Mentor Reunion And 2008 Lessons

SPEAKER_02 0:40

All right, everybody, Ryan Garland here, founder and chairman of Paradigm. Thank you very much for joining me today. I am beyond honored and extremely excited to introduce you to Rob Seacrest. Rob is actually my mentor. And if you guys are listening to some of my podcasts in the past, you know that I talk about this man a whole lot. So it's an honor for me to have him today because you're going to hear a little bit about my backstory and how we re-established our relationship. And then we're going to kind of talk deeper into what it is he's doing. I want to build awareness with my network and including my investors to have a uh maybe participate in what it is they're doing because not only is this guy extremely smart, but they're very strategic and uh they have a deep-rooted knowledge of what's happening in the game, and they've they've created a niche for themselves to, in essence, in my opinion, grab a monopoly on the on the business. So, so this is really kind of cool. So it's Polorous Capital Group, Rob Seacrest, he is one of the founders, and I am extremely happy that you're here. I couldn't even tell you how excited I have been that uh you're you you got on the calendar, bro.

SPEAKER_00 1:37

I'm very, very grateful to be here, and I am um beyond happy for you of everything that you've achieved. And we've been watching what you've done and your growth. And um we always knew you were gonna be a force. Um to what to what level, we weren't sure. Um, and uh, I'm just so so so proud of you. Oh, thank you and your family.

SPEAKER_02 2:00

Well, that meant that meant a lot to me when you called me the other day going, hey man, we gotta talk, you know. And I think it was my post on LinkedIn on the barn caves. And you're like, that is a cool gym that he's building. I gotta talk to this guy. What's he got going on? Yeah. That was that was pretty cool. Okay, so let's uh let's talk. So we met back in 2008 when I was just a young, dumb loan officer, right? Kind of coming off the 08 crash and trying to figure my way through and navigate through that. And I actually had my first son in 2008. Yeah, so that was a hard time for I think a lot of people. Yeah, you know, and I remember we had a couple loans together, and uh, like you mentioned today, I kind of got um kind of got uh sideswiped a little bit on that one. And you guys like me, and you're like, that poor guy got his butt kicked, so maybe we'll take him under our wing and and show him the ropes a little bit.

SPEAKER_00 2:43

Yeah, I think everybody was getting their asses handed to them in 2008. And um, but that's a part of a shakeout, it's part of the process that you know real estate goes through a cycle, usually around every 10 years or so. And, you know, you need to be prepared for those cycles when they when they come. Um, and uh, you know, we could see that you were uh a highly motivated person with a lot of energy. And um, you know, things, the business seemed to be shifting around a lot. And um, you know, you asked uh to see if you could join us. We're happy to make that make that happen. And um, you know, we tried to we tried to harness that energy. And um we we got it, we got that tire by the tail for for a while. And um, you know, um it it was a a a time that um you know we were all just cranking and doing a lot of a lot of business and trying to put those best practices in from what we learned from that um great financial crisis, you know, for

Rebuilding A Lean Lender

SPEAKER_00 3:40

for us, um, making sure that in the next cycle, that typically what happens in those cycles is that the lenders are are staffed to be originating. And if they're not originating, they can't survive. And if your business isn't uh set up in a way that you can expand and collapse to absorb those um market shifts, you're gonna go out of business every single time there's a there's a market cycle. And so our philosophy was um we had gone from having 40 employees directly that were like, gosh, 20 of these people are escrow officers and a bunch of these other people are um you know processors and things like that. Why do we have these people on our payroll directly? Why don't we just sub out for all that stuff? So when we reimagined the structure of the company, we're like, we're only gonna have the very top, top key employees, and everything else is gonna be third party. So that as we go through those cycles, that that there is that that staffing issue is able to be handled by the uh third parties.

SPEAKER_02 4:42

And it's a perfect structure because less, you know, as uh an employer, less employees is always good. Less overhead, of course, but less uh emotions to manage, right? So you guys went from 40 employees to what four?

SPEAKER_00 4:55

Yeah, um, I think it was three, four with you.

SPEAKER_02 4:57

Yeah, four. So I was the only originator for the company. We had a processor and you and Dan. Yeah. So you guys, we we had a lot of fun. Yeah. So in the beginning, I think you guys were really kind of just got done recalibrating, restructured your guys' firm. I came on and you guys were doing you guys were doing good, but you guys bolted me on and we just took off, man. Yeah.

SPEAKER_00 5:16

If you remember at that time, um Dan is my best friend and co-founder and um you know my mentor. And I don't know if you remember, but in reality, what Dan had created is he had financially engineered a new product. The idea that Dan had was there's all these qualified builders in uh out there that have been completely wiped out by the great financial crisis. And we were trying to think what could we do for these families in their businesses to get them stood back up? You've got idle people and you have the most opportune time to take advantage of products out there. And they have talent. They have talent. We already knew who they were, and but they didn't have any capital. And, you know, with with uh uh private money lending, you've got to come in with, you know, typically 30 to 40 percent of the of the equity that you need to close that. And they didn't have that. And so what Dan did was very strategic is that we created a new financial structure that hadn't been done before. And what we did is that we did a um uh a private lending model where all the borrower had to come up with was the earnest money deposit and to get the property tied up. So what we did is we teamed up with a hedge fund and we did a product where our company, um, us, did the entire transaction, but we broke it into an A B piece, the A piece being the senior piece, which was the what which was the loan piece, which was ours that we raised the capital. So we lent a 50% um future value, and we had a hedge fund came in behind us and put in the equity on behalf of the borrower. And so we pre-funded the interest reserve, and we the had the equity fund did a profit split with

Engineering 100% Fix-and-Flip Capital

SPEAKER_00 7:00

the borrower. And I don't know if you remember, but that product was the first one to be uh put together.

