State Packs & Market Dynamics, Safe Banking, Capitol Hill Updates ft. Rob Sechrist

The Future of the Industry: State Packs & Market Dynamics, Safe Banking, Capitol Hill Updates ft. Rob Sechrist

Rob Sechrist: We can see that there's 1,600 dispensaries that still need to be built in California — but that's not perfect data yet, and here's the reason why... Bryan Fields: What's up, guys, welcome back to an episode of The Dime. I'm Bryan Fields, and with me as always is Kellen. This week we've got a very special guest, Rob Sechrist, co-founder and president of Polaris Capital Group. Rob, thanks for taking the time — how are you doing today? Rob Sechrist: Doing well, thanks for having me back. Excited to see you, Kellen — how are you doing? Kellen: I'm doing really well, really excited to talk to Rob and learn about the capital markets and what's going on in the cannabis space as it relates to funds. I'm also excited to have another West Coast representative on. How are you doing today, Bryan? Bryan Fields: I'm excited as well. Obviously Rob's expertise can be very beneficial specifically here on the East Coast with some of the real estate, so we're looking forward to getting some of those insights. Rob, before we dive in, can you give a background about yourself and how you got into the cannabis industry? Rob Sechrist: Sure. Polaris is an asset manager that specializes in private credit, primarily value-add — that's the type of transactions we do. I co-founded Polaris in 2010. In 2014 our local congressman, Dana Rohrabacher, passed what we consider the most consequential piece of cannabis legislation to date — the Rohrabacher–Blumenauer Amendment — which defunded the Department of Justice from prosecuting cannabis-related businesses. Once that passed, we realized this was the largest newly created asset class that probably nobody was lending into in a programmatic way. So we became the first dedicated cannabis lender in 2016, launched our first fund in 2018, converted to a private mortgage REIT in 2020, got investment-grade rated, completed the first FDIC-insured specialty-use warehouse line of credit, the first bond offering with institutional investors, and most recently the first securitization with institutional investors. Bryan Fields: So as the first mover, with no roadmap, how does that work when you're paving the way? Rob Sechrist: We'd already paved the way in commercial real estate lending before cannabis, whether in thought process or deal structure — we came up with a 100% loan-to-cost loan back in 2010, teaming with a hedge fund on the equity side and doing profit splits with borrowers, then went to 50% loan-to-value with prepaid insurance. Cannabis is challenging because when you deal with third parties — title insurance, property insurance, errors-and-omissions — and they have a clause saying "this is federally illegal, we won't insure it," you lose the leverage you'd normally have to negotiate coverage or pricing. Bryan Fields: When you don't have those protections, do you have to seek outside parties or work with entrepreneurs to establish them? Take us through the origin of those early days. Rob Sechrist: Start with title insurance — you can typically get it two ways. One, by not disclosing cannabis use, which is what most people do since the property may not have been cannabis-used at purchase. We know from making title claims ourselves that insurers will find any way to deny a claim if they can — you want to solve for that up front. The second way is title companies giving an inferior policy called a CLTA, which isn't worth much, or lenders claiming to have coverage without disclosing what level. We won't accept either. Our CEO and team have built relationships across the country that let us get full coverage — the right named insureds, the right endorsements — on transactions worth tens of millions up to nearly $100 million. You want to de-risk every element you can, because things you assume exist in traditional real estate may not exist when you pivot into cannabis. Bryan Fields: In those early days, were there internal conversations about these gaps and whether it was worth building solutions, or were you just focused on real estate with blinders on? Rob Sechrist: The Rohrabacher–Blumenauer Amendment passed in 2014, and it took us two years to line up the closing process and third-party relationships, even though we could have closed loans sooner. Very few transactions closing during that window had a proper ALTA title policy or the enhanced coverage we require — like insuring for 125% of value instead of 100%, so you can actually afford to enforce the policy. These are things you de-risk over time; you don't want to pay your own legal fees just to enforce a title claim. Kellen: One thing we've seen become popular in the industry is sale-leasebacks. Can you expand on what that is and how it works? Rob Sechrist: A sale-leaseback is different from lending in that the buyer owns the property. We think of it as a synthetic 15-to-20-year