Joe Lustberg: What Cannabis Lenders See That Operators Miss

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Joe Lustberg: If you're not profitable, the bank is not going to lend to you. So a lot of these operators think that rescheduling, SAFE Banking, or even federal legalization is going to be their savior. From my perspective, the rates are going to stay the same. No new lenders are going to come in. Bryan Fields: Joe, you've financed operators for years and now you're fighting to open up your own dispensary in New York. How has being inside the fight changed your perspective on risk? Joe Lustberg: For us, we're on both sides of the equation. We're helping operators raise capital on the upper side, and then on the other side of the business, we're an operator in the trenches, really just trying to launch cannabis on the North Fork of Long Island. We've been in a legal battle with the Town of Southampton for two years now, and we've been leasing that property for two years. So we've learned firsthand that there is a serious struggle when trying to overturn a municipality, and there are certain things in a cannabis operator's hands, when they're starting that business, that are just not in their control. There's definitely a lot more risk being a cannabis business owner — not only getting banking, insurance, raising capital, and getting investors to put in money, but also local risk. Long Island, especially here in New York, has been an absolute battleground. Bryan Fields: Just to be clear, though — you've been paying rent for two years, right? Joe Lustberg: Yeah. Bryan Fields: For more than two years now? Joe Lustberg: Yeah. Bryan Fields: Now, does actually going through this change how you've looked at things historically? You've been in the industry a while, financing a lot of these businesses, evaluating them, and I'm sure you've thought about some of these obstacles and challenges — but now actually being physically on the other side, dealing with the nightmares and headaches, has that at least changed your perspective? You have to still pay, because you made a commitment, and these municipalities are making things insanely difficult. Joe Lustberg: No, to be honest. For retail, especially in cannabis, it's location, location, location — it always has been, always will be. From my perspective, we've always had the best location in the Hamptons. The town went as far as to try to rezone my property on me so that we couldn't operate in that location — because they know it's a great location too. We ended up winning our lawsuit in December. We overturned the town's rezoning. We also overturned their special use permit process, which required certain setbacks from residential properties. From our perspective, they were simply discriminating against the cannabis business, which is not allowed under New York State cannabis law. I believed the entire time that state law would trump the local laws they tried to make up. We're still very, very pro-cannabis, pro-opening our stores, and excited to get them open. We're still in the appellate court process, but we're watching every day, hoping we can get the go-ahead to start building. We've done everything right throughout the process — we've done nothing illegal. Other stores have just built without permits and opened their doors; we've taken the higher road. We're going to continue to fight, and we're going to pave the way for the rest of the operators looking to open there too. We believe in our property, our brand, and our company, and we're going to continue that fight. Bryan Fields: And putting your Upwise Capital hat back on — does that soften your stance when operators come to you? Joe Lustberg: So much — it has to. When they tell me the struggles they're going through, I can relate so much, and I try to relay how much I relate to that. Those who really know our story, who've read up on it, seen us in the news, watched us fight with the OCM to get things pushed along — we were the first "unreasonable and impracticable" claim in the state of New York. We've made a lot of changes for these municipalities and for the OCM, and the OCM has been great in stepping in. From our perspective, we've been through the trenches, and now we understand what all these operators go through. That's why we're trying to help every operator we can, whether it's a small deal, a $20 million or $50 million deal, or somebody looking for a $25,000 or $50,000 piece of equipment. We're looking to help as many operators as we can access capital. Throughout the years I've built a very vast network of lenders, and being an operator myself, I now really understand the struggles and have empathy for operators. Bryan Fields: Does that experience bleed into conversations with people looking at early entrance into the market or startups? Maybe their business plan talks about eight to ten months when in reality they might need more cash for unforeseen situations — because when you got into this, you didn't anticipate paying rent for two-plus years just hoping for the opportunity to run the business normally. It's really difficult for newer, wide-eyed business owners. Joe Lustberg: Every situation is different, but the biggest thing I always tell operators in emerging markets is that you need a lot of burn