SPEAKER_02 7:05

UN Essence built uh like a class A, class B slug is what you did.

SPEAKER_00 7:09

That's what we did, and that was that 25102F. And that's where we started utilizing that structure because it was really important to the hedge fund because it was one senior loan recorded that went up to 70% of the ARV after repaired value. But our A piece was only 50%. So our investors loved it, but the hedge fund was able to sell it to their uh investors as a senior secured, but the B piece in there, and they loved it, and we crushed it with that product, and that that that started the whole evolution of everything that we did.

SPEAKER_02 7:42

So let me just kind of give our audience a little color, right? So when back in the day, for those of you that used to watch Fix or Flop and Armando Montelango, the Hispanic guy that had the uh, what was it, the F or the um Hummer, right? And he was flipping properties in Texas. Uh, and then you have, you know, a lot of these other uh what's the what's some of the other um bigger pockets? There was a lot of these other groups out there that were saying, hey, you could do 100% financing as a flipper, you know, that type of stuff. Um, that'll give you guys an idea. Uh Dan and Rob were the ones that tailored that uh 100% financing product. So when you saw all these fixers and flippers go out there and do it, we actually had that product first. And that's why we became the top producers, literally in the state. I mean, we were crushing it.

SPEAKER_00 8:26

So that product became a product throughout the whole industry. Yeah many, many times. So one of Dan's best gifts that he has is financially structuring products. And so we basically say, you know, um, capital is kind of like water. As the markets change, it just flows to where it needs to land next. And that's just the imagination of recreating financial products that work for that period of time.

SPEAKER_02 8:49

And just to kind of give you additional, so at that time when you guys created that, you gave me a product to, in essence, go sell and build awareness on, right? And educate, like you like to say. So I was going out and speaking at all these events, and what I ended up doing was figuring out a way to get in on the Armando Montalango coaching system where they would have all of these investors across the country would pay to be a part of a coaching system. They would have bus tours that would come up to California. I had a relationship with the broker that built the relationship with the coaching company, and we'd have, you know, every three months or so, 300 people on bus tours coming through. And I was the only, you know, loan officer coming through there. And then they were, you know, obviously offering to their um students that a lender like us would be there and that we can actually provide 100% financing. So you could only imagine for my audience right now listening, how insane that it was that after 2008, when there was a there was a bottleneck of capital where you have a firm that figured out a way to do 100% financing to catch that swing on the way up in the market. So uh with that type of awareness and me being able to get into like uh Nick Man Freddie, he had a big coaching system in Corona. You know, he had, I don't even know, a couple thousand people in that system. So I was able to get in front of a lot of uh borrowers.

SPEAKER_00 10:02

What made us um most proud is all these operations were able to get operational again in these families in their subs. And there were there needed to be somebody that kicked this off because a bank that is not something a bank could do. It's always gonna be private capital. And these these families, there that's their skill set, and there was no other place to flip out to. You know, they could go do uh building for somebody else, but that's not going to support their whole family and give them you know the the equity upside that they needed. So and and there was massive upside in those those projects back then. So uh the profit split was if you could if you could flip it in 90 days, they got 70% of the profit. I mean, it was awesome.

SPEAKER_02 10:46

It's a big deal. And you know, you're in some cases, you're like doubling your money. You know, it was pretty impressive.

SPEAKER_00 10:51

Well, the the ROI and their their money was unlimited because they we we we they would actually get their uh earnest money deposit back out at the end.

SPEAKER_02 10:58

Exactly. Yeah, absolutely. Because that was a first in, kind of first out kind of thing. Yeah, for them. Yeah, that was pretty cool. Okay, so let's talk about uh really the whole point for you to be here today. Let's talk a little bit about what the firm has morphed into.

SPEAKER_03 11:09

Sure.

SPEAKER_02 11:09

Um, I think I left right around 2014, kind of started my own brand paradigm, and then you guys saw an opportunity and you hung your hat on it. So let's talk about that.

SPEAKER_00 11:19

So, in so Dan is um always researching and looking at where the opportunities are in in the lending sector. And in 2014, our local congressman, Dana Rohrbacher, um, passed the Rohrbacher Bluminar Amendment, and that amendment defunded the Department of Justice from any prosecution of a cannabis-related transaction. And Dan came to me one day um and he said, Hey buddy, we're gonna start doing cannabis loans. And I looked at him, and the first I so the way that we run the company is I raise the capital, and Dan does the underwriting um of the of the transactions. And I the first thing I thought to myself, this is gonna be impossible to raise money for. For many things. Back then in 2014, the uh stigma around cannabis was um a different place than today. Um and there's just so many uh things that before we could ever even talk to investor, they they had already in their minds turned off. It's not gonna that they don't want to be associated with it. And so when he told me that, I'm like, oh great, this is gonna be impossible to do. But um, you know, uh that passed in 2014. We started researching it. Dan is meticulous on how he thinks about things. And so just raising the capital

From TV Flips To Top Production

SPEAKER_00 12:40

is only one element. You need to make sure that the processes um and all the elements are there. Is the title company able to work with us? Can we get the can we make sure that the title company records that this is a cannabis transaction so they don't uh, you know, don't honor our title claim if we had to have one? All of those things he worked out, and then by 2016, we started originating our first transactions. And um, you know, it really was the beginning of a of a new um era for our company and what we were doing. And um ultimately we launched a fund in 2018 specifically focused on lending to cannabis uh sector, commercial real estate. And that fund um today uh we've done more than a half a billion dollars with that fund. Um and then we also recently launched an equity fund, which is what we're kind of here to talk about.