loan to recover full principal — you're never going to foreclose because you already own the asset. The disadvantage in this industry is you're completely cashing out the borrower on day one, at a time when they're willing to do almost anything for liquidity instead of raising equity — which misaligns their interest from the property going forward. You lock them into a lease with an escalator for 15-20 years, rising even as the market's cost of capital compresses over time. We don't think that's the best strategy for an emerging asset class and regulatory environment, especially since interstate commerce could evaporate the protective margins of limited-license states overnight. Bryan Fields: What do you think drove so many companies toward that structure a few years ago, right after the pandemic? Rob Sechrist: REITs are popular because investors rely on the long track record of equity REITs — accretive real estate value, passive cash flow, depreciation benefits — all fully baked into mature markets across every asset class. Bringing that structure into a still-immature, still-evolving regulatory environment is further out on the risk spectrum than we're comfortable with. If regulatory reform or interstate commerce forces a reset of lease rates across a portfolio, that's a systemic write-down. It's a bomb waiting to go off, because eventually protected state markets may no longer be protected. Kellen: That's the difference — your team is structuring for the long term, while a lot of operators are focused purely on the short term, on keeping the lights on. That's the big disconnect in this industry. Rob Sechrist: One nuance to add — that disparity only grows depending on where the lease-rate basis starts relative to where true market rate eventually lands. Bryan Fields: When you talk about a "fully baked" market, are you talking about the industry as a whole, or specific states individually? Rob Sechrist: Every state moves through its own path from medical to recreational, and we think all 50 states will legalize within three to five years — but that doesn't create one national market, because licensing remains a states' rights issue. Each state is its own universe. No state has reached full maturation, where license supply balances demand. New states typically start with outdoor wholesale, no brands, everything sells — then compression hits as more entrants and more experienced indoor operators arrive. We built our own data sets to track where each state sits in that maturation curve, since nobody else had that. Bryan Fields: What do you think will be the hallmarks of market stabilization in these states? Rob Sechrist: It varies by state, and also depends on whether compacts form — like potentially California, Oregon, and Washington. Some states have lower capex, opex, and tax burdens, making cross-state growing-and-selling arrangements more efficient under a compact. Without giving away too much proprietary data — based on California's population and per-capita consumption, our model shows capacity for roughly 1,600 more dispensaries statewide. But that's skewed, because about 70% of California counties are not cannabis-friendly, so licenses can only exist in the remaining counties — and some of those counties still have individual cities that allow it. We mapped every license type geographically, including ownership and applicable tax jurisdiction, because two cultivation sites next door to each other can face very different tax treatment. Bryan Fields: I have to clarify — you said California has room for 1,600 more dispensaries. Everyone's going to say California's cutthroat and operators are going out of business — how does that square? Rob Sechrist: That 1,600 figure is the capacity to serve the whole state in a fully mature market. We're always refining the data — Nevada, especially Las Vegas, has huge tourist flow we factor in, and New York shows similar theoretical capacity around 1,600 as well. This isn't us misreading the data — it tells you the market isn't stabilized yet. There's massive unmet capacity, and how it's unlocked depends entirely on the regulatory landscape maturing. Kellen: Are these conversations you're having directly with regulators, trying to help shape that regulatory landscape? Rob Sechrist: All the time, but more at a higher level — mainly with congressmen and senators. I've spoken with Senator Daines, Cory Booker, and others, mostly at the federal level, trying to educate legislators and investors, because we believe we have the largest data set in the country. Take SAFE Banking — the name implies there's no banking today, but there are 684 banks already doing cannabis deposit relationships, about 15% of all banks. Any bank can accept cannabis deposits by filing a Marijuana Suspicious Activity Report correctly, but most won't take that risk without a built-out compliance department. We're trying to correct misinformation across the board — for legislators, investors, and operators. Kellen: All of that is so valuable, especially