Below are some of our most frequently asked questions. If you have a question that is not listed here or would like more clarification on anything please head to our inquiries page and one of our representatives will be able to provide you with additional information.
How long has Pelorus Equity Group been lending in the cannabis sector?
Pelorus started originating cannabis transactions in 2016.
How many transactions has Pelorus closed in the cannabis sector as of Q1 2020?
Pelorus has originated 32 transactions for a combined total of approximately $65M
When was The Pelorus Fund launched?
The Pelorus Fund remains 100% intact and now wholly owns a REIT, which is technically called a Sub-REIT. This structure allows the existing Pelorus Fund to get the benefits of being a REIT without needing to create a new fund.
What are the benefits of a Mortgage REIT?
- 20% Tax Deduction: with a REIT ordinary dividends qualify for the new “20%” tax deduction under §199A.
- State K-1 reporting to fund investors. REIT dividends would be taxable in the state of the investors’ residence rather than being sourced to a state at the fund level.
- REITs “cleanse” UBTI for Self-Directed IRA accounts.
What fees do I pay as an investor/member in the fund? (“No Cost Fund” Fee Structure?)
The Pelorus Fund was structured to be an ultra-low cost or effectively no cost Fund. This was achieved with a low asset management fee of 1% combined with the Manager sharing revenue with the Fund Members.
Does the fund manager share any fees with its members? If so, what are those?
Yes, the Manager of the Fund has aligned its interests with the Fund Members and shares 25% of origination fees, 75% of extension and exit fees and 50% of all other fees. The combination of the revenue sharing from the Fund Manager should offset more than the 1% asset management fee in most years. Additionally, there is no carry-interest split or preferred rate of return because 100% of all net revenues go to the Fund Members.
Who pays off these short-term bridge loans?
There are more than four dozen other private lenders currently in the space, as well as dozens of state FDIC insured banks and credit unions, all lending within their own states. In addition, there is at least one publicly traded national FDIC bank lending nationally.
Is the 15% target yield net to the members?
How often does the fund pay distributions?
The Fund makes monthly distributions.
What is the lockup period?
One year starting on the date each portion of capital is invested.
Why would each member have a different monthly distribution?
Each Fund Member’s distributions are based on when they were admitted to the Fund and if they choose to reinvest the proceeds or take cash distributions. Additionally, Fund Member Year-To-Date and Life-Time averages are based on time they were admitted into the Fund.
How long does it take for my capital as an investor to start earning interest?
New Fund Members’ capital is received into a non-interest bearing holding account called the admitting account. The capital is held until the next transaction is closing for the capital to be admitted into the Fund, at which point the capital starts to earn yield. This process usually takes 2-4 weeks, but can sometimes take more time.
What is the average investment amount and is there a minimum to get started?
The current average investment amount is approximately $250k, with a $100k minimum investment.
Do the borrowers make their loan payments in cash?
No, the borrowers must make their payments by wire or check from an accredited bank or credit union.
Does Pelorus bank with a cannabis friendly bank?
Yes, Pelorus is banking with an FDIC state bank.
What makes Pelorus different from the other private lenders in the space?
Pelorus focuses on value-add transactions, meaning a portion of the loan proceeds is reinvested into the property to enhance the value in tenant improvements or new construction. A major differentiator for Pelorus is our experience — most other private lenders have little or no experience in these types of transactions. In addition, Pelorus has refined the draw process that the borrower uses to be reimbursed for the improvements made to the property. The draw process with most lenders takes 5 – 10 days, whereas Pelorus has streamlined this process to 1 – 3 days. This is extremely important in cannabis lending because improvements must be completed to stabilize the asset, which allows for the cannabis operator to start generating income.
How many credit unions and state FDIC insured banks are cannabis friendly for deposits?
Some reports indicate there are currently more than 600 credit unions and dozens of FDIC insured state banks for depository accounts.
Do your lenders include any credit unions and/or state FDIC insured banks?
Yes, we are aware of dozens of credit unions, about a half-dozen FDIC insured state banks and at least one publicly traded FDIC bank.
Does Pelorus lend directly to these cannabis operators?
No, Pelorus is non-plant touching and does not lend directly to any cannabis related business. Pelorus only lends to the owner of the property, which in turn leases the property to cannabis tenants.
Have you had, or do you currently have, any defaults in the fund? Can you explain the foreclosure process in the event a borrower defaults and can’t make their payments?
As of 12/31/19, none of the cannabis transactions are in default. However, if we were to foreclose, it is typically a 120 day process.
What is the alternative use for these cannabis properties in the event of a default?
The highest and best use for an alternative use would be another cannabis related business, since that is what the property is zoned, licensed and has tenant improvements for.
What comps/valuations are we using when assessing the value of these properties?
Pelorus uses the cannabis sales comp and income approach to determine the values.
Does Pelorus lend just in California or do you originate transactions nationwide?
Nationally in any medically licensed state.
What types of cannabis businesses are the loans in the portfolio composed of… dispensaries, extraction, cultivation, distribution?
Pelorus is able to lend on all types of cannabis related business and currently has at least one in each category.
Is it legal for me to invest in a fund if cannabis is still federally illegal, and am I at risk of prosecution from the federal government?