SPEAKER_02 13:31

So don't go too far yet. So this is what's kind of wild because and I'm just gonna kind of give some, and some a lot of my audience are actually uh pretty deep rooted in finance and development, and they understand what exactly it is we're about to say. But I as a private lender, I have my debt fund. And so I'd have developers and borrowers come to me all the time going, Hey, can you lend my lend me money on this commercial building? And it is gonna be for you know a grow up or what have you. And I would say, No, I'm sorry, I can't do that, right? Even if you have your license. So I would actually pass on it, and most of the times those borrowers could not get bank finance, that's for sure. So they come to alternatives, guys like me, and even I was saying no to it. So you guys found a niche, which is not which is not surprising whatsoever, right? Given your track record. And then, and then, but let's talk about how you structured that because I think that's gonna overlay kind of where you're gonna end up sharing here.

SPEAKER_00 14:21

Sure. So in the beginning, um, it's a it's a brand new emerging sector. Nobody has done it. And so it's a learning curve, and we're trying to use all the best practices that we've developed over doing thousands of transactions, more than a billion dollars in transactions that we've previously done for um not related to cannabis. We're taking all those best practices, but we're trying to layer in the nuances that would that would need to be in this sector. And so in the beginning, um, we would lend on the real estate value of the cost basis of the um of the transaction. Um, but in the beginning, we didn't cross-collateralize the license from the tenant, which may or may not be related.

SPEAKER_02 15:06

Real quick, before I don't want to interrupt, let's just to go deeper into the weeds on cross-collateralizing. When you say you lent on the cost basis, just for our audience to understand, is it the cost basis of the building or both the building and the business?

SPEAKER_00 15:18

Yeah. So I'm really glad that you delineated that. So we only lent on the cost basis of the real estate. Right. And so back at that time, because of where we came from, we just never thought about the the business or collateralizing that because in a normal lending world, you would never be able to get that. Nobody would ever give you, and it may not even be a related party. So you can't, they would say, you know, we don't have anything to do with this this loan. Yeah.

SPEAKER_02 15:45

So it'd be it'd be the the owner of the building wants to lease out that to a tenant that is gonna grow up. Right. So so they weren't related, correct?

SPEAKER_00 15:52

Right, yeah. But but in how Dan was thinking through all this stuff is he's like, we had lent the first transaction we did.

Enter Cannabis: Legal Shift And Strategy

SPEAKER_00 16:00

I mean, free and clear property, the guy paid cash for it. You know, it's a construction loan for a million dollars. We only advance after the guy had you know made the initial uh spend and then we verified it and we reimbursed him. Yep, we cross-collateralized his bayfront house in San Diego. I mean, you couldn't be any more secure. So, but ultimately, Dan realized that we really need to make sure because it's a specialty use asset, and really when you say alternative use, the alternative use is just an alternative user of the same. You're never going to not have a cannabis property. I shouldn't say never. You're you're 99% of the time not going to have a cannabis property that's gonna be repositioned for somebody else unless it's just a dispensary or something like that.

SPEAKER_02 16:43

And let me share a little further. I'm sorry, I don't want to interrupt, but I want everybody to get a very clear understanding of how much in-depth you guys had to work through this stuff because the the war room wounds that we talked about yesterday, I I have to touch on. So um, so when you say a special uh purpose building, ultimately it's a building that's being built for cannabis. So ultimately, it's not like the building's like a regular retail building or some sort of single family home where you have comps. I mean, this is totally different. It's designed for the right water, the right electrical, the right power, right? The certain space where you can have all of that stuff, drainage, right? All of that stuff has to be customed. No windows, no windows, yeah. So totally like a totally freaked in weird building, right? But it's designed for that. So if if so it's really hard to comp. And then two, if you were to foreclose, you you you have to spend millions of dollars in some cases to repurpose the building to be to the open, you know, so market.

SPEAKER_00 17:36

On that point, so when we would get an alter, we would we'd get an appraisal, as is future value, uh non-cannabis value and and cannabis value. But the thing that was ironic is that the non-cannabis comps never included what it would actually cost to decommission it to get it to that. And so I we always kind of internally, you know, like really like where do you come?

SPEAKER_02 18:01

Well, who comes up with the numbers?

SPEAKER_00 18:02

Like, okay, so this building theoretically um could be uh this size building square footage in this area could be a self-storage. Well, to get it to be self-storage, you would have to come in and tear out every single wall, every air conditioning duct, every everything that's in this entire, all the water piping, everything that is in there, all the the ADA compliant trays to moving the cannabis across the um, excuse me, the the rooms, and you would have to for it would cost you millions of dollars. It would be it would be more more than sometimes the building would be.