given how fragmented the industry is by state. Given that we're early and haven't hit peak maturation, we're likely heading into consolidation. For vertically integrated companies that eventually don't want to stay vertically integrated everywhere, how do you see them disposing of assets? Rob Sechrist: I think you're making assumptions that may not hold. A lot of big MSOs believe size and scale wins no matter what. We've underwritten 2,000 transactions and have 32 in our current portfolio, and some of our smallest borrowers — maybe 30,000 square feet across three buildings — are so nimble and efficient that no MSO could match them consistently. MSOs take longer to adapt because they're managing regulatory regimes, labor markets, and power costs across many regions — what works in one region may not work in another. Desert Hot Springs, one of the earliest California cities to go recreational, now has a deep bench of ancillary service providers — HVAC, power, water — that a newer market like Michigan might not have yet. There's more to this business than people realize — think Napa: bottling, packaging, co-packers. Bryan Fields: Can states expedite market stabilization, or is it not that simple? Rob Sechrist: The fastest path to stabilization is an unlimited-license market — though "unlimited" is misleading, since every license still has to attach to real estate, and real estate is geographically constrained by distance requirements from schools, churches, residences, and other facilities. Still, laissez-faire economics forces the fastest, most efficient market outcome. Kellen: As markets stabilize, do consumers benefit too, or mostly businesses? Rob Sechrist: Unlimited licensing forces businesses to become more competitive — in California, they compete against operators who can produce more cheaply. We have one borrower that could drop prices 20-30% and still be profitable; an MSO coming from a limited-license state could never compete with that, because they were never forced to become that efficient. In limited-license states, there's no constant new competitor forcing efficiency — until the legislature issues more licenses and suddenly your license value drops. Bryan Fields: Going back to something you said about geography — O'Brien mentions this all the time, that we don't grow all our food in every state; some locations have cheaper power and better sunlight for cannabis. From a real estate standpoint, how much do you look at emerging markets that might be big long-term but lack agricultural history? Rob Sechrist: We think through it on every transaction, but we're a specialty lender focused solely on cannabis, not trying to aggregate deals across a whole state. We evaluate each transaction standalone — is this the most experienced operator, the best sponsor, and are we comfortable with this specific market. We're not the property owner, so the real question is: if we had to replace a tenant here, how confident are we we could reposition the asset and still be fine on our basis? We estimate the entire national cannabis real estate opportunity across all 50 states at about $50 billion. Once that capacity is reached, there will still be ongoing repositioning as operators and technology evolve — which is why we built two loan products: a bridge product, and later a fully stabilized long-term product, since we realized there won't always be assets turning over to refinance us out. With our bond and securitization work, we believe we can eventually compete head-to-head with banks and other mortgage REITs. Bryan Fields: So once we can deconflict state and federal policy, when do you think we'll get SAFE Banking? Rob Sechrist: I was actually the one who announced, right after meeting with Senator Daines' office, that they had the 60 votes needed — that was about a month ago. We've been talking directly with staff working on this, and the biggest tell is that Schumer's staff has reportedly been the most responsive people have ever seen them, turning things around immediately — which signals real willingness to move it forward, even though Schumer controls the calendar and could still choose not to schedule a vote. What makes me more optimistic now is that the House and Senate versions are aligned as the same bill, so it just needs to clear Section 10 language, and there's reportedly a backup plan if that language doesn't land as hoped. Bryan Fields: Does SAFE Banking passing change your business at all? Rob Sechrist: Our business is built to thrive in the current landscape, but meaningful legislation helps the whole industry, which is why we advocate for it. For us, our cost of capital would decrease and our access to institutional investors would significantly increase — a real upside. The downside is every lender, including banks without cannabis experience, could jump into the sector; most don't understand the special-use asset class the way we've learned to. We've institutionalized the company to compete against the biggest asset managers once that day