PP 73 | Triple Net Lease

What is a triple net lease and what’s included in it? In part six of eight segments, Tony Frischknecht and Flavia Hungaro, the owner of the new company called Locomotion Cannabis, discuss triple net lease lessons. They also touch on the limits to grow operations and how you can eliminate them.

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Massive Social Equity Opportunities in Massachusetts Part 6 of 8 With Flavia Hungaro

Triple Net Lease Lessons In The Grow

This is episode 6 in our 8-part series. We are continuing our conversation with Flavia Hungaro, who was a cannabis entrepreneur in Massachusetts. She’s working through the Social Equity Program out there. We’ve learned a lot since I’ve been talking with her. If you haven’t been able to catch up in this series, try to go back to part one of our series and start from there. In this episode, we are going to be discussing triple net lease lessons. Without further ado, here’s your show.

Let’s go back to the grow side because you have that lease that you have in place and you’re paying on it. It was 32,000 square feet. 

The whole building is 32,000.

How much was it lease to you?

On paper, we have about 15,000 square feet. There was also an additional area for office space that we have negotiated with the owner. Once we get to that point, we’re going to add into our lease. Hopefully, what I’m planning to do is to find a way to purchase the building because the lease with an option to purchase, I have a certain amount of time to buy the building. The same way that I have an option to purchase, the other company who rents the other half also has the same option for a slightly different amount of purchase price that they agreed upon.

We were talking originally how important it is for you to have somebody looking over your contract and so forth. That was one of my beginner’s mistake. I ended up saying something that I should’ve got help for that. I am in to a point that I cannot get out of the lease. If I decide to go forward and invest in this cultivation project, I have to buy the building. Otherwise, I’ll be putting money and then five years later, I might not be able to continue there.

How long is the lease for it?

The lease is for five years. It’s 3.5 or 4 years left. The negotiation that we got for the purchase price of the building is good to lease. The price that I had for a square foot is incredible. My idea originally was to expand to the other half of the building, but we didn’t have enough money to hold off the whole building at that point. The property owner saw it as an advantage for him to have another company come in and pursue the licensing as well. At this point, that’s the goal because even if I buy the building, the rent that is coming from the other side will be enough for me to pay for the loan if I get a loan for that.

How much money are you losing a month on the lease? 

It’s about $5,000.

You have somebody leasing part of it.

There are also utilities that come.

I did an episode on triple net. We talk about triple net, leases and stuff like that. That’s another thing you learned about.

PP 73 | Triple Net Lease

Triple Net Lease: Working together with extractors, growers, and other people in cannabis is going to help you stay alive.

If I had planned out that I would have started a lot smaller to get the cultivation up and running. It’s to a point that I have to do something with this place and hopefully, I’ll be able to figure something else soon.

Is there a possibility where you could sublease it to somebody that would come in and do growing there? 

There’s one thing that I have to go back with my contract and see if I’ll be able to sublease. The owner is helping me out because he already had those tenants there while I’ve been renting. They’ve been there before me. One of the ideas I had was to find an ideal partner. They’ll have the funding so I could do the project together instead of giving up the space because it’s a great space. We have a lot of possibilities there.

You could potentially take that and say, “You fund the grow part of this.” In a space that’s 15,000 square feet, you could spend $1 million, no problem. The grow has huge tax advantages but the upfront cash it takes is so huge. It can become a money pit quickly. I’m a grower. We started in and we did a 7,500 square foot place. 

You have a building out the whole 75,000 or you went into different phases?

We did 7,500 and then we acquired another 15,000 square feet. My question for you is, is there any limit to grow operations besides zoning? 

The minimum is up to 5,000 square feet, which is a microbusiness.

What I mean is, are they only allowing 100 grow licenses in Massachusetts? 

Not yet. I feel like that’s going to happen at some point.

From my experience, what happened to us is we got the biggest space that we could afford at the time which was only 7,500 square feet. We put in hundreds of thousands, we were taking our money from our store and pumping it right back into the grow facility. We constantly reinvesting into a building. We had a lease option on it. What it ended up happening is that there were a lot of failures that were happening around Colorado. We are more able to move into a growth space that was outfitted with $1 million-plus in grow equipment, electrical upgrades, AC stuff. 

We were able to move in there almost day two and start growing plants into our cycle. It required us to do a transfer. My point of all this is that you’re going to have some failures out there that are going to happen over the next couple of years. If you are able to build your retail platform, somehow either sublease this one. I like the idea of a partnership but another partner that you can trust in a grow is tricky. You have to trust that this person knows how to grow and can produce because that’s where a lot of arguments start happening. 