SPEAKER_02 18:34

Yeah. But it might be easier to just tear down the building and rebuild at some point. Yeah, for sure. So that's the point is you know, the risk that goes involved. And then obviously, even I think appraisers, you probably even had issues with appraisers. How do appraisers even how appraise something that they don't know? Yeah, that's new. So I'm sure I can say I can only imagine every layer has been something.

SPEAKER_00 18:53

Every layer, we had to educate people on what was happening and what they were doing, and um continue to refine best practices and make sure that they are it's uh there's just there wasn't the data. And so we actually had to create a whole nother data company, Floor's data project, that would effectively be the co-star of cannabis lending commercial properties because nobody had any of that data. Nobody was public was producing it, and yet we had thousands of loans that were flowing through to us and we were capturing that so that we could get the market comps, we could get the lease rates, but no appraiser had that because it wasn't public anywhere. So the only way they'd ever have that is if they happened to have done another transaction remotely in the area, but that would have been stale.

SPEAKER_02 19:38

But you're the ones that are doing more of the transactions by far than any other appraiser. So you're almost educating them on how to do it. Yeah.

SPEAKER_00 19:43

So we would have to provide data comps and information. Um, and but also when we would get transactions from other borrowers in their appraisals, we had all the data to to dig into that and and basically validate it or just disprove it.

SPEAKER_02 19:59

Yeah, gotcha. So yeah, so again, layer after layer after layer. Okay. So you get through your first one, and how much money, how much uh how much capital did you guys raise? And then what was your AU AUM the first year?

SPEAKER_00 20:10

Um, so you said this is 16? Yeah. So when we first started doing transactions, we were syndicating transactions just to get a feel for it and doing deal by deal. Once we got a feel for it, we then we pivoted to launching a fund. And then the fund was taking a small piece to get diversification and we're still syndicating. The plan was always to get to the fund being just the the sole vehicle. So um in the first year 2018, it was just a partial year, we only had about 1.65 million. So Dan and I are putting in millions and millions of dollars so that all the infrastructure and the operations are set up for, you know, a $250

Designing Processes For A Stigmatized Asset

SPEAKER_00 20:50

million fund or whatever it was planning on being at that time, but the income wasn't there to support it. So we were supporting all that. The next year we got up to $6.5 million. The reason that it was such a struggle is that there was no investor that existed for this type of product yet. You you had either people that were willing to do cannabis at the time were only equity, and they were doing equity-like returns and there wasn't.

SPEAKER_02 21:16

Into the business, not necessarily the real estate part, yeah.

SPEAKER_00 21:19

Um there wasn't any but there wasn't any private credit fund specially focused on cannabis. And so and and just the morality part of a lot of people, we never got a chance to explain to them look, the that we are actually helping this sector. We are this is this is not for kids. This is this is you know licensed, this is getting rid of the illegal market. Would you not lend to to, would you send would you have that same issue with the lending to a drugstore, a CVS that sells opiates?

SPEAKER_02 21:51

Yeah, that's a good way to think about it.

SPEAKER_00 21:53

And so, you know, when it was we could quickly de-conflict what what their issues were when we had a chance to talk to them. Yeah. But 99% of the time we didn't have a chance to talk to them because they're like, no, I just don't want to do that. But then we started posting our returns. And the returns were phenomenal.

SPEAKER_03 22:11

Yeah.

SPEAKER_00 22:12

I mean, ridiculous. And so then people started saying, well, look, maybe I'll look at this. And then COVID happened in 2020, and I also converted the fund from being a standard fund to a private mortgage REIT for the tax savings. And that also was really important because the investors, what most people don't understand about a REIT is it's one thing to have the qualified business um uh classification to reduce your taxability on the income. But in reality, that's not the most important thing. The most important thing is that individual investors are only taxed in their state. So even though we're doing business uh all throughout the country and domiciled in California, you're not gonna get a K1 from California, which is awesome. It's huge. Yeah. And so that was really important. And so that allowed us to start bringing in investors in um, you know, low tax state or no tax states, and it just took off. And then COVID was really the um the genesis of where it really took off for a couple of reasons. One, cannabis was considered a um uh gosh, I forget the name, emergency business where where you it was you it could be open. Um uh I forget the terminology, I'll come back to in a minute. Um, but more importantly, as all other sectors of real estate were protecting the tenants, they didn't have to pay, you couldn't evict them, and nobody was coming to work anymore, and real commercial real estate was was faltering, our sector was exploding. In our sector, what I realized is that the what the way to most distinctly articulate it is everybody is invested directly or indirectly in a real estate asset class, whether it's through your broker dealer, your asset managers, or whoever it is. And what we said is that look, what whatever your allocation is, a certain portion of that allocation should be out allocated to a specialty asset class that is less impacted in a real estate or economic downturn. And that when people started thinking about it from that perspective, and I switched the fund from being quarterly distributions to monthly distributions, I did everything I could to make it as retail friendly as possible. That year we ended up at 54 million, the next year at 150 million, the next year 250 million, we got up to like 440 million or something like that.

SPEAKER_02 24:33

So you guys is cranked. Yeah. And so let's talk about the positioning of that, um, those assets now and where you plan on going, because we can go down rabbit hole after rabbit hole. But I I think really this is the fruit. This is what people are I want people to know, is right where we're about to get into because this is impressive.