comes. Bryan Fields: Sounds like a lot of scenario planning goes into that. Rob Sechrist: Exactly why building structured products like our bond and securitization mattered — in a normalized lending world you'd have full access to those tools. We've proven we can do it; the limiting factor now is the constrained buyer universe because cannabis is still federally illegal. Bryan Fields: Could you briefly explain securitization? Rob Sechrist: You pool assets — in our case about $70 million of loans, segregated from the rest of the portfolio — and sell the most senior tranche, about $45 million, to institutional investors at a lower rate, capturing a spread. Those loans become non-recourse to the rest of the fund. We then re-originate that $45 million into new loans and can repeat the process, picking up spread each time even though we no longer technically own the original loans. Kellen: Are institutional investors eager for exposure, or more hesitant? Does it vary? Rob Sechrist: Two things going on — some want diversification into a specialty asset class less correlated with broader real estate cycles; others just don't fully understand the space yet. Typical institutional check sizes are $50-100 million, and they don't want to be more than 5-10% of an issuance, which makes filling these structured products challenging given our portfolio size and the limited pool of eligible investors. Then there's the custodial question — who holds the assets, who handles the tax implications, whether the attorney involved can even be affiliated with anything cannabis-related. Bryan Fields: Sounds like a lot of fun — you can't just Google those answers. Rob Sechrist: There were 64 attorneys on the closing email at the end. The lawyers always win. Bryan Fields: Rank these in terms of value to the industry: SAFE Banking, removal of 280E, interstate commerce. Rob Sechrist: Removal of 280E is the most impactful, because it hits every cannabis business in the country at once — a 20-40% net income uplift for virtually everyone. Even cannabis-friendly states like Illinois still disallow expense write-offs at the state level. It's also the hardest to achieve, because rescheduling to Schedule III could raise banking questions too, and the federal government would be giving up real tax revenue without necessarily replacing it — so be careful what you wish for. Next most impactful would be meaningful SAFE Banking, because it clears the path for institutional investors. This sector has struggled partly because there's been no real path for institutional capital into U.S.-based cannabis companies — everything you've seen has been retail-driven volatility. Jason Wild, through the CSE, created the first path for institutional investors to access a U.S. cannabis company via a custodian like Pershing, which was hugely significant. If SAFE Banking passes, it moves us toward institutional capital and eventually toward NASDAQ and the New York Stock Exchange — we have a great relationship with the NYSE, and they're leaning in to be ready once cannabis is federally legal. Bryan Fields: What's the most expensive lesson you've learned? Rob Sechrist: Lessons cost you dollars or time. The cheapest lesson is learning from someone else's mistakes — when I ran my first company, an action-sports company, in my 20s, I sought advice from people who had failed, because they'd actually tell you the truth, unlike successful people who only share highlights. For Polaris specifically: small-town building departments hold real power over certificates of occupancy and conditional use permits, and sometimes local officials don't honor what was previously agreed or permitted. We ran into that in a California city, where low-level officials nearly exposed the city to a massive lawsuit by trying to force a different operator into a permit already issued to someone else. We lost time, not money, but it's a reminder you can't fully underwrite for individuals acting in their own self-interest at the local level. Bryan Fields: What's one statistic about the industry that shocks lawmakers? Rob Sechrist: That there's actually ample banking already — even though the number of participating banks has dropped from 702 to 684. Of the roughly 2,000, now closer to 3,000, transactions we've underwritten, we've never seen a deal where the property owner, borrower, or cannabis tenant lacked banking. Lawmakers think SAFE Banking solves the cash problem — it doesn't. The real unsolved issue is that you still can't process credit cards on federal payment systems, and even after SAFE Banking, few new banks will rush in without building out compliance departments. Cory Booker's staff listened well, but many congressmen didn't know what they didn't know. When we spoke to New York State officials a couple of years ago about their social equity licensing program, we told them: you can't lend against a license you just handed someone unless there's a guarantor with real financial strength and experience. They were solving the problem