If you own a cannabis growing facility or cannabis processing facility, you know firsthand the business acumen required to stay compliant, structure debt, operate according to established SOPs, and manage investor expectations. From application to approval — and well into sourcing, building, and operating your business — it’s critical to keep an eye on the bottom line and ensure forecasted spending and earnings are still within reach. But what if you’re ready to reconfigure your debt or equity based on changing needs? What is restructuring? And what is recapitalization? Let’s discuss the difference between recapitalization vs restructuring cannabis real estate debt and equity.
To kick off the conversation, let’s establish the foundation of each. When discussing recapitalization, it applies to the equity portion of the capital stack. When we talk about restructuring, it’s concerning the debt portion.
Let’s also define a few additional terms to better understand these processes.
- Strip sales: A form of fund restructuring that involves the partial sale of a fund’s investment (strip) in all or some underlying assets. This process provides Limited Partners (LPs) with liquidity, or access to their funds.
- Liquidity: The rate at which an asset can be purchased or sold on the market at a price that reflects its current value.
- Joint venture buyouts: Two or more businesses that join under a contractual agreement and strategic alliance to conduct a specific business with both parties sharing profit and losses.
- Capital structure (a.k.a., debt and equity blend): Equity is a company’s common and preferred stock plus retained earnings. Debt typically includes short-term borrowing, long-term debt, and a portion of the principal amount of operating leases and redeemable preferred stock.
What is Restructuring?
Restructuring is a redistribution or shift in ownership of shares, essentially a shift in partnership. Another way to describe it is to call it a secondary loan. A secondary loan means that someone who is a borrower is selling a portion of the loan (the first sale was between the lender and borrower, and the secondary sale was between a borrower and a new borrower). A redistribution happens between a limited partner and a new potential partner — not directly from the lender.
Restructuring may be a good move for investors who are ready to own more of the company. Existing limited partners may buy shares from another or sell off a portion of their shares to someone outside the organization. This shift doesn’t change the portfolio or require a new business plan.
Refinancing of a loan typically involves getting lenders to reduce the interest rates on loans, extend the due date for payment, or both.
In trying times, both of these steps can improve the company’s likelihood of re-paying its obligations and staying in business.
What is Recapitalization?
While restructuring debt can be a useful tool for businesses in a phase of volatility or change, recapitalization may be a good opportunity for businesses ready to leverage their successes. When a company is ready to maximize its capital structure, it’s poised to restructure its equity and debt blend. It’s a great tool to use to rebalance exposure to different managers, operators or investors while maintaining ownership. Some forego recapitalization and sell outright, but for those looking to remain invested, recapitalization offers a refreshed portfolio.
So, what is recapitalization and what does it entail?
- First, recapitalization starts with an assessment of the existing portfolio.
- During this assessment, a new business plan may need to be established.
- This may include the restructuring of funds, strip sales, or joint-venture buyouts.
- If necessary, the business may require a reposition of commercial real estate asset valuation and in some cases, may include the payoff of investors or local banks to free up cash.
- Removing investors thus frees up the company to, in some cases, seek debt financing for a commercial real estate expansion or additional acquisition(s).
- In the end, a fully custom solution that considers the overall goals of management and underlying investors while ensuring growth.
- You can learn more about debt and equity here.
How can CannaRE\Group help?
Based on these details, which option is best for your cannabis business? CannaRE\Group can help operators of a cannabis growing facility or cannabis processing facility determine recapitalization vs restructuring by analyzing their ownership and the debt structure of their capital stack. Most of the time, Canna Real Estate Group can help identify cost allocation strategies to create capital for facility expansion and plan routes to reach stakeholder goals.
At Canna Real Estate Group, it’s our passion and honor to walk new clients through the process of securing their real estate projects and choosing between recapitalization vs restructuring. Whether you own a dispensary, cannabis growing facility, or a cannabis processing facility, we are here to help. We know these processes through and through. You can’t surprise us — we have seen it all.
Are you ready to make your dreams a reality? Let’s start the conversation.