SPEAKER_00 24:50

So going back to that part where we lent on the value of the real estate and and we cross-collateralized the businesses, the licenses, the brands, the equipment, everything. But we never gave that value. And our our thesis was if things really hit the wall and we have to take this property back, and if we can't find a third party to operate it, we may have to operate it ourselves. And if we have to operate it ourselves, we better have the licenses because in reality, there is no alternative use that it's going most likely it's not going to pencil.

SPEAKER_03 25:26

Right.

SPEAKER_00 25:27

And so as um years went on um and the markets changed, and some states are unlimited licensed, like California and Michigan, and other states are limited licenses like Florida and Illinois. There's a different market dynamic in a unlimited license state that's the best for the uh consumer because you're getting the highest quality product at the lowest price. In limited license states, because of the regulatory capture in those states, you're not necessarily getting the best product because you have an artificial barrier that is keeping the prices

Data Moat: Building Cannabis Comps

SPEAKER_00 26:00

up and is protecting those people from having best practices that would that would you know put them out of business if they were competing in an unlimited license state. So ultimately, um as the each state is its own market, you can't cross state lines. And as these states are going through what we call their maturation process of you know, uh the state opens up, it's it's everybody comes in, and you know, any anybody can grow weed, and it can be the worst weed in the planet, and you can make sell it for thousands of dollars a pound. Over within typically, the the cycle is usually within about 18 months to 24 months, the quality starts to get better, the consumers start to become more educated, and the people that came in that really didn't know what they were doing, um, but but they could sell anything, they go out of business.

SPEAKER_02 26:45

Right.

SPEAKER_00 26:46

And so you the market, it's a normal cycle.

SPEAKER_02 26:49

It's happening right now.

SPEAKER_00 26:50

We see it every time in each state, and as each state comes online. And so as that happens, though, the um some of those people are going to fail. Now, the industry or the sector is doing very well. The numbers of the income, it's about a $40 billion annual industry across the whole country. That that demand is not going down. It's just where that revenue flows to, whether those businesses can be profitable or not. And as they fail, that that profit or that income goes to somebody else, and hopefully they can be profitable.

SPEAKER_02 27:22

And so where we're at today is so the demand doesn't change. It's just like banks. You know, as banks start collapsing and you get smaller and smaller banks, those banks are now getting more and more depositors, right? Same concept.

SPEAKER_00 27:32

So um ultimately, unfortunately, we had several transactions that ultimately couldn't compete and were uh wiped out. And there's only so far as a lender you can go to try to help them through it. Now, if we have a good actor, uh borrower that's trying to do the right thing, we have we have more latitude that we're willing to go to in that circumstance. Um if it's a bad actor, we want to shut that down as quickly as possible and and move on to the next cycle of where we're gonna go with that property. Over time, we ended up um not foreclosing because remember, we not only captured the business, the real estate, which would be a foreclosure, but you a foreclosure would not capture the cross-collateral. So the cross-collateral, you have the option of potentially an Article IX sale, but that's not as the best. The best is a receivership. So receivership is the same as a bankruptcy, but at the state level. And so what we would do is put them into receivership, and then we would effectively wipe the entire capital stack, uh, all liabilities for not only the real estate, but the brands, the businesses, and everything. And now we owned everything free and clear. And at that point, we would then try to find a third party to step into that transaction. If we were unsuccessful in finding a third party, or if we're gonna have to put all the money up for that third party to come in, then we might as well get the equity upside. So what ended up happening is that of these transactions that we unfortunately had to take back, take back, the businesses, some of the businesses became um unbelievable opportunities when um our team looked at it and um really dug into it. And we can get into some of that when you're when you're ready. But um, it really has morphed into where we ended up having to create a whole new fund to capture the opportunity. So just like when we started off the podcast and we were talking about um 2009 and the great financial crisis and the reset and all that opportunity, we're in the same, we're in the same period right now in this sector, but the upside to the investors is orders of magnitude isn't even the right word relative to what it was on that side. And so previously that upside was going primarily to the borrower and the hedge fund. Today, we've been able to model

Fund Launch, REIT Pivot, And COVID Tailwinds

SPEAKER_00 29:50

that where all the upside comes to our investors.

SPEAKER_02 29:52

So let's talk about this. So the structure. So you lend money on the cost basis of the building, right, or the real estate, but you're encumbering all of the business components too, including the license that was issued for the cannabis or whatever, whatever that practice is for that building. Right. Because it's it's non-transferable, and we talked about this too. So you uh you in essence acquire that. I love how you go into receivership, you wipe out any of the capital stack, and then basically it's free and clear. And then you, in essence, are doing what I would say standard practice of a PE roll-up, where you guys come in, you already have back office, you can look at the books and records and start shaving costs for overhead and get that thing to turn up to more profit, and then bring in other practices to actually get it to produce more, you know, whatever it is that you're doing. Um, what how many let's talk about your big picture? What where you are now, how how many assets you've ended up having to take acquire back, which I know the number, but it's that's such an impressive number. And then kind of what how this has ended up morphing, because that's really what it comes down to. I tell my team all the time, I'm go, there's a reason I named the company Paradigm, right? You have to shift when the market shifts. And sometimes you don't see the opportunity when you created the fund. The opportunity presents itself later on, and usually through hardship or distressed situations. And so that's what I think has has turned up for you guys.