from the wrong side — giving away licenses without qualifying or supporting recipients sets people up to fail. Bryan Fields: In my experience, whenever someone gives you something with nothing expected in return, it's called a gift. Rob Sechrist: Exactly — and there's a tax catch too. If a license is worth a million dollars, a state might waive state tax on it, but at the federal level that's ordinary income the year you receive it, so it's not really "free." My suggestion to New York was to require anyone in the final round for a license to have qualified legal counsel, because right now people are negotiating with counterparties — often friends or people with a personal interest — who have no cannabis licensing expertise. Bryan Fields: I think the best part about New York is that we were one of the first states to legalize, and we're still a small state with only nine or ten open dispensaries — it really shows where we are on infrastructure. Rob Sechrist: I love New York — they've set the new bottom for what a Harvard Business School case study looks like. If you'd asked anyone in the industry beforehand whether any state could mess it up worse than expected, nobody would have bet on it — Illinois and Chicago had a rough rollout too, but coming in below the previous worst is quite an achievement. Bryan Fields: All right, Rob, prediction time — what's the first state to reach maturation, and when? Rob Sechrist: Pure speculation, not our data talking — I'd say California. It has a legislative supermajority that makes passing pro-cannabis policy easier, unlimited licensing, and deep cannabis history, whether legacy market or not — all of which give it the biggest head start. Bryan Fields: When? Rob Sechrist: Tougher to say — I'll say five years, to be safe. You could reach theoretical full-market capacity on paper, but it still has to filter geographically through such a large state — someone in Eureka doesn't have the same access as someone in Los Angeles. People underestimate how much geography, latitude, and climate matter — 14 storms in a row earlier this year will materially affect this year's outdoor and greenhouse harvest. Kellen: I'll pick Washington. They decoupled retail licensing from cultivation and manufacturing early on, which was smart, and they have a strong agricultural history with hops and similar crops. It was a street fight in the early days, but it's mellowed, they run their own track-and-trace system, and there's less outside lobbying. Speaking as a Coloradan, it looks like a well-put-together regulatory environment from the outside — and they still don't accept outside investment, which for all these reasons might help them reach maturity first. Bryan Fields: What do you think, Rob? Rob Sechrist: I actually think that's a disadvantage — you want licensing as unlimited and transparent as possible. Every artificial barrier you put up, people find ways around, and whatever you think you're solving, you create a new problem. Kellen: That's a good point. Bryan Fields: I'd 100% agree with Rob on California, but per the rules of the podcast I can't pick California, so I'll take New York. Rob Sechrist: New York, I knew it. But by 2030 we might have 20 dispensaries, right? Man, are they going to operate efficiently, though. Bryan Fields: We have very stable weather conditions, great growing conditions, we grow a ton of product here — it's ideal, we'll just grow it all indoors. Rob Sechrist: Yeah, I guess you could tell your brother that. Kellen: I'd take Oregon if I had to pick another one, given the price compression and struggling companies — I think that's part of the necessary consolidation for the industry's long-term strength. Unfortunate for the people losing their businesses, but critical for strengthening the market. Rob Sechrist: You have to be more nuanced than picking one state for the whole cannabis market — if compacts form between California, Oregon, and Washington, California already dominates non-cannabis crop cultivation in that group because of climate, infrastructure, and labor. It's like asking which state's real estate market is best without specifying multifamily versus owner-occupied — lumping it all together is a mistake. Bryan Fields: That's perfectly said. Rob, for listeners who want to learn more and follow you, where can they find you? Rob Sechrist: Follow us on our YouTube channel, where we post educational videos fairly often, plus LinkedIn, Instagram, and Twitter at @PolarisCG. For fund interest, reach investor relations at ir@4cg.com; for borrowers, info@4cg.com. We only lend on real estate-secured transactions with experienced operators, typically $10-30 million loan sizes, to sponsors well-capitalized enough to essentially qualify for a bank-quality deal, with a proven operating track record. We don't do intro calls — send a detailed loan request by email if you want a response. Bryan Fields: Awesome, we'll link it all in the show notes. Thanks for taking the time, this was a lot of fun. Rob Sechrist: Awesome.