capital just in case — whether it's hiring, holding rent, dealing with municipalities, whatever your buildout budget and cost basis is to get operational. You need to build in one-and-a-half times whatever you're budgeting for cushion — that burn capital category, just break-glass-in-case-of-emergency money. Bryan Fields: So do you think other lenders in the space who haven't lived through this friction can truly understand the crisis — or is that even needed? Joe Lustberg: Lenders who've been in this space a while really understand what happens when you overbuild, what happens when price compression comes in, and how you become a profitable business running lean, which is very tough in cannabis given all the taxes. There are certain lenders who are no longer lending because they were lending on cannabis valuations, thinking that once you build a cultivation or manufacturing facility it's worth $20 or $40 million, when the real estate value on that property is $5 million. We're seeing that throughout the country — a lot of cannabis lenders foreclosing on properties, people going out of business. Only the strong will survive in this industry. Everybody gets into this thinking there's a pot of gold at the end of this green plant, but it's one of the most compliant, restrictive, tough industries to be in. Layer in 280E, local taxes, state taxes — it's tough to be profitable. It's a very difficult industry, built only for the strong. In states that are starting to compress, like Massachusetts right now, we're seeing our smarter operators — the ones we've financed for years — looking to buy up those assets for pennies on the dollar. It's still a great industry with a lot of runway; we're very bullish on cannabis. New York still has a lot of runway, New Jersey is crushing it, Missouri is a big state for us right now. We're putting out a lot of capital where people are building out — construction and real estate is a big part of our business. Bryan Fields: When you're evaluating businesses doing well and looking to grow, how do you understand the right balance so teams don't over-leverage or overbuild for tiny markets like Massachusetts? How do you know when a market has enough biomass and supply and is approaching the tipping point? Joe Lustberg: It's really lender specific. The benefit of working with Upwise is we currently have over 115 lenders and banks that will lend to the cannabis industry — working capital, term loans, lines of credit, construction, equipment, a mix of everything. We're lending in every state — California, Oregon, you name it — but we monitor price per pound, the number of operators opening, the number of licenses being issued. In overlicensed states it's tougher to get capital. But if you're a profitable operator running an EBITDA-positive business, making money, and can meet a minimum debt service coverage ratio of 1.25, it doesn't matter what state you're in — we can get you capital. Bryan Fields: Are there restrictions outside of that based on nuances? Joe Lustberg: It's real estate. There are a lot of nuances — if they're trying to secure a property for a construction loan and the property is in Desert Hot Springs, for example, it's very difficult for us to get a deal done there. What's the alternative use value in Desert Hot Springs? If it's not a cannabis facility, who's ever going to lease that? But if it's near a city center with good alternative use value, we can definitely leverage it. We still have lenders building out facilities based on a loan-to-cost basis — the lender comes in with 65% loan-to-cost, the operator brings the other 35%, plus another 35% for burn rate, so there's enough equity to build out, get operational, and be comfortable. Bryan Fields: Is that math market specific, or a general playbook that morphs by location? Joe Lustberg: General playbook, but location definitely matters on whether the deal can get done. If it's rural, it's tough; if it's not rural, we're typically able to get the deal done through one of our sources. It always comes back to location, location, location. Bryan Fields: That works for a standardized industry, but ours has major events like rescheduling that influence the future dynamic. Are you seeing operators aggressively take on more debt? How do rescheduling and other changes influence what you're seeing? Joe Lustberg: It's a mix. We're seeing a lot of volume of people looking to refinance at better cost of capital — everybody's always looking for better cost of capital. A good operator usually has financing in the high teens and is looking to refinance into something better. Rescheduling is always the "save-all" for these operators — they think once it goes through recreationally, banks will step in and cost of capital will drop. From my perspective, it's SAFE Banking that allows banks to really start lending, but there are already banks lending in cannabis — it's state specific. A Jersey operator goes to a Jersey bank, a Missouri operator uses Missouri banks. They'll lend, but it's attached to real estate and to the deposit relationship, and you still have to be a profitable business. If you're not profitable, the bank isn't going to lend to you. A lot of operators think rescheduling, SAFE Banking, or federal legalization will be their savior — from my