SPEAKER_00 31:06

Yeah. So, you know, I I always say that your best asset managers are the ones that have been through distress. That that's what tests the metal of an asset manager. And if they've never been through it, it's easy to say that you crush it. Show me a guy that's been through two down cycles and and how they what they learned, because that that's where you really learned the workouts, the tough part. Just originating and everything going fine is easy peasy. Those workouts is where you have to put in put in the work. Um but um, you know, so we ended up uh we ended up taking back uh about 140 million of assets, and those assets were all taken back on the cost basis of the real estate. We spun all those assets off out and launched a new fund. The cross collateral of all the businesses we never valued. So the new fund was seeded at the cost basis, 100%, no discount on those. And now we are marking all the values of the businesses.

SPEAKER_02 32:12

So let's just let's just kind of dumb it down even further. You open up a billion dollar fund, because that's the offering, right? You open up a billion dollar fund, you guys are seeding it with existing real estate that you've already foreclosed and take back that is debt-free, and you're putting $140 million, seeding that that with with an assets that in essence, whatever you're doing can either cash flow, but there's already equity, and now the investors are coming into the new fund to advance that strategy.

SPEAKER_00 32:39

So in the new equity fund, the Ploris Growth Fund, it got the real estate or the businesses, or both, but the businesses were in that in that new fund. So those businesses we hadn't given any value yet. So, you know, we can talk about how how we're we're how that works out and how we do that. But um that structure and those assets were became the ecosystem that we then used to execute on the bigger strategy.

SPEAKER_02 33:10

So No, sorry, the the the the businesses let's just because you what's what you've done is you guys separated the real estate and the businesses. You guys are from a different hat, in essence, you guys are coming over here with your team and you guys are converting those businesses into positive. So, for example, you said you had one that was losing a million a month, now you got it back to a million positive a month. So as you guys continue to scale that, and you now now those businesses are generating income. So now that that evaluation is different, but then you bolt on real estate, then you bolt on tax strategy, then you bolt on all this stuff. So as my our audience can imagine how far this can go. So keep going, please.

SPEAKER_00 33:46

Sure. So I'll give you uh one transaction that is the ninth largest operator vertically integrated in California. It was a company um uh called State House. And the the thesis was right. We it was to merge three companies together to become vertically integrated. And California is the most competitive market, and it's the largest market in the world. And it is, I mean, unbelievably competitive. And so, unless you're vertically integrated with scale, you're not gonna be able to compete in that state. And so we originated a $77.3 million loan secured by a portfolio of 110 million of real estate. We cross-collateralized the company. Ultimately, we put that company in receivership. They weren't able to integrate the the company, the merger together. They weren't able to get those those cultures.

SPEAKER_02 34:35

It was And what were those cultures?

SPEAKER_00 34:37

It was um cultivation, uh dispensary, uh, and manufacturing. So it was three different ecosystems.

SPEAKER_02 34:43

Pretty much everything you need.

SPEAKER_00 34:44

Yeah. And the the it just uh it was unfortunate. The right strategy just they just the execution wasn't completed. Uh we put in a receivership last year. Um our team um has is very strategic of how we set up the receivership. It's actually part of the core tenant to make sure that you you don't lose the company in receivership. And so, and we'll I'll give you an example of what how ours worked and another one that didn't, but that that was somebody else ran. But that uh in that receivership, we were able to take that company from losing a million a month to making a million dollars a month. We didn't lose any top line

Cross-Collateralizing Real Estate And Licenses

SPEAKER_00 35:20

revenue. We were able to grow at 2% over year-over-year growth while the state itself decreased by 15%. So we had a 17% net positive gain while in receivership, and we went to the top creditor, uh, credit risk of the entire state. And we turned around everything and got that company operational uh cash cash flow positive, EBITDA positive, and ended the year at 106 million top line revenue, and I think about $8 million EBITDA. And the only reason it was only $8 million is that we we still had some losses that we were turning it around from when we got it in May.

SPEAKER_02 35:52

So just this just just so we're clear, you went from losing a million to making a million, right?

SPEAKER_00 35:58

For the business level.

SPEAKER_02 35:59

For the business level, which now is $106 million, uh you said $106 million a year. Okay, that's separate than that $77 million in real estate that was valued at $110 million. That's a whole nother ballgame.

SPEAKER_00 36:11

So the way that we think about it, and this is a perfect transaction, is to really walk through why those licenses and everything is so important. The six pieces of real estate that are were valued at 110 million, without this company operating those, there is nobody that is gonna step in and operate it. So our value of our collateral would have been wiped out. There's some alternative uses. We might have been able to get some percentage of officers.

SPEAKER_02 36:35

So again, the building itself was designed for this. So the part of the conversation in the beginning was like we'd have to repurpose the building, spend millions, and we you'd be you'd be losing money. There's no way. No offensive. Yeah.