You need so much for the store. He or she promised this and all of a sudden, they’re producing half what they said. That huge strain on you and your business. If you’re able to be patient and wait for some of the fallout to happen over Massachusetts, you might be able to find a grow that’s already built out. You’ll have the connections through being in the industry for 3 to 4 years. You’ll be like, “I’ve got a grower. We can partner up. He’s a good guy. He’s got some stuff available,” and you can put them right into a grow that’s already built out. That’s got millions of dollars invested. You’re going to find a landlord that’s like, “I’ve got to figure out who’s going to rent this from me now.” They’re going to pay a top dollar for it too. I want you to keep that in mind. You don’t necessarily have to do the build-out.

Find an ideal partner who has the funding so you could do the project together instead of giving up the space. Click To Tweet

Speaking with somebody that’s dealt with a lot of growers, I also have a lot of experience working at hydroponic stores. I know their attitudes and who they are. They’re not bad people but a lot of them are flaky, they have big egos, and they think they can grow so well. It was their ten plants in a basement that they had done well. You open them up to a 10,000 square foot grow and they want to take their knowledge from a basement of ten plants and multiply that by 100 and there you go. It doesn’t work that way. Finding that exact partner for a grow is one of the more challenging things to do that I’ve noticed because I’ve hired a lot of them in the past too. 

I consider myself an expert but I’m not the best grower in the world. I wouldn’t say I would put myself against the top ten in the world. There’s no way. There’s a lot of amazing growers out there. However, I understand production and how to produce a lot of flowers that will supply a few different stores. If there is a way that you’re not able to sink a lot of money into expanding this grow or if you can lose it as a loss leader and you can lease it out for $3,000 a month, pay $2,000 a month until you get out from underneath that shitty lease. You might have to pay to play. 

Unfortunately, you’re learning that lesson over a five-year period of, “I didn’t know what I was doing.” Sometimes, it’s better to lose that money as opposed to throw good money after bad. We’ve all heard that. Option in your grow, those are a few different things you can take advantage of. When I had started, I didn’t think, “How am I going to find a grow that’s all built out?” You’re going to find them. People are going to go under. There were a lot of them that went out especially in the beginning. Regulations eliminated half of them in Colorado. 

There are a lot of people that are growing illegally. They would also allow those people to get up to par with all their regulations and build their grow so that it was legitimate. You’re going to find that will happen too. You might be able to partner with those people that have had some real success. They’ve had 2 or 3 years in their grow. They’re producing regularly. Once a week, they’re putting out a brand-new flower and you may partner up with them to help you out with these other stores.

As I said going back, you could lose $1 million like that. From our conversation, you don’t have millions of dollars to throw around. We don’t have much more time here but I want to touch on step six. I talk about the product source. Being able to source that wholesale whether you grow yourself or you are able to partner up with somebody that can supply you. One of these things that were hard for me to understand is I can grow it. I’ve done this. I couldn’t grow enough and I didn’t have the money too. We talked about the value of the flower and you had told me it was $4,000. 

I’ve heard more about that too. $400 or $500 or probably more.

The same thing happened in Colorado. When we started to open up, we were getting $4,000, $4,200. Some people were getting $4,500 a pound. It’s short-lived though. What I didn’t realize is it’s a commodity. What had happened is we were always chasing that number. By the time we got to the production that we needed to make money, the price had already dropped $1,000, $1,500. We put in all that effort to get to that $4,000 number and all of a sudden, it’s $2,500. 

In these big facilities, if you’re the grower and you’re there every day, seven days a week, it’ll take you a year to get stuff level. My concern is it’d take you 6 months to 1 year to open your grow. By that, you’re already losing $1,000 a pound because production is up. There was no limit on grows now so production is happening, and then it takes you another twelve months to get a steady amount of flower production coming out. By that time, you’re down to $2,500. What did you gain when you get to the $2,000 to $2,500 number? 

They’re still good but if you’re selling it through your door, even at $100 an ounce which you’ll see it at one point. You’re not seeing it now but that’s $1,600 a pound. You’re selling for out-the-door $200 an ounce. You’re still getting $3,200 which is more than that wholesale cost. It takes you longer to sell it. When you have these big ups and downs in production, the customer is what you can control. You can’t control that price fluctuation as much. By the time you get to, when you can produce the numbers where you can make big money, the cost of that product has already dropped so much. 

It’s like, “Why didn’t I buy it from somebody? I could’ve saved myself all this headache.” That’s what I got out of our conversation about the $4,000. Why don’t I do this? Pulling yourself in those directions takes you away from your focus of making that store a high priority, and making that sell a lot of products. If you can get a good customer basis where you have a 76% return, that’s how you have that stability and foundation for your business and there’s a limited amount of retail stores. There’s not grows. 

Those are going to be a dime of dozen, the retail not. However, the negative to that is 280E. I know you met Kevin. I had an episode with him. I’d urge you to check it out and read our conversation if you haven’t. We talk about ways that you can set up your accounting so you can avoid these huge taxes on 280E, because then the next thing comes, marijuana legalization across everything. That’ll change everything but you need to do this to survive as a business owner. For getting into your dispensaries or grows value, those were some of your questions. I want to give you a minute here to see what questions you might have for me now that I spewed that on you. It was a lot of stuff. 

