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Retail real estate tied to the cannabis industry does not usually attract mainstream mortgage lenders, largely because federal law still treats the plant as a controlled substance. That gap has created an opening for specialized financiers willing to work directly with landlords who lease their buildings to licensed operators. One of those specialists closed a transaction that shows just how creative this corner of financing has become.
Chicago Atlantic Real Estate Finance, Inc. (NASDAQ: REFI), a commercial mortgage real estate investment trust based in Chicago, announced it had completed second lien notes secured by thirty-two retail properties. The properties are managed by Koach Properties Manager LLC, an affiliate of Koach Capital, a firm built around sale-leaseback financing for cannabis operators. Under that model, a cannabis retailer sells its building to Koach and then leases it back, freeing up cash it would otherwise have tied up in real estate.
Koach issued REFI notes with an aggregate principal balance of approximately $62.5 million. Rather than paying cash for those notes, REFI handed over 4,306,754 of its own common shares, valued at $14.53 each. That is an unusual twist. Instead of REFI writing a check and collecting interest payments over time, the two companies effectively swapped paper, REFI’s equity for Koach’s debt obligation.
The notes carry terms built for the long haul. They pay 10.0% in cash interest annually, plus another 2.0% that accrues as payment in kind rather than being paid out right away. There is also an exit fee equal to 2.5 times the commitment amount of each note, due whenever the notes are eventually repaid. On a weighted average basis, the notes will not mature for approximately 12 years, giving REFI a long runway of exposure to this portfolio.
Because the notes sit behind a first lien on each property, REFI is taking on more risk than it would with a senior loan. If something goes wrong, the first lien holder gets paid before REFI does. In exchange, REFI is betting that these properties are leased at capitalization rates more attractive than what a typical retail landlord could find elsewhere, and that Koach’s approach to acquiring, stabilizing and eventually selling properties will pay off over time.
Peter Sack, co-chief executive officer of Chicago Atlantic, framed the deal partly as a wager on where cannabis policy is headed. He said the company is pleased to support a leading portfolio of retail assets and cannabis tenants, particularly because regulatory changes in cannabis markets could compress capitalization rates on properties leased to cannabis operators. That view lines up with broader shifts already underway. Rescheduling discussions in Washington and a growing number of state licensed cannabis companies pursuing public listings have started to change how investors think about the sector’s real estate. If more capital sources open up and more buyers compete for these properties, values could rise, and REFI’s second lien position would benefit accordingly.
Chicago Atlantic Real Estate Finance mainly originates senior secured loans to state licensed cannabis operators in states that limit the number of available licenses, and it is managed by Chicago Atlantic REIT Manager, LLC. Koach Capital, founded in 2019, is a privately held firm that has developed and financed dozens of properties leased to some of the country’s largest cannabis retailers.
This deal is a reminder that cannabis remains a patchwork industry where financing solutions often look different from those in other property sectors. Traditional banks still largely avoid cannabis related real estate because of federal restrictions, leaving room for firms like Chicago Atlantic and Koach to build relationships that combine debt, equity, and long term partnership. Whether this particular structure becomes a template for future deals may depend on how quickly cannabis policy actually shifts, but for now, it stands as one more sign that this market is finding ways to work around old constraints.