SPEAKER_00 36:46

So parts of it. This the the thesis was the the thesis was to stand up that business and get it operating. That's stabilized our real estate. So today, that real estate is valued at 100 million. And so our um, you know, we're we're net positive just there alone. But we picked up the business. And so the business now, we own not only the business, but all the brands, and it also had a portfolio of dispensaries that wasn't even part of our collateral. It had brands that weren't part of our collateral. All of that we brought in. And so that strategic hub model is one of our four strategies that we implement across the country. As what we did for our own credit fund, we're doing for other asset managers and creditors across the country. So we had to do it for ourselves, but we realized that all creditors are going to need these, this. Most of them can't actually even own the real estate directly, and they for sure can't own the cannabis business or operate it. So the thesis was let's get it stand up for our stuff, let's build the let's build the ecosystem, and then let's go out and track every receivership across the country and let's look and see what assets are complementary using our data project. And if it's an asset that's complementary, all the creditors know who we are. We come into those creditors and we we already know if they can even own the asset directly or not. And I'll give you an example. So we went to one that was um uh doing a receivership of a company in California about the same size as Statehouse. And we got the creditors to assign their credit rights to us so we could foreclose on their behalf. If it reverted back, then they could do a seller carry back and we would be able to acquire that transaction for nothing down. They're happy because they didn't have to take a loss and we can hold it from them and then we can operate it for them.

SPEAKER_02 38:27

So let's unpack this because this is important. This is probably one of the most important. So I'll use it as an example of 08, right? When all those short sales and REOs hit the hit the market, the banks internally asset managers had no idea how to oversee them, right? So you they had to figure out ways to create sectors. They couldn't, you know, they would, that's why they were offloading a lot of these assets to fix and flippers and working with brokers and had REO agents and so forth. But they didn't have the the team internally to manage it. That's why they were always outsourcing it. Same concept. All of these lenders were lending, you know, a lot of lenders were lending on these assets, but once they took them back in a distressed market, right, which they are in right now, they don't know how to repurpose it and they're about to lose their butt, like you said, and they don't know what they definitely don't know how to operate, nor can they own it. So what's happening is you guys are identifying those assets, you guys are going after those lenders in essence, saying, Hey, we'll work with you, give us the opportunity to take over the foreclosure in essence, we'll come in and repurpose the asset, and then you guys get back to a positive on your books.

SPEAKER_00 39:29

That's that's correct, but there's more to it than that. And we talked a little bit about last night. So um, as you as a fund manager, when you start to go into a distressed transaction, you're now having to adjust your low and loss reserves for that specific transaction. And if it's if it's becoming distressed, it the value is coming down. And then you're starting to uh do comps and theoretically you should be adjusting your value as quickly as possible to increase the reserve if you have to liquidate. If if that property comes back to you, um, let's just say that the proper, let's just say it was a uh loan that you did for 10 million bucks on a let's just say it to make numbers easy on a 20 million dollar valuation, but the f the borrower failed and they're foreclosing on it, and the best prices out there right now is only five million for that same property.

SPEAKER_02 40:23

So five million dollar loss.

SPEAKER_00 40:24

It would be a tw it would be a five million write down.

SPEAKER_03 40:27

Yeah.

SPEAKER_00 40:27

So they would be increasing their reserves on that. Now, if I can come in and I can restabilize that that real estate and stand up a business so that it's back to a Original use, all they have to do is get back to the 10 million. If I can, if I can get them back there and I can show them a path through, they can release that five million dollar reserve. If we've if we do a seller carry back for the whole thing, we can we can we can clear five million dollars off of their unrealized loss reserve. That's massive.

SPEAKER_02 41:01

Oh yeah.

SPEAKER_00 41:02

That is an immediate uplift for their investors. Yep. And so that's that right there is something that you wouldn't really think about as a retail investor of unless it's negatively impacting you. And we've had to deal with this as ourselves as well. But we realize that this is something that the asset managers need relief on as well, because without they're getting they're getting this maximum uh price disparity in in where they're having to reserve for. And if we can get them back out uh whole or closer to whole, then that reserve can be released once the transaction has been completed and everybody is it's a it's a better situation for everybody.

SPEAKER_02 41:39

It's a win-win. And you guys

Receivership Over Foreclosure

SPEAKER_02 41:40

are in essence popping up more businesses, which is more income, which is a part of your overall strategy. You're helping the bank, you know, basically not lose any money, along with the investors that are back there. So the fund managers are going to be very open-minded to making this happen.

SPEAKER_00 41:54

You know, we're we've even we're talking because we're in the investor ecosystem, but in reality, we're we're we're we're employing thousands of people across the country right now. And those jobs are important to us. We want to keep this country stabilized, we want to keep this industry stabilized. And so it really is important to create an ecosystem where you can save as many jobs as possible. And say, and you know, we don't want to see people get wiped out. We want to try to save where we can, what we can, um, for giving some optionality for people to recover as best as they can. So we think that we found the best way possible in a specialty asset sector. That's not always true. You know, um, I'll give you, you know, specialty asset is something like movie theaters. There's it's only one use for that, that theater. Um, and you know, as the markets start to change and people aren't going to the to the theaters anymore, you've got all these theaters that are idle, you know, that are probably not making money or making very little money right now. And it's who knows if that's gonna get turned around. And so, how are you gonna reposition? How are you gonna we have the same thing, it's just a different class, and we've got a better way through.

SPEAKER_02 43:00

Well, I'm gonna I gotta tell you a story. So, right here in Lake Avassar, so I don't know, 200 yards from us is the is the North Side Mall, right? So uh the shops or whatever they call it. So they the movie theater was having a hard time, and they actually uh in essence separated a movie, a part of the theater and opened up a Buffalo Wild Wings in there. So they actually took up some of the actual movie theater and built a Buffalo Wild Wings. So it's it's that's how they repurposed that building. They still have some of it as left for movies, and the other is now arrested.