Are you saying that if you were to go back in time on your situation and you would focus on the retails and not even deal with cultivation?

PP 73 | Triple Net Lease

I had a grow in place like you did but it was running. I was producing. We had already invested money we had it in there. Right now, you don’t have anything. I wouldn’t have expanded upon it. You’re too early because you don’t have a grower or a store running. If you need one or the other, the retail is the answer. I’m not saying to don’t grow but the situation you’re in is not ideal. You’ve got a shitty lease and then you’ve got millions that you’re going to have to plow into this. 

I was fortunate enough that we started before the regulations happen so we were able to mold into it but there were several businesses I built along the way that produced a lot more money for me that I took the efforts of another grower, and use their product to build my company until I was able to invest in my own grow. Had I done it that way, I would have saved myself so much headache because all the stress lies on the grow and the farmer at the end of the day. Being able to control your margins is great but all that stress falls on it, there’s going to be a lot of failures that happen. 

I didn’t realize that at that time. I was like, “We can go through this process and I’m going to grow some good stuff.” However, it was all selling. It didn’t matter where you got it. We had that issue where supply is very low so prices are high. You’re going to have to pay some more, but if you strategically make partnerships with some people that you meet at these association groups and some other growers, you can say, “I know prices are going to fluctuate, what if I pay you $3,000 a pound and I need 10 pounds a month?”

You’re guaranteeing them $30,000. You’re buying futures in cannabis. If you can negotiate those deals ahead of time with 2 to 3 strategic partners, then you spread your risk. What you do is you create a steady cost for yourself. You’re giving the grower guarantee that he’s getting his money and you’re also guaranteeing your margins because you know what it’s going to cost every time you go to RHA. Most people didn’t think about that at the beginning. They just buy as they went. If you can think twelve months in advance and say, “We might bump this up. Now, let’s start at 2 pounds a month,” and then give them a guarantee, “This is where my projected futures will be.” 

All of a sudden, you’ve eliminated pests, crappy employees, watering issues, cost of fertilizer, electricity costs, which is astronomical when you start going to a commercial grow. These are the things that you limit by getting that constant price with the negotiation power of, “I’ve got two stores, I need product. Will you wholesale to me?” By then, you’ll have the system figured out. You can save for your own grow whether it be this property in Taunton or a new property and you can start your own grow, or you save enough money to buy your own grow from somebody that went out of business. That way you don’t have to borrow any more money, you can still build as you go, and you take a lot less stress off of yourself. 

On top of this project in Taunton for cultivation, I also had another one in a different city where I could have up to 100,000 square feet of canopy. That was the dream.

It is a dream and you’ve experienced growing so you got that love for it. It’s amazing but the hardest part of this whole system is being a farmer. 

Looking for profits, I have a company that I had some negotiations with. To begin a relationship with them, I’d have to pay $15,000 to get the first products. After that, they’ll be able to work with me on a consignment basis. That way I wouldn’t need so much capital towards acquiring the product for inventory. That would save me some money upfront. How many companies will be willing to do the same thing especially because there’s not enough product out there? Before, I heard there were a lot of companies doing consignment. Nowadays, not so many. I see a good way if I can find those companies to work with.

Those are going to be your relationships you’re going to build in these association groups because you’re going to be in there with a bunch of people that are in cannabis. They are extractors and growers. They have retail outlets and delivery stores, and you can start working together with these because you guys are all one. You’re going to be a part of little guys and you’re going to have these big guys up here that don’t deal with anybody. That’s how you’re going to stay alive. It’s working with these couple of guys. 

I met a few business partners in my association group that made me a multimillionaire because I went out and I networked. Sometimes, that’s what it takes. A couple of deliverables and then we’ll come back to our story here so I can give you some more information. One thing I want you to do if you haven’t already done it, is a personal finance budget. How much is your housing? How much is your food? How much is your electricity and phone bill? Simple stuff. I’ll show you how important it is because it’ll help you out as you grow. 

You’re going to find through association groups and you’re going to sit in. If you’re having a tough time, reach out to NCIA, National Cannabis Industry Association. They’re all over the US but I believe they have an NCIA in Boston. Reach out to them and see what local groups they have. That might help you out. They’ve been around since 2009 so they’ve got a lot of different connections. The other thing I would like you to do is, would you share with me an outline of your business plan? 

Yes.

We could talk about that, and then let’s have a discussion about how you pick your partners. I’d be curious on what you’re looking for. That’s a very valuable conversation. I never knew about it until I had to go through it. I’d like to understand where you sit with, what your process is, and how you find them. What I’m going to do here is we’re going to bring you back into another episode with Flavia. This has been fun going through all the stuff she’s doing. We’re going to go back and get the rest of her dreams and what’s driving her into being a cannabis entrepreneur. Thank you for joining me. I will see you next time.

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