environment.
Dave Spray
Wow, that's, that's amazing. Can you kind of walk through like an example? I mean, this can just be What's the word I'm looking for an amalgamation of, like, yes, some different clients.
You're sort of a Hypothetical scenario. Just kind of walk us through, maybe what it looks like like let's just pick a state and let's maybe, you know, maybe think of a particular deal you've done You can just talk about anonymously or something close. I know a lot of our listeners are, you know, financially oriented, so could we kind of just sort of walk through what a deal might look like.
Hayden Kelly
Yeah, absolutely, david, and I'll share what I would consider is one of our most reputable loans. It's a publicly traded company called Brano Holdings, and Brano is a 1.1 1.2 billion dollar Publicly traded operator. There's been quarters of the company doing over a hundred million dollars in EBITDA quarter.
That is a 350 million dollar loan, meaning we're less than one time senior, that TV, that and that loan is at the cost of an all-in Just over 14 percent. Where seniors are cured on the deal, we're fully collateralized by real estate, all-acid lean stock pledge devices. No personal guarantees in that loan. It is a publicly traded company and no warrants in that deal. But that is just shows the The industry, the holes in the industry where there is very much so mispriced risk.
If Verano was a Widget manufacturer or they were in the tire business Generating that type of revenue and having that type of dominance in the market, they would be at the cheapest cost of capital possible. But just given the lack of the institutional money in space, the banks not being willing to lend to the sin industry, which is cannabis, were able to charge a company of that magnitude north of 14 percent, which just speaks to This industry and how they're truly is mispriced risk. Ultimately, every single state to David, so they're all across the board. We've exposure through various states and many different markets just with that that one company.
Dave Spray
Okay, yeah, and they're happy to pay the 14 percent because their margins are substantially higher than that, obviously.
Hayden Kelly
Yeah, and there's a few other factors. There is a capital super creative to them. But what's more important to understand is you've had these cannabis equity markets. You have some operators that are performing very well whose equity valuations are still getting crushed. Now They're not going to inject equity and raise equity To dilute existing equity holders. They're not gonna, you know. I see, when they know their values are higher than they're being betrayed Today, which is ultimately why they're willing to pay for more expensive debt.
Dave Spray
Sure. So paying 14 percent for debt is still far cheaper than selling equity at a depressed price.
Hayden Kelly
Absolutely and it won't last forever, i can't tell. You will be able to generate 12% cash paying returns, a gross on every deal of over 18% forever. But I think we have a four to seven year window and the reason being is you have An issue right now with the Democratic Party as well, where originally the Democratic Party is ever in a league-class cannabis. It's great. We can generate significant tax revenue, we can implement social equity, we'll get back to the people that were harmed on the war, on drugs and incarcerated etc. And what happened as time kind of progressed is the Biden administration You know the runoff to the Senate ever thought it would happen and the cannabis equity market skyrocketed.
If you look at a chart, i like to use MSOS. It's an ETF of the ticker to some of the largest publicly traded cannabis companies and You see this boom right following election and over the last few years It's just gone directly right back down, nearing all-time lows. And it's not because the companies can't perform. It's the loss of faith that there's gonna be any reform, any real meaningful impact and to get institutional investors involved. And it's because half the Democrats like it for tax revenue, half like it for tax revenue and one implements social equity.
There's something going on in New York right now where, you know, potentially implementing 150 licenses for Dispensaries to ex-devicted felons. Now I think it's great if you want to, you know, get back to those who have been wrongfully incarcerated for something that is now legal. It makes sense. But what doesn't make sense is Having these operators now be the ones that are going to control the cannabis trade in the state, maybe individuals that don't have as much business experience or operating experience. So you see, issues like that the Republicans aren't too favorable of that. Some of the Democrats don't love it, which is why we've seen what is the safe banking act been shut down at the Senate level for a great time now.
Dave Spray
Oh, wow, okay, And so help us understand. like what a smaller deal looks like, like do you have any operators? or just like a single location. Was that too small?
Hayden Kelly
No, but location is everything. So we'll do individual deals. Anywhere from 10 to 30 million in size is our sweet spot. It might be an operator in a state like Pennsylvania or Ohio or Maryland where this limited license model exists. It might be a smaller operator, but the goal there and the thesis there is you're in a state like Pennsylvania where there's 25 cultivations, or in a state like Maryland where there's 50 cultivations and you're forced to be vertically integrated because if you have a cultivation you get three dispensaries. So having one of those licenses is super valuable Now, where the operator might not be printing as much cash as a Verano, a GTI or a Crestor or a big operator.
They're in an industry where they don't need to do anything in an instant. Be attractive. They don't need to have the best brand, they don't need to have the best product, they just need to be able to operate. They need to be able to grow cannabis, open up their dispensary on time, have employees in the shop And, given the soledopathy that exists, they're very much able to be very profitable and have very attractive licenses, which is I break this flat as well.
Dave Spray
Okay, that makes sense. What makes me think of something here in Texas. There's a Texas ice cream company called Bluebell in about an hour northwest of Houston, in Brenham, texas, and supposedly if you go to the manufacturing facility they just have ice chest full of like single serving ice cream for the employees to just sample at will throughout the day. I'm guessing that some employees at cannabis operations think it's going to be a similar setup, but I'm guessing it's probably not like that, right? Is this the dream job for somebody who's a regular cannabis user? or they can just consume while they work? Is that, or is that just probably a myth?
Hayden Kelly
Yeah, no, it's definitely a myth. Now, a California, Washington, oregon grow operation or dispensary, that might be very, very all common, just given the lack of regulation, the very cheap wholesale prices, the oversupply, that is very much real Now in a state like Pennsylvania or Illinois and Ohio these states that keep looting to you can't do that in your rooms, you can't do that Your dispensary is, and then what you stand to lose is the ability to operate. So if you're consuming product in your cultivation, it's not a good idea. We don't advise on it. We haven't seen any of our operators doing it. But there's something to consider. Right, if you're working that close to the plant, you might have an affinity to the product. At Chicago Atlantic we don't have an affinity to the product, we just like the sufficient markets And it might happen. But from our perspective it's a big no-no and you stand to lose much more than you stand to gain by consuming product during the workday.