perspective, rates will stay the same, and no new lenders will come in over the next six to twelve months. Maybe a couple of banks here or there, but it won't change the overall lending atmosphere. It always comes down to underwriting: the ability to make payments, what the team looks like, the growth strategy, and the assets. Bryan Fields: Let's run through a scenario. Say a team is looking to refinance debt at, say, 18% — how long does that process take? Joe Lustberg: It depends on what they qualify for. Our process is typically: collect documents, financials, bank statements, application, run credit, run background, then go out to different lenders and groups to secure term sheets. That whole process usually takes a week to two weeks, then about a 45-to-60-day close. If they qualify for a better term loan, they'll typically save three to five points on a refinance. If they transition from a private debt lender into a bank loan with real estate attached, and they're willing to move their deposits to that bank, you're looking at 7% to 9%, typically. On the working capital side, maybe 10% to 12%. Bryan Fields: That could make a massive difference for companies fighting right above that profitability line. Joe Lustberg: That's why full recreational rescheduling helps a lot of cannabis businesses — they'd be able to take traditional write-offs like any other business, and someone who was just EBITDA-positive would suddenly put a lot more income to the net bottom line and qualify for a much better loan. If we get rid of 280E and it goes through recreationally, that's a huge game changer for the entire industry — not just the MSOs who've been fighting for this for years, but also the small operator with one or two dispensaries struggling to be profitable. Bryan Fields: Does an operator need to show profitability prior, or are lenders sophisticated enough to model what the books would look like once 280E goes away? Joe Lustberg: It depends on the lender. Most want profitability and at least six months of showing it on the books. Bryan Fields: That's difficult — if 280E is the difference for them and it goes away, waiting six months could mean the difference between life and death for some businesses. Joe Lustberg: That's why you hire a broker like us — we're going to get on the phone and fight for you, just like you're fighting for your business. We'll explain to the lender and show a pro forma: what does the business look like if this loan comes in, where does profitability go, how is the money put to work. If we can show that full picture with a real pro forma, we can sell that. That's the benefit of working with us — we send a lot of volume to lenders in cannabis, we have relationships, and we'll push it through. Bryan Fields: Are lenders surprised when you show them the numbers post-280E repeal? Joe Lustberg: Of course — half of them don't believe it. Underwriters underwrite on reality, not on the future and what could be. Bryan Fields: But it's very possibly the near future — everybody's said it's coming. Joe Lustberg: I think there's a very good chance it happens before the end of this year. Bryan Fields: Going back to the growth phase — operators running strong businesses now essentially get a double head start: they can refinance their debt and save money fast, and they can also acquire struggling assets from operators who overbuilt. Do you think you'll see the strong teams separate from the pack? Joe Lustberg: Definitely, especially in compressed markets and even newer markets. You'll see the early, big companies with multiple locations, vertically integrated, with the team and capability to execute. There's going to be compression no matter what state you're in — when a state legalizes, you have a good five years to really try to crush it and make your money, but price compression comes as competition opens up. The strong will survive, and the strong will also expand — into other markets, taking advantage of growth opportunities, getting leaner, cutting costs, growing strategically. I've seen thousands of pro formas, projections, P&Ls, and balance sheets over the years, and a lot of companies are very profitable in this industry — those are the smart ones. You can tell the difference between a smart, put-together business owner and someone who can't get it together. Bryan Fields: What's the biggest tell when you look at a pro forma before you've even spoken to the operator? Joe Lustberg: It's really the balance sheet. First you look at the top line, then EBITDA and net income to see what they're running, then all their costs. There have been many times we've gone into a P&L and balance sheet and the company's losing money, but the executive salaries are more than what the company's losing. There's a lot that stands out, but we're looking for good, smart operators looking to grow, and we have access to the best cost of capital available to them — it's the Upwise decision, as we say. Bryan Fields: You've probably got a good feel for when numbers feel wrong without even verifying the specifics yet? Joe Lustberg: You can tell just by looking at a balance sheet what type of operator you're going to get on the phone with, and how quickly they get you documentation. Smart operators keep some money in the bank — it's something