Pelorus is not associated with any illegal acts, since our borrowers are the owners of the real estate and not the actual cannabis operators (tenants). However, in the event any borrower is prosecuted for any reason, and loses the case (including upon appeal), and subsequently has its assets seized, it is important to remember the seizure consists of the borrower’s net equity. The lender (Pelorus Fund and its investors) still has due process in which any recorded liens must be paid off in full.
Can I invest using my IRA or Self Directed IRA?
Yes, BUT it must be a cannabis-friendly account if you’re using a 3rd party custodian such as PENSCO they will not allow investment into our Fund yet.
What if my IRA does not allow me to invest in your fund because cannabis is still illegal at the federal level?
We can provide a list of cannabis friendly custodians.
How do you fund a transaction if the loan amount is more than the current liquidity of the fund?
The Fund would syndicate the balance of the loan.
Can I invest if I live in a foreign country and if so, how?
Not directly into the Pelorus Fund, but we have helped to create feeder funds for ultra-high-net-worth and institutional international investors with initial investments of more than $1M.
What are the biggest risks when investing in the Fund and do I, as the investor, have any guarantees?
The largest risk is the fact that this is an emerging market, which naturally comes with certain unknowns. The vape crisis of 2019 is a good example of an unforeseeable circumstance. If a similar crisis leads to a policy change, which in turn causes a tenant to fail, it could require the borrower to replace that tenant with another cannabis related tenant. Compression or commoditization of certain cannabis related products can also change the market. But such a change would develop over time, and there should be recognizable indicators that would allow for adjustment, such as the markets pulling back in specific sectors. Regardless, unforeseen changes do occur in emerging markets, which is why all Pelorus Fund loans are secured by real estate assets and personal or corporate guarantees.
What recourse does a borrower have, if any, in the event of a foreclosure?
Borrowers may try to file bankruptcy but so far the federal bankruptcy court has denied any cannabis related transaction the ability to file for bankruptcy protection. This could, however, change depending on how the assets are held.
What is the average loan amount and average term for loans in the Fund?
The average loan amount is approximately $2M, with an 18 month term.
Does the Pelorus Fund get first priority on funding all deals?
Yes, the Fund has first priority on any transaction that fits the Fund’s investment criteria.
Do Fund Members have the option to reinvest our distributions instead of taking the cash? If so, does that reinvestment extend my lockup period?
Yes, Fund Members can reinvest their monthly distributions. This DOES NOT extend the one year lock.
Where can I log in to see my account details and fund performance?
The Pelorus Fund provides Quarterly Statements of accounts and is actively working finding an online platform for investors to view their accounts.
Is the fund leveraged?
Currently the Fund does not have any leverage, but the offering documents allow for leverage. It is possible that at some time in the future the Fund may utilize leverage, most likely in the form of a warehouse line of credit in order to minimize yield drag.
Who underwrites the transactions?
Pelorus underwrites and approves all of the transactions internally. The underwriting process is complemented by SitusAMC, one of the world’s premier asset underwriters, to complete the credit memos using the credit policy developed in conjunction with SitusAMC.
How does Pelorus source new deals, and what does the current pipeline look like for future deals?
New loans come directly from borrowers, brokers, asset managers, attorneys, and a vast array of networks that Pelorus has developed since 2016.
What is a Green Zone?
The Green Zone is the area a city has designated to allow for cannabis related businesses located within the city.
What is a CUP (Conditional Use Permit)?
Each property within the Green Zone must also apply for a CUP, which allows for cannabis related business operations on the property.
Does a CUP and/or Operator License transfer in foreclosure?
The CUP pertains to the property, so it DOES transfer with the property in the foreclosure process. The Operator Licenses, on the other hand, are issued to the cannabis operators tenants (tenants), and therefore do not transfer.
How much do the principals have invested in the fund and how much will they maintain?
The principals have approximately $1M invested in combination between both the Manager and the Fund.
Do the loans in the Fund have any personal and/or corporate guarantees?
Yes, all loans have personal and/or corporate guarantees. In the rare exception that a guarantee has been removed, the loan to value would be significantly reduced to adjust the risk.
Does a 15% target yield mean more risk? If so, what is that risk?
No, the reason we are able to achieve a 15% target yield is because of the revenue sharing from the Manager and the lack of competition in the value-add lending space.
How long do the managers think we will continue to see these high yields before they start compressing?
We believe our lending peers are already closely watching us and will be entering the cannabis lending space soon, but we still believe we will be able to achieve close to our 15% target for the next couple of years because we are originating the transactions today, which will take at least 18-24 months to pay off and most of our peers are not focused on the value-add transactions.
Is the fund comprised of just debt, or is there debt and equity?
The Fund is comprised mainly of debt, but has the ability to provide real estate equity deals.
What happens if/when cannabis becomes legalized at the federal level (“deconflicted”)?
In the event that cannabis is legalized at the federal level, the capital markets will open up and provide more liquidity to our borrowers. This will provide access to lower-cost refinance options (which already do exist). Institutional equity will enter the market, pushing up both demand and valuations. Even in this environment, Pelorus is very confident of our continued success. We have successfully competed against banks for our entire careers, and feel comfortable continuing to do so. The biggest challenge will likely come from our lending peers compressing the yields downward over time.
How many loans were in the fund as of Q1, 2020?
How many payoffs has the fund had as of Q1, 2020, and for how much?
Four loans have been paid off for a combined total of $6,200,000.