Dave Spray
Sure No, that makes sense. Hey, do you know one of the theories of one of the benefits of legalizing a cannabis was that, as I understand it, when you have a black market there's a huge premium that the consumers paying because of the risk of the whole supply chain being illegal. And part of the theory was that by legalizing it you could really dramatically reduce that premium to where the black market really wouldn't exist, because there would be kind of no economic aspect to it. Are you familiar with any of those dynamics, like in California, let's say? has the black market effectively been either eliminated or kind of made irrelevant?
Hayden Kelly
So it's interesting, ultimately the actually the opposite is happening in a state like California, where you have a very robust tax regime in a state like California where it's already hard to be profitable, no matter what business you're operating in. Now you're in a state that is overbuilt supply so dramatically that it is so hard to be profitable that some of these legal operators have adjusted and started doing black market activity shipping and product over state lines, maybe selling cannabis, you know, out of the shops And, david, there's actually kind of to an extent exist in New York too, because there's really no crackdown, there's no real push to let's incarcerate, let's shut down these black market operators that are selling out of trucks.
You can go into a bodega, buy an e-cigarette, a sandwich, a soda and actually buy cannabis from someone behind the counter, and they might even put it on a credit card for you. So there's a lot of black market activity. In Houston it's not heavily regulated. Now in Pennsylvania, in Maryland, in Florida et cetera, you'll absolutely see that where. Why go to the black market dealer to purchase an eighth of smokable flour when it's going to cost maybe 30 to $40 from the black market dealer? That same eighth might be $35 or $50 in a dispensary. It's not dramatically more expensive.
You get to know where it's grown. You get to see all the metrics of the cannabis how much THC, cbd, everything that's in the product. It's sealed, it's labeled, it's sold at a licensed dispensary. It's much safer. Now you even have a new adoption of people that maybe would never consider smoking cannabis if you're buying it in a bag from a black market dealer outside of a shopping center et cetera. Where, if you go into a dispensary, you see it's labeled, you see it's secure, you have the child-proofing packages, big brands, real customer service. You might have that housewife or that house husband that was once drinking a glass of wine or a beer before bed, now eating an edible or smoking a vape cartridge to relax. So it's definitely happening. Now in the more unlimited licensed states, the opposite's happening, because the operators can't be profitable, they're a little bit more desperate and they're turning towards a black market product. The states east of the Mississippi is where I typically go. They're really very much doing it right when it comes to issuing licenses and regulating licenses.
Dave Spray
Okay, and like is California, like one of those states where somebody can grow their own marijuana for personal consumption too.
Hayden Kelly
There's over 6,000 licensed grows in California, which is crazy. It's very easy to grow, It's very easy, obviously, to consume and then purchase and sell Where in some of the limited states it's very difficult to get a license. I mean an application process in a limited license state costs anywhere from $100,000 to $300,000 just to submit a good application and potentially be considered to be a worthy license.
Dave Spray
Wow. Well, we spent a fair amount of time in Colorado And my understanding of the Colorado law is it's actually legal, i think, maybe three plants per adult or something like that, where you can actually grow it completely unlicensed, unregulated, for personal use. Do you know if California or Oregon has that kind of stipulation too?
Hayden Kelly
I'm not exactly sure. I'm sure it does To the extent operator. both consumers want to grow their own cannabis, as long as they're not trying to open up a dispensary near positive.
Dave Spray
It's the same way in Oregon and California, because it would seem like that would also create another black market, because I'm guessing in California the tax rate on the cannabis is probably higher than just the standard sales tax rate. I'm guessing it's a pretty significant number. You know what that is.
Hayden Kelly
Absolutely. It's very high In California, one of the worst tax regimes. obviously in the US there's a premium associated with cannabis even in Illinois. Tax revenue generated from cannabis in Illinois just last year, for the first time ever, actually was larger than tax revenue generated from alcohol.
It's not because there was more sales in alcohol, it was because the rate is higher. That just shows the magnitude of tax revenue from the product. States ultimately aren't legalizing it because they say you know what, david, this is better for you than buying Advil from Walgreen. This is better for you than getting prescription bill. It's ultimately to generate tax revenue where there are significant health benefits to cannabis. States are really being pushed and urged to legalize cannabis due to that tax revenue generation.
Dave Spray
Yeah Well, it would also seem like that would also further depress the price, the black market. Even if all you're doing is eliminating the tax, that creates a significant difference. Because I can just imagine somebody who's maybe been illegally growing their own cannabis for a long time. There's just a little small operation for them, a couple of their buddies, very low key. Now all of a sudden it's legal and they can have I don't know, it's either three or six plants, i think in Colorado You can grow them outside, i believe.
Now all of a sudden they're like hey, just like in the past, i produce a little more than I need, so I can just sell it to my buddies. I'm actually selling it to them cheaper than I used to because I don't have to charge the incarceration risk premium. Now all of a sudden they're able to buy it from me for half the price that cost them to go to a dispensary. You only have one strain but they come over anytime they want. They can kind of see the operation. I would also think that would be another downward pressure phenomenon on pricing as well, although it may not be material and quantity.
Hayden Kelly
Yeah, that's. The latter is the most important part. Not only these plants aren't going to produce enough cannabis ultimately if you have three plants to supply many people with the product. But growing is not that easy. It's not like planting a tree where you can just put it in the backyard or somewhere or water it once in a while. It takes sophistication. It takes very significant nutrients, soil, water, lighting.
The process is difficult where, if I was an advocate for cannabis and even just for some reason I couldn't buy from a dispensary, which would be the first place I would go. I'm much more likely to find a black market operator who would chip it to me from California, oregon or Washington because, a it's probably even cheaper than trying to grow it yourself and B the new sense of growing is it's not easy. It takes anywhere from six to 12 to 24 months to have a clone producing cannabis. That's smokable. It's not something that is ultimately too reputable or even it's not that easy to do. It takes someone that really understands it. There is definitely an existence. It's not going to have too much of an effect on wholesale pricing at the dispensary level.