most operators should do, but it's tough with all the taxes and compliance. Bryan Fields: In more limited markets like Ohio, does that change your evaluation, knowing there's less competition and a more controlled state? Joe Lustberg: Ohio is still a great market for us — we're doing a few construction loans and equipment financing deals currently. A lot of people are building out there. We still have groups that will approach it from a loan-to-cost or cannabis valuation basis, giving more capital to build out in limited-license states. There's a cost to that — a construction bridge loan is typically 13% to 15%, interest-only, a couple years. The goal is to get the operation fully funded, including burn capital, get profitable within the two-year window, then graduate them into a bank loan at 7% to 9%, a 10-to-15-year term with a 25-year amortization. By then, hopefully the business is profitable, meeting a 1.3 debt service coverage ratio with a 1.5 global debt service coverage ratio from an asset and personal guarantee perspective — the cheapest cost of capital for a cannabis cultivator or manufacturer that owns their property. You still need to check all the boxes: team, equity raised, contributed capital, and enough from a personal guarantee perspective. Bryan Fields: Does anyone come to you with weird requests — like people chasing these new DEA export registrations? Joe Lustberg: Yeah, we get crazy deals — Colombia, Greece, those DEA licenses, we've seen a couple. For us it's the same underwriting: what assets do you have, what are you building, and what's your ability to service the debt from a cash flow perspective. All those guys with a DEA license think it's a license to print money — who knows, we haven't seen it yet. Bryan Fields: What's the craziest deal that's come across your desk that you thought would never work, but ended up being a really good business? Joe Lustberg: For us it was the old Pepsi bottling facility in Pueblo, Colorado. When we met them, they were building out that 150,000-plus square foot facility — I think that was 2020. I went out to see it and thought, "You're going to put cannabis in this entire place, in Colorado, of all the compressed markets?" He said, "We're just going to grow cheaper than everybody." I asked how, and he said he was using insulated foam paneling — R30 in the ceiling, R72 in the walls or something like that — really keeping the energy in the room, and he told me they could grow at like $250 a pound indoors. That blew my mind. It took years to build — we did a $10 million loan on it, and it took about two years to get fully open and operational. By the time we saw the finished facility, I was astonished he was really growing at that price per pound, even cheaper on certain strains. Bryan Fields: How do you balance that skepticism — you went out there thinking there's no way, but still got the deal done because the numbers checked out? Joe Lustberg: It's a beautiful facility, they did a great job. I never thought somebody could grow indoors at that price per pound. We've seen the worst of the worst and the best of the best — operators who spend $40 million building huge facilities and flop, and operators who bootstrap it, get a small loan here and there, and turn it into a beautiful, profitable, operating facility. Bells and whistles, beautiful equipment and technology, don't always grow the best weed or turn out the best — there are so many other factors that can go wrong. Bryan Fields: Have you ever helped someone who was a star within an organization but didn't have the capital to go out and disrupt the market on their own? Joe Lustberg: We get a lot of those calls — "I've been a cultivator," or "I've got a license and a dream." It's tough, and we can relate. You have to be able to raise equity — that's the biggest thing when starting any business — or put your own money where your mouth is. Coming to us asking for 100% financing is never going to work. But if you come with assets, contributed capital, and a business plan — something to leverage — yes, we can get it done. Once they're generating revenue, six months in business, we can do working capital lines of credit. Upwise is a story-type group — we'll listen to the story, but it has to make sense. We're looking for good, established operators. We're one of the only companies that still does startups, where you're looking to build out, do construction or equipment financing — we think outside the box, using cross-corporate guarantors, other companies operators own. If a guy owns a construction company and wants to get into cannabis and needs to build out his dispensary, we could use the construction company to help service that. We listen to the story and do what we can. Like I said at the beginning, we're operators ourselves — we've been through it, in a very tough market, Southampton — so we understand the struggles, but it has to be realistic. Bryan Fields: What markets do you think are underappreciated or undervalued that most people are missing? Joe Lustberg: New York, obviously, since that's where we're sitting. Bryan Fields: At what point is it going to be enough? I'm more frustrated with the speed than anybody, but I'm also glad it's gone slowly because my lawsuit's taken a while. There's still a lot of people