SPEAKER_00 43:29

So, you know, in a traditional bank, you don't have anybody that can make those. You might have somebody that comes up with the idea, but it to get that all the way approved and to into things, the banks just sell those properties off. Nobody's really working it. We are freaking working every single option and you know, some reiterating and and and then and and it starts to to grow. Once you start to come up with strategies, then you can start to expand that strategy across the country. So, and back to um State House, in that particular transaction, we realized that we had a uh strategic hub model that we could now take other assets that we had taken back in the state and start adding them complementary to that ecosystem. And so we believe that we can get from number nine to number four within the next probably 90 days in the entire state. And while, you know, the if there is about 1,500 dispensaries in the state of California. And uh Statehouse is currently in, I think like four or five hundred of them that they're selling their product, but we own 12. We've just contributed another one, we own 13. Why that's important is how many you own is that your margins on your own branded products are about double what they would be if you were selling in another store. And so every single dispensary that is out there that is a standalone dispensary on its own, they don't have the buying power that we have. They don't have the cost savings of the management, and they certainly don't have the ability to bring in their own vertically integrated products, branded products onto their shelf space and pick up that double the margins. And so, with just those three elements that I just shared with you, we can take a standalone dispensary, laterally move it into our ecosystem, and we can increase the EBITDA profitability by 27%. And we can acquire that dispensary. I just happen to know the figures and uh off the top of my head, um, the one that we just contributed was about 7 million of top line revenue. It was doing about 655 of uh net annual EBITDA revenue. And that transaction is those are trading at one to two times multiple. If we use two times multiple, roughly $1.3 million cost basis, we could effectively give that dispensary $1.3 million of shares in our fund, because without us being there, they're gonna go out of business because we're gonna, we're gonna, if it's not them, we'll do the dispensary next to them. We

Case Study: Turning StateHouse Profitable

SPEAKER_00 46:00

can take that dispensary and take it's it by adding those three elements that I just shared and take the uh the profitability up to, I think it was uh 2.2 million or so. And now because it's in our vertically integrated ecosystem, the multiple is 4.5. So we just picked up uh that same store, I think, would be um around 7 million or something like that. I can't remember off the top of my head. And I think we net about 6 million enterprise value to the fund from one dispensary, and we increased the revenue from 655 to by you know over a million dollars.

SPEAKER_02 46:33

And so not only do all these dispensaries actually have real estate holdings, but some of them do, right?

SPEAKER_00 46:38

Well, we don't need the, we only actually need the business. We don't even need the real estate. Yeah. So it's like the whole dynamics change, uh, interestingly enough. And so if we're out there to add, you know, uh 100 dispensaries in the next six to 12 months, if we just use those same numbers, that's 700 million of additional top line revenue and hundreds of millions of net EBITDA positive. And we're just gonna keep picking up economies of scale. And so that's why we, when we launched the the growth fund, it we did a billion dollar offering, and and a lot of people said, How are you gonna raise a billion dollars of equity? Well, we're gonna raise equity as we go, but we don't need a whole lot of cash. We're actually gonna be using the chairs as one of the ways of acquiring something. So if you're that seller of that dispensary um and there's no maybe no but no buyers out there, not only can you contribute, but you're getting yield on, you're participating in the upside of what you just contributed.

SPEAKER_02 47:34

Yeah, and so and they keep their business, they keep the employees.

SPEAKER_00 47:36

You can give them a cash offer, but it's certainly not going to be uh full price.

SPEAKER_02 47:39

Yeah, right. You're giving them full price for the most part on what they're already making. And then you come in, then like you said, you bolt on some of your guys' infrastructure, your guys' product. You guys are covering back office and starting to shave down their overhead. Yes. And now you're seeing it to create revenue that bolts on to your guys' portfolio, and now they get shares on the overall exit strategy of this project or this entire uh operation.

SPEAKER_00 48:01

So that's just one of several strategies that we have that you know, some of the stuff we don't want to talk about all the things because we it it is a massive opportunity, and again, we're the we're leading it in this sector right now.

SPEAKER_02 48:14

But can't tell all your secrets.

SPEAKER_00 48:16

There's there's other asset managers that are going to be uh executing on similar strategy, um, but we'll we're pretty far ahead of them.

SPEAKER_02 48:22

I think right. Um okay, so let's talk about the fund and the opportunity here. So let's go back to seeding the fund, the billion-dollar fund. What's that look like? What are we trying to accomplish? What's the next move?

SPEAKER_00 48:32

Yeah, so we seed it with 140 million. Um, we're actually waiting for our third-party reports to give the valuations to the businesses right now. Um, I don't have that that value, but um, you know, we didn't pay anything for them. So uh it's it's gonna be net positive. And uh the each acquisition that we do now going forward will will be at a much higher uh value increase to the fund because the first assets that we we acquired, we acquired it on 100% of the cost basis of the real estate. That's the first and only time that we'll ever do that because it was our own existing uh uh fund. Going forward, we will acquire stuff that's not our stuff, and we will get those at discounts or use our shares or many different strategies that we're going to use. So the fund is structured as an open-ended evergreen fund, 2% asset management fee, and 8% pref with an 80-20 split. We