Dave Spray
Okay, well, thanks for that industry background. Now you mentioned that in your $1.8 billion you have deployed that you haven't had access to the traditional equity markets, institutions and insurance companies. In that, because of this awkward age that we're in with cannabis, how are you all raising your funds? because it doesn't sound like you're borrowing money. It sounds like it's all equity investment from nontraditional sources. Is that correct?
Hayden Kelly
Correct. When I speak with anything here, it's in regards to our private funds. But our private funds are completely unlevered. We do not take on debt. We don't go to a bank and say let us borrow $50 million, $100 million, we'll mix it in the fund with LP equity. It'll actually sit on top of the LP equity, which means in a waterfall scenario or something goes wrong, the bank gets paid back before investors are considered. That's in the traditional investment world private credit.
REIT et cetera. We are completely unlevered. It's no bank debt, it is all LP equity and traditional investors of ours are qualified purpose-served investors where you have to have $5 million or more in assets. Our typical minimum check is anywhere from $250,000 to $1 million. It's ultra-hine-worth individuals, It's family offices, It's private investors that want great opportunity for clients that offers quarterly income.
How is the investment very liquid. What's the typical tie-up if an investor does choose to team up with you?
Hayden Kelly
guys. The investment has. A two-year lockup is the standard. Investors can get out at one year at a 10% discount if they need early liquidity. The standard two-year lockup has no discount associated with it. We make redemptions on a quarterly basis.
But, if investors are interested in the fund, you come in immediately, diversified across 37 loans. 15 of those loans have some sort of equity kicker, which means about a third of the deals are actually able to get some sort of piece of the business if the company goes public or gets acquired, which is alluded to in the past significant markups. We've had years where equity kickers are worth an additional 200-300 basis points. We've had years where they've been worth nothing, but they're solely gravy and they can help bolster returns at the investor level.
Dave Spray
Okay, that explains how you lend the money at 14%. You pay your overhead, but your investors are capturing a greater than 14% return because of the equity kickers.
Hayden Kelly
To an extent that's correct. The only thing I'll say is that 14% that's to one of the best billion-dollar publicly traded companies, oh okay, the cost of capital is well over that.
Dave Spray
I've got you. Okay, That makes sense. So, accredited investor. if an accredited investor is listening to this and wants to learn more, where would you direct them to?
Hayden Kelly
There's two ways You can check out our website. You can read about the team I oversee, our investor relations team. We have about 500 line-item investors. If you have any interest in learning more talking about the cannabis industry, maybe you are pursuing debt for cannabis operation. If you're looking for income alternatives in these uncertain markets, I'm happy to talk to you about potential investment opportunities.
Dave Spray
Okay, should I just email you? That would be great. What's the email address?
Hayden Kelly
It is HKelly at ChicagoAtlanticcom. That is HTELY at ChicagoAtlanticcom.
Dave Spray
Okay, and then the website ChicagoAtlanticcom ChicagoAtlanticCreditcom Correct. Okay, chicagoatlanticcreditcom. Well, this has been really interesting. Is there anything that I didn't ask you, that you wish I had?
Hayden Kelly
No, i think we covered a good chunk of it. We covered a little bit of everything. You know what makes this different I think it's important because there are some other lenders in the space is both were largest by a pretty significant multiple but it's where we focus we said early on, we want to stick east of the Mississippi.
We want to focus, for allogopolis exist. We've never done a direct loan in California, which speaks magnitude, because most people the first thing in the first state they think of when you hear cannabis is California. It's where started, it has this, you know, feeling to it. If you go to California, that's where cannabis is, etc. We really focus on these allogopolis and one thing that makes a significant be different, david, is we focus on direct originations. We directly originate our loans from ground up. We have eight direct originators that are in the field, looking for new deals, uncovering new opportunities, staying current with borrowers for introductions and up sizes, which gives us a competitive edge. But we're actually seeing a lot of these deals before anyone else has the opportunity to even talk to the operator. So that's us. I'm happy to chat with anyone more in depth. There's a lot we can go into and I look forward to it.
Dave Spray
Yes. So one last question. So is there any? you know, given the muddy waters during the federal and the states, if somebody has like Qualified retirement dollars They're looking to deploy, are there any prohibitions against that? I mean, if it's in a qualified retirement, you know, an IRA, roth IRA, or does it have to be, you know, outside that type of vehicle?
Hayden Kelly
No, great question. We included an offshore feeder on our Second fund, which is available to investors. That eliminates what is called UBTI and ECI, which are on favorable, favorable tax treatments for Qualified plans like a self-directed IRA. Now, if the individual is no longer employed with the firm that maybe they had a 401k with Like we heard is they can roll it into a self-directed IRA and invest. We take self-directed ira's, traditional ira, we take foundations etc. So you can use taxes and dollars. Very attractive from that perspective, given the high yield.
Dave Spray
Yeah, well, super Well, hey, this has really been. This has really been fun And I appreciate your kind of opening our eyes to an interesting Opportunity that sounds like it may not be around forever, because it was just kind of this unique, influenced of events that's created this opportunity. I heard this quote by Sam Zell. Do you know, sam, the famous Chicago? I think he invented the read. Basically, i think he did. I Heard him speak at a conference. In fact, it was that same conference in Miami where I first met one of your colleagues Earlier this year and Sam, i didn't hear this from him then. Sam spoke at that conference, but I heard him on a podcast and he said when somebody asked him what his occupation is, he said I'm a professional Opportunist, so this sounds like a great opportunity for a professional Opportunist absolutely.
Hayden Kelly
I think I need to send Sam an email and let him know what we're working on. A Chicago Atlantic, that sounds great.
Dave Spray
Well, hey, thanks again for your time. Really appreciate it. Have a great day. Thank you, david.
Hayden Kelly
Bye.
Dave Spray
There we have it another great episode. Thanks for listening in. If you want to continue the conversation, go to ic disc show dot com. That's ic D is C showcom and we have additional information on the podcast, archived episodes as well as a button to be a guest. So if you'd like to be a guest, go select that and fill out the information And we'd love to have you on the show. So that's it. We'll be back next time with another episode of the ic disc show.
Special Guest: Hayden Kelly.
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By David SprayIn today’s episode of the IC-Disc podcast, I have a great guest today, Hayden Kelly from Chicago. He is with Chicago Atlantic and they have a really interesting cannabis fund for accredited investors.
They've identified a market inefficiency because endowments, institutions, and non-profits are usually prohibited from investing in cannabis. Additionally, these cannabis companies are typically not bankable for traditional debt. So Chicago Atlantic has a really interesting debt model for accredited investors, with great collateral coverage and attractive loan-to-value ratios.
Hayden is a really interesting guy, and even if you're not investing, he has a really interesting update on the state of the cannabis business, especially east of the Mississippi. In fact, Hayden shares some background on cannabis legalization history and why states east of the Mississippi are more financially attractive. I hope you enjoy the episode.
SHOW HIGHLIGHTS
TRANSCRIPT
(AI transcript provided as supporting material and may contain errors)
Dave Spray
Hey, this is Dave. Welcome to another episode of the podcast. I had a great guest today, Hayden Kelly. He's with Chicago Atlantic and they have a really interesting Anibus fund for accredited investors. They've identified a market inefficiency because endowments institutions nonprofits are usually prohibited from investing in cannabis But additionally, these companies are not really bankable for traditional debt. So they have a really interesting debt model for accredited investors that has some really attractive returns with unbelievable collateral coverage and loan to value ratios. So Hayden is a really interesting guy And, even if you're not investing, he has a really interesting update on the state of the cannabis business, especially east of the Mississippi, as it relates to cannabis from a purely financial aspect. Hope you enjoy Well. Good morning, hayden. Welcome to the podcast.
Hayden Kelly
Thanks, david, appreciate you having me?
Dave Spray
Yeah, my pleasure. So what were you calling into? from today Are?
Hayden Kelly
you in Chicago. Despite the background, i'm actually in Miami, our offices are based out of Chicago. We have an office in Miami as well, but I made the move down to South Florida a little over eight months ago.
Dave Spray
OK, now are you so eight months ago? Sorry, are you a native of Chicago then, or how'd you end up in Chicago?
Hayden Kelly
Yeah, born and raised in Delaware. Actually, i spent two years in Chicago. I went to the University of Delaware, made the move to Chicago just in the beginning of 2020. I enjoyed the city. It's a great city. We just have a lot of clientele through South Florida and decided to make the move here for convenience. Whether that's a great place to be.
Dave Spray
OK, well, super. So let's talk about Chicago Atlantic real estate finance. So if I've got like a couple of single family homes that I want to rent out, are you getting the guys I call to get that financed? There's a little more to it than that.
Hayden Kelly
Yeah, no, absolutely, it's a little bit different. So we do operate as a REIT. Our public vehicle is a publicly traded mortgage. Right now, what I specialize in and where I work with is our private funds, which is very similar to the REIT the extent of the industries in which we invest in the collateral we we obtain as collateral towards loans. We make direct loans, and Chicago Atlantic as a whole is credit oriented. We're an investment platform that focuses on making loans to industries that for maybe some reason, banks won't lend to. Maybe it's one industry that we've really specialized in over the last four years is the US medical and recreational cannabis industry. So, ok, we started making loans in 2019. We have a public REIT on Nasdaq, we have a private credit fund, we have an equity fund and a variety of vehicles and our goals to get outsized returns to investors with very limited downside risk, and we're an industry where there's very limited competition.
Dave Spray
OK, i'd love to just dive into that cannabis industry. You know, kind of the last I looked at it, geez, four or five years ago, it seemed like because of the of us being a listed drug. Is it listed? What's the correct technical term? It is still a scheduled substance. Scheduled substance, yeah. So it created this hodgepodge thing where they couldn't use credit cards, they couldn't have a bank account, everything was in cash. Is that evolved in the business or is that still the case?
Hayden Kelly
So a few are still the case, still scheduled. You have an industry that is, for that reason, unbankable. So the big banks, the insurance companies, the endowments, the pensions, the institutions of the world that are typically the big check writers, the big investors in any traditional industry, are shut out from investing due to that lack of federal legalization, where the federal government has said you know, at states, you decide what you want to do. There's 22 states with recreational programs, meaning anyone over the age of 21 can consume cannabis and purchase it like alcohol, and then 38 with some sort of medical program where, if it's chronic pain, sleep apnea, etc. You can acquire cannabis with a note from a doctor and a prescription to be filled at a dispensary. Now your point on the card is completely right No credit card processing in dispensaries, and now what they do have is ATM obviously withdrawals, which is easy for cash transactions, but also you have debit card processing in a good chunk of dispensaries.
What we've seen, though, is a big misconception on operators. Everyone thinks operators can't get bank accounts. They're paying us off through amortization payments for our loans and cash and trash bags account. The reality is there's probably anywhere from two to six state chartered banks. These are local banks that will take deposits, open up bank accounts for operators That's how we get comfortable potentially making loans And we require operators that bank accounts for at least a year and a half before we would consider a loan. So to that extent there are bank accounts in the space, but there definitely are a lot of regulatory hurdles at the operators' face.
Dave Spray
Okay. So I suppose I think it was Zig Ziglar that said every obstacle contains the seed of an equal or greater opportunity. So it kind of sounds like that's how you guys are looking at this. Instead of seeing all the obstacles right You can't use credit cards, can't get big institutional investing you're choosing to see the opportunity in it. it sounds like Absolutely, david.
Hayden Kelly
So I'll give you just a little bit of a background for us. It started a little over four years ago For one of our founders, tony Cappell. He worked at a traditional lending shop in Chicago called Stonegate And, being in Illinois, you had a super robust medical program. So when it flips recreational, all those patients were already consuming. You had a wholly new addressable market that was interested in cannabis. Maybe they were using it on the black market side and wanted to now try it from dispensaries etc. So when that state flipped recreational, you had what are now the billion dollar publicly traded companies like GTI, presco, barano, spinning out of the state And they were actually coming into the offices of the Stone Gates and the other credit shops of the world and saying listen, guys, the banks won't give us a loan.
We'll give you whatever you need to get comfortable. You can take our real estate as collateral. We'll pledge you all of our assets. We'll even personally guarantee the loan. You can charge us 20%. We'll give you a little piece of the company, just give us debt.
Because of that point in time there are equity valuations of skyrocketed. They didn't want to sell any more equity in their company, so what they wanted was debt. They were willing to pay an arm and a leg for it. But unfortunately, even Stonegate was a shop that said listen, we can't do it. We have leverage from a bank. We have a few institutional investors who are not comfortable with cannabis. We can't make these loans. And being the head of credit, which was where Tony sat, he said why not make these loans when you have very limited competition, an industry that is growing 20% year over year? You can charge whatever you want And it's way more secure than anything else we're doing. And that's pretty much how Chicago Land it came to be. He got together with two of his classmates at the University of Chicago. They did their executive MBAs together at Booze And it's solid to just really understand the industry travel state by state. And that's at that point is when we launched the fund.
Dave Spray
Oh, wow. That's really cool, and can you share approximate like size of the cannabis portfolio that you guys have or any kind of metrics?
Hayden Kelly
Yes, so between our public reach, our two private funds and LP call investments that would lead underwriter on and lead collateral agent on. we've deployed a little over 1.8 billion into cannabis, or the largest vendor in the space.
Dave Spray
Wow, and so help me understand, like, is that like a couple dozen clients, or is that tens of thousands, or is that something in the middle, you know kind of what's? could you maybe kind of walk me through just like a typical you know sort of deal structure, as much as you're able to, you know, without giving away your secret sauce.
Hayden Kelly
No, absolutely. Well, it's closer to the earlier part, which is that I've done about 60 loans. Okay, we have some very large loans, one to a company called Verano Holdings who is a billion dollar publicly traded operator. That's a $350 million line of credit.
We have 30 million in our REIT, 30 million in our private fund. Verano is probably, in my opinion and you can look at it anywhere is probably one of the top five operators in the world today. Well, we will go in. We will do a loan anywhere from 10 to 30 million in size. We like to structure the loans as delayed drawl term loans, where we lend It's very accretive, so the operator is either building something or buying something. So we can structure the note to be delayed drawl term, which says we'll maybe give you the first tranche of 10 million upfront Once you get a permit to build your new cultivation or you're awarded the license, maybe we'll unlock the second member of that loan. So not putting all the cash up front is great from a downside protection standpoint. We like to lend anywhere less than two times and two and a half times senior debt to EBITDA.
Dave Spray
When in traditional businesses.
Hayden Kelly
You typically see people lending maybe at five, six, seven times senior debt to EBITDA. So very low leverage. The loans amortize. We prefer our operators to be amortizing monthly. So that is actually paying down the principal of the loan rather than just paying its interest. For the big balloon to a maturity, that loan principal amount is getting smaller and smaller every single month.
And then one thing that we've done since early on, and we're very happy we did, was focus on floating rate loans. So where you've seen these increased rates and this inflation hedge and it affecting big credit shops, big publicly traded mortgage rates, it hasn't affected us, not in a negative way but in a positive way. Where our cost of capital right now is the best of expectations. We don't use leverage So we're not relying on a bank to ultimately lend to us. That rate would have gone up Where when we make a loan to a borrower, the rates based on crime. As capital becomes more expensive to borrow and crime rate goes up, our loan gets more expensive, making the return for investors higher. So we have a portfolio right now in one of our private funds that has 37 loans. The gross on levered yield on that vehicle is over 18%, which is phenomenal and it continues to rise.
Dave Spray
Yeah, and especially given the well collateralized nature of the loans.
Hayden Kelly
That's something we haven't even touched on yet, which is the most important part. A typical loan when there's real estate coverage, we're getting a mortgage or deed of trust. So the operators and where we're lending is primarily on the East Coast, where all agopolis exist. You have indoor warehouses, 15,000 square foot grow operations where the operator has various grow rooms and they're growing cannabis indoors. That's how they can control climate and ultimately grow in a state like New Jersey, pennsylvania, west Virginia, ohio, because you can't do it outside like you can in California and Oregon. We're getting all asset UCC one lean. So the company's assets, the receivables, cash on hands, security, interest on their inventory, equipment, lights, receivables, etc. But the real hammer, david, is we're actually getting what is called a stock pledge of the subsidiary that owns a license.
One thing that I did not get the touch on it, which is super important, is there's two types of markets in cannabis. You have unlimited license models and you have limited license models, where some of the early adopters the California's, the Oregon's, the Washington's of the world said cannabis is great, let's issue as many licenses as we can, people love it, we're generating great tax revenue. But what happened was, over time, too much competition entered the state. When that competition entered the state, it created, at first phenomenal, a lot of cannabis coming online, a lot of people consuming it. But over the years you've seen a decline in wholesale cost. You've seen an increase in competition. You have operators that it's very difficult to be profitable and they're not making any money. What that's done at the state level is the states are now losing out on tax revenue because they're charging excise tax And the way to optimize your excise tax is to keep wholesale prices high.
So the new states that have been adopting the Pennsylvanians, the Ohio's, the West Virginia's, the Florida's, the Illinois's of the world. They said we're going to issue limited amount of licenses, where maybe they issue 20, 30, 50 licenses. Doing so creates oligopolies. Doing so keeps wholesale prices high, limited competition, very easy to regulate. And with that not only do you have a market where cannabis is trading at 2,000 or even $2,800 a pound in some states, you also have now created this license that is very valuable. You can sell the license, you can transfer the license. Now what is the most important thing with our loans is when we focus on these east coast operators We're getting. That license is collateral. The Pennsylvania licenses are valued anywhere between 15 and 25 million dollars. You saw a license itself for over 90 million dollars. So it's a very attractive piece of collateral on our loans and with the licenses, the real estate, the leans, even personal guarantees. When we consider LTB's of the enterprise value of these companies, we typically say under 25% of an additional lending environment.
Dave Spray
Wow, that's, that's amazing. Can you kind of walk through like an example? I mean, this can just be What's the word I'm looking for an amalgamation of, like, yes, some different clients.