here in New York who don't know there's adult-use cannabis. Joe Lustberg: Do you really think people in New York don't know there's adult-use cannabis? Bryan Fields: There's a bunch of people specifically on Long Island who have no idea they can buy legal cannabis — maybe it's proximity to where the dispensaries actually are. Joe Lustberg: It's a municipal, local battle here on Long Island. A lot of municipalities opted out, and it's shaping up in a framework similar to California — you drive forty minutes and hit seventeen dispensaries, then drive another forty minutes and hit eight more. That's unfortunately how it's shaping out on Long Island because it's a local battle. But I hear it on the radio — OCM doing radio ads telling you not to drive and smoke. I think the majority of people in New York know cannabis is recreational; whether they know the difference between a legal store and an illegal one, I'm not sure. But New York still has a lot of growth potential. Bryan Fields: Massive growth potential — not disputing that. I'm just more frustrated at the speed of how they've handled the market. I don't think anybody's happy with the speed of what happened in New York. Joe Lustberg: It's been an absolute regulatory shitshow. Hopefully we still have a lot of runway, and the East Coast is hot right now — New Jersey, Connecticut, Ohio. There are still states with a lot of runway doing well, and, like we said, limited-license states are where most lenders want to lend. But in compressed states, if you're in a good area with a good asset, a good property, a good business, there's still capital available for all cannabis operators. Bryan Fields: Are there any markets you're not in right now that you want to be in? Joe Lustberg: I don't know why the state I'm thinking of isn't coming to mind. Bryan Fields: Nevada? Joe Lustberg: No, not Nevada — definitely not Las Vegas. Bryan Fields: That was an easy throwaway. Joe Lustberg: What's the new one... not Nebraska... We like Arkansas, we like Missouri, Kentucky — Bryan Fields: Yes! Joe Lustberg: Huge — but it's already a big state for us, we're in Kentucky. There's one more I'm thinking of. We got a deal two days ago and I can't think of the state — somewhere in that southeast pocket, I think northeast actually. Bryan Fields: We're going to get live breaking news here. You going to cut this out? Joe Lustberg: I've got to test you now since you used the magic word. Bryan Fields: I think I'll just leave that part in. Bryan Fields: Let's talk about how the future unfolds — some teams are talking about interstate commerce. It's early, but if that came about, some of the assets you're valuing now from a market-maturation or supply-demand standpoint could be massively disrupted through supply agreements — a market like Kentucky, for example, could serve other markets. How do you have the foresight and balance to weigh that risk? Joe Lustberg: In that instance, we'd put that risk onto another lender and try to broker that transaction, finding the right group for that particular deal. We've seen a few transactions in Kentucky, Arkansas, Missouri, some of the hotter limited-license states. It comes down to location, the operator, their ability to execute — since they've often already proven that — and how well-capitalized they are to actually execute the business plan and turn a profit. In some limited-license states it's very easy to turn a profit — Missouri, for example, a lot of operators are profitable because it's hard to find product there still. Bryan Fields: Missouri specifically, with some of those lawsuits around monopolies — I can understand why some assets would be valued more than others when there are claims like that. That's the interesting dynamic in how these markets unfold — certain teams have a stronger foothold and it influences how it all shakes out. Joe Lustberg: Definitely, like I said, it's the strong — the well-capitalized — who survive. Like you said in Missouri, you have those monopolies coming in and taking over. Bryan Fields: Allegedly, allegedly. Bryan Fields: Last question for you, Joe — what question do you wish more people asked you? Joe Lustberg: I really wish people asked us for capital that's actually available in the market, instead of capital that's just not out there for their type of business. We see a lot of deals and work with a lot of operators, but it always comes down to cost of capital. What's most important — cost of capital, or speed to market, getting your product out before compression hits? Historically it's both. If you're an operator, you want the best cost of capital, but you also want it quickly so you can get into the market fast. Using debt capital typically pays off better in the long run than giving up equity. I really just want operators to be a bit more realistic about the cost of capital in cannabis and what's actually available in the capital markets today. Bryan Fields: Joe, for our listeners who want to get in touch and learn more, where can they find you? Joe Lustberg: They can go to upwisecap.com, check us out on Instagram, email me directly at joe@upwisecapital.com, or email our cannabis team at 420@upwisecapital.com. Bryan Fields: Thanks for taking the time — this was a lot of fun. Joe Lustberg: Thanks, man. Appreciate you.