You're sort of a Hypothetical scenario. Just kind of walk us through, maybe what it looks like like let's just pick a state and let's maybe, you know, maybe think of a particular deal you've done You can just talk about anonymously or something close. I know a lot of our listeners are, you know, financially oriented, so could we kind of just sort of walk through what a deal might look like.
Hayden Kelly
Yeah, absolutely, david, and I'll share what I would consider is one of our most reputable loans. It's a publicly traded company called Brano Holdings, and Brano is a 1.1 1.2 billion dollar Publicly traded operator. There's been quarters of the company doing over a hundred million dollars in EBITDA quarter.
That is a 350 million dollar loan, meaning we're less than one time senior, that TV, that and that loan is at the cost of an all-in Just over 14 percent. Where seniors are cured on the deal, we're fully collateralized by real estate, all-acid lean stock pledge devices. No personal guarantees in that loan. It is a publicly traded company and no warrants in that deal. But that is just shows the The industry, the holes in the industry where there is very much so mispriced risk.
If Verano was a Widget manufacturer or they were in the tire business Generating that type of revenue and having that type of dominance in the market, they would be at the cheapest cost of capital possible. But just given the lack of the institutional money in space, the banks not being willing to lend to the sin industry, which is cannabis, were able to charge a company of that magnitude north of 14 percent, which just speaks to This industry and how they're truly is mispriced risk. Ultimately, every single state to David, so they're all across the board. We've exposure through various states and many different markets just with that that one company.
Dave Spray
Okay, yeah, and they're happy to pay the 14 percent because their margins are substantially higher than that, obviously.
Hayden Kelly
Yeah, and there's a few other factors. There is a capital super creative to them. But what's more important to understand is you've had these cannabis equity markets. You have some operators that are performing very well whose equity valuations are still getting crushed. Now They're not going to inject equity and raise equity To dilute existing equity holders. They're not gonna, you know. I see, when they know their values are higher than they're being betrayed Today, which is ultimately why they're willing to pay for more expensive debt.
Dave Spray
Sure. So paying 14 percent for debt is still far cheaper than selling equity at a depressed price.
Hayden Kelly
Absolutely and it won't last forever, i can't tell. You will be able to generate 12% cash paying returns, a gross on every deal of over 18% forever. But I think we have a four to seven year window and the reason being is you have An issue right now with the Democratic Party as well, where originally the Democratic Party is ever in a league-class cannabis. It's great. We can generate significant tax revenue, we can implement social equity, we'll get back to the people that were harmed on the war, on drugs and incarcerated etc. And what happened as time kind of progressed is the Biden administration You know the runoff to the Senate ever thought it would happen and the cannabis equity market skyrocketed.
If you look at a chart, i like to use MSOS. It's an ETF of the ticker to some of the largest publicly traded cannabis companies and You see this boom right following election and over the last few years It's just gone directly right back down, nearing all-time lows. And it's not because the companies can't perform. It's the loss of faith that there's gonna be any reform, any real meaningful impact and to get institutional investors involved. And it's because half the Democrats like it for tax revenue, half like it for tax revenue and one implements social equity.
There's something going on in New York right now where, you know, potentially implementing 150 licenses for Dispensaries to ex-devicted felons. Now I think it's great if you want to, you know, get back to those who have been wrongfully incarcerated for something that is now legal. It makes sense. But what doesn't make sense is Having these operators now be the ones that are going to control the cannabis trade in the state, maybe individuals that don't have as much business experience or operating experience. So you see, issues like that the Republicans aren't too favorable of that. Some of the Democrats don't love it, which is why we've seen what is the safe banking act been shut down at the Senate level for a great time now.
Dave Spray
Oh, wow, okay, And so help us understand. like what a smaller deal looks like, like do you have any operators? or just like a single location. Was that too small?
Hayden Kelly
No, but location is everything. So we'll do individual deals. Anywhere from 10 to 30 million in size is our sweet spot. It might be an operator in a state like Pennsylvania or Ohio or Maryland where this limited license model exists. It might be a smaller operator, but the goal there and the thesis there is you're in a state like Pennsylvania where there's 25 cultivations, or in a state like Maryland where there's 50 cultivations and you're forced to be vertically integrated because if you have a cultivation you get three dispensaries. So having one of those licenses is super valuable Now, where the operator might not be printing as much cash as a Verano, a GTI or a Crestor or a big operator.
They're in an industry where they don't need to do anything in an instant. Be attractive. They don't need to have the best brand, they don't need to have the best product, they just need to be able to operate. They need to be able to grow cannabis, open up their dispensary on time, have employees in the shop And, given the soledopathy that exists, they're very much able to be very profitable and have very attractive licenses, which is I break this flat as well.
Dave Spray
Okay, that makes sense. What makes me think of something here in Texas. There's a Texas ice cream company called Bluebell in about an hour northwest of Houston, in Brenham, texas, and supposedly if you go to the manufacturing facility they just have ice chest full of like single serving ice cream for the employees to just sample at will throughout the day. I'm guessing that some employees at cannabis operations think it's going to be a similar setup, but I'm guessing it's probably not like that, right? Is this the dream job for somebody who's a regular cannabis user? or they can just consume while they work? Is that, or is that just probably a myth?
Hayden Kelly
Yeah, no, it's definitely a myth. Now, a California, Washington, oregon grow operation or dispensary, that might be very, very all common, just given the lack of regulation, the very cheap wholesale prices, the oversupply, that is very much real Now in a state like Pennsylvania or Illinois and Ohio these states that keep looting to you can't do that in your rooms, you can't do that Your dispensary is, and then what you stand to lose is the ability to operate. So if you're consuming product in your cultivation, it's not a good idea. We don't advise on it. We haven't seen any of our operators doing it. But there's something to consider. Right, if you're working that close to the plant, you might have an affinity to the product. At Chicago Atlantic we don't have an affinity to the product, we just like the sufficient markets And it might happen. But from our perspective it's a big no-no and you stand to lose much more than you stand to gain by consuming product during the workday.
Dave Spray
Sure No, that makes sense. Hey, do you know one of the theories of one of the benefits of legalizing a cannabis was that, as I understand it, when you have a black market there's a huge premium that the consumers paying because of the risk of the whole supply chain being illegal. And part of the theory was that by legalizing it you could really dramatically reduce that premium to where the black market really wouldn't exist, because there would be kind of no economic aspect to it. Are you familiar with any of those dynamics, like in California, let's say? has the black market effectively been either eliminated or kind of made irrelevant?
Hayden Kelly
So it's interesting, ultimately the actually the opposite is happening in a state like California, where you have a very robust tax regime in a state like California where it's already hard to be profitable, no matter what business you're operating in. Now you're in a state that is overbuilt supply so dramatically that it is so hard to be profitable that some of these legal operators have adjusted and started doing black market activity shipping and product over state lines, maybe selling cannabis, you know, out of the shops And, david, there's actually kind of to an extent exist in New York too, because there's really no crackdown, there's no real push to let's incarcerate, let's shut down these black market operators that are selling out of trucks.
You can go into a bodega, buy an e-cigarette, a sandwich, a soda and actually buy cannabis from someone behind the counter, and they might even put it on a credit card for you. So there's a lot of black market activity. In Houston it's not heavily regulated. Now in Pennsylvania, in Maryland, in Florida et cetera, you'll absolutely see that where. Why go to the black market dealer to purchase an eighth of smokable flour when it's going to cost maybe 30 to $40 from the black market dealer? That same eighth might be $35 or $50 in a dispensary. It's not dramatically more expensive.
You get to know where it's grown. You get to see all the metrics of the cannabis how much THC, cbd, everything that's in the product. It's sealed, it's labeled, it's sold at a licensed dispensary. It's much safer. Now you even have a new adoption of people that maybe would never consider smoking cannabis if you're buying it in a bag from a black market dealer outside of a shopping center et cetera. Where, if you go into a dispensary, you see it's labeled, you see it's secure, you have the child-proofing packages, big brands, real customer service. You might have that housewife or that house husband that was once drinking a glass of wine or a beer before bed, now eating an edible or smoking a vape cartridge to relax. So it's definitely happening. Now in the more unlimited licensed states, the opposite's happening, because the operators can't be profitable, they're a little bit more desperate and they're turning towards a black market product. The states east of the Mississippi is where I typically go. They're really very much doing it right when it comes to issuing licenses and regulating licenses.
Dave Spray
Okay, and like is California, like one of those states where somebody can grow their own marijuana for personal consumption too.
Hayden Kelly
There's over 6,000 licensed grows in California, which is crazy. It's very easy to grow, It's very easy, obviously, to consume and then purchase and sell Where in some of the limited states it's very difficult to get a license. I mean an application process in a limited license state costs anywhere from $100,000 to $300,000 just to submit a good application and potentially be considered to be a worthy license.
Dave Spray
Wow. Well, we spent a fair amount of time in Colorado And my understanding of the Colorado law is it's actually legal, i think, maybe three plants per adult or something like that, where you can actually grow it completely unlicensed, unregulated, for personal use. Do you know if California or Oregon has that kind of stipulation too?
Hayden Kelly
I'm not exactly sure. I'm sure it does To the extent operator. both consumers want to grow their own cannabis, as long as they're not trying to open up a dispensary near positive.
Dave Spray
It's the same way in Oregon and California, because it would seem like that would also create another black market, because I'm guessing in California the tax rate on the cannabis is probably higher than just the standard sales tax rate. I'm guessing it's a pretty significant number. You know what that is.
Hayden Kelly
Absolutely. It's very high In California, one of the worst tax regimes. obviously in the US there's a premium associated with cannabis even in Illinois. Tax revenue generated from cannabis in Illinois just last year, for the first time ever, actually was larger than tax revenue generated from alcohol.
It's not because there was more sales in alcohol, it was because the rate is higher. That just shows the magnitude of tax revenue from the product. States ultimately aren't legalizing it because they say you know what, david, this is better for you than buying Advil from Walgreen. This is better for you than getting prescription bill. It's ultimately to generate tax revenue where there are significant health benefits to cannabis. States are really being pushed and urged to legalize cannabis due to that tax revenue generation.
Dave Spray
Yeah Well, it would also seem like that would also further depress the price, the black market. Even if all you're doing is eliminating the tax, that creates a significant difference. Because I can just imagine somebody who's maybe been illegally growing their own cannabis for a long time. There's just a little small operation for them, a couple of their buddies, very low key. Now all of a sudden it's legal and they can have I don't know, it's either three or six plants, i think in Colorado You can grow them outside, i believe.
Now all of a sudden they're like hey, just like in the past, i produce a little more than I need, so I can just sell it to my buddies. I'm actually selling it to them cheaper than I used to because I don't have to charge the incarceration risk premium. Now all of a sudden they're able to buy it from me for half the price that cost them to go to a dispensary. You only have one strain but they come over anytime they want. They can kind of see the operation. I would also think that would be another downward pressure phenomenon on pricing as well, although it may not be material and quantity.
Hayden Kelly
Yeah, that's. The latter is the most important part. Not only these plants aren't going to produce enough cannabis ultimately if you have three plants to supply many people with the product. But growing is not that easy. It's not like planting a tree where you can just put it in the backyard or somewhere or water it once in a while. It takes sophistication. It takes very significant nutrients, soil, water, lighting.
The process is difficult where, if I was an advocate for cannabis and even just for some reason I couldn't buy from a dispensary, which would be the first place I would go. I'm much more likely to find a black market operator who would chip it to me from California, oregon or Washington because, a it's probably even cheaper than trying to grow it yourself and B the new sense of growing is it's not easy. It takes anywhere from six to 12 to 24 months to have a clone producing cannabis. That's smokable. It's not something that is ultimately too reputable or even it's not that easy to do. It takes someone that really understands it. There is definitely an existence. It's not going to have too much of an effect on wholesale pricing at the dispensary level.
Dave Spray
Okay, well, thanks for that industry background. Now you mentioned that in your $1.8 billion you have deployed that you haven't had access to the traditional equity markets, institutions and insurance companies. In that, because of this awkward age that we're in with cannabis, how are you all raising your funds? because it doesn't sound like you're borrowing money. It sounds like it's all equity investment from nontraditional sources. Is that correct?
Hayden Kelly
Correct. When I speak with anything here, it's in regards to our private funds. But our private funds are completely unlevered. We do not take on debt. We don't go to a bank and say let us borrow $50 million, $100 million, we'll mix it in the fund with LP equity. It'll actually sit on top of the LP equity, which means in a waterfall scenario or something goes wrong, the bank gets paid back before investors are considered. That's in the traditional investment world private credit.
REIT et cetera. We are completely unlevered. It's no bank debt, it is all LP equity and traditional investors of ours are qualified purpose-served investors where you have to have $5 million or more in assets. Our typical minimum check is anywhere from $250,000 to $1 million. It's ultra-hine-worth individuals, It's family offices, It's private investors that want great opportunity for clients that offers quarterly income.
How is the investment very liquid. What's the typical tie-up if an investor does choose to team up with you?
Hayden Kelly
guys. The investment has. A two-year lockup is the standard. Investors can get out at one year at a 10% discount if they need early liquidity. The standard two-year lockup has no discount associated with it. We make redemptions on a quarterly basis.
But, if investors are interested in the fund, you come in immediately, diversified across 37 loans. 15 of those loans have some sort of equity kicker, which means about a third of the deals are actually able to get some sort of piece of the business if the company goes public or gets acquired, which is alluded to in the past significant markups. We've had years where equity kickers are worth an additional 200-300 basis points. We've had years where they've been worth nothing, but they're solely gravy and they can help bolster returns at the investor level.
Dave Spray
Okay, that explains how you lend the money at 14%. You pay your overhead, but your investors are capturing a greater than 14% return because of the equity kickers.
Hayden Kelly
To an extent that's correct. The only thing I'll say is that 14% that's to one of the best billion-dollar publicly traded companies, oh okay, the cost of capital is well over that.
Dave Spray
I've got you. Okay, That makes sense. So, accredited investor. if an accredited investor is listening to this and wants to learn more, where would you direct them to?
Hayden Kelly
There's two ways You can check out our website. You can read about the team I oversee, our investor relations team. We have about 500 line-item investors. If you have any interest in learning more talking about the cannabis industry, maybe you are pursuing debt for cannabis operation. If you're looking for income alternatives in these uncertain markets, I'm happy to talk to you about potential investment opportunities.
Dave Spray
Okay, should I just email you? That would be great. What's the email address?
Hayden Kelly
It is HKelly at ChicagoAtlanticcom. That is HTELY at ChicagoAtlanticcom.
Dave Spray
Okay, and then the website ChicagoAtlanticcom ChicagoAtlanticCreditcom Correct. Okay, chicagoatlanticcreditcom. Well, this has been really interesting. Is there anything that I didn't ask you, that you wish I had?
Hayden Kelly
No, i think we covered a good chunk of it. We covered a little bit of everything. You know what makes this different I think it's important because there are some other lenders in the space is both were largest by a pretty significant multiple but it's where we focus we said early on, we want to stick east of the Mississippi.
We want to focus, for allogopolis exist. We've never done a direct loan in California, which speaks magnitude, because most people the first thing in the first state they think of when you hear cannabis is California. It's where started, it has this, you know, feeling to it. If you go to California, that's where cannabis is, etc. We really focus on these allogopolis and one thing that makes a significant be different, david, is we focus on direct originations. We directly originate our loans from ground up. We have eight direct originators that are in the field, looking for new deals, uncovering new opportunities, staying current with borrowers for introductions and up sizes, which gives us a competitive edge. But we're actually seeing a lot of these deals before anyone else has the opportunity to even talk to the operator. So that's us. I'm happy to chat with anyone more in depth. There's a lot we can go into and I look forward to it.
Dave Spray
Yes. So one last question. So is there any? you know, given the muddy waters during the federal and the states, if somebody has like Qualified retirement dollars They're looking to deploy, are there any prohibitions against that? I mean, if it's in a qualified retirement, you know, an IRA, roth IRA, or does it have to be, you know, outside that type of vehicle?
Hayden Kelly
No, great question. We included an offshore feeder on our Second fund, which is available to investors. That eliminates what is called UBTI and ECI, which are on favorable, favorable tax treatments for Qualified plans like a self-directed IRA. Now, if the individual is no longer employed with the firm that maybe they had a 401k with Like we heard is they can roll it into a self-directed IRA and invest. We take self-directed ira's, traditional ira, we take foundations etc. So you can use taxes and dollars. Very attractive from that perspective, given the high yield.
Dave Spray
Yeah, well, super Well, hey, this has really been. This has really been fun And I appreciate your kind of opening our eyes to an interesting Opportunity that sounds like it may not be around forever, because it was just kind of this unique, influenced of events that's created this opportunity. I heard this quote by Sam Zell. Do you know, sam, the famous Chicago? I think he invented the read. Basically, i think he did. I Heard him speak at a conference. In fact, it was that same conference in Miami where I first met one of your colleagues Earlier this year and Sam, i didn't hear this from him then. Sam spoke at that conference, but I heard him on a podcast and he said when somebody asked him what his occupation is, he said I'm a professional Opportunist, so this sounds like a great opportunity for a professional Opportunist absolutely.
Hayden Kelly
I think I need to send Sam an email and let him know what we're working on. A Chicago Atlantic, that sounds great.
Dave Spray
Well, hey, thanks again for your time. Really appreciate it. Have a great day. Thank you, david.
Hayden Kelly
Bye.
Dave Spray
There we have it another great episode. Thanks for listening in. If you want to continue the conversation, go to ic disc show dot com. That's ic D is C showcom and we have additional information on the podcast, archived episodes as well as a button to be a guest. So if you'd like to be a guest, go select that and fill out the information And we'd love to have you on the show. So that's it. We'll be back next time with another episode of the ic disc show.
Special Guest: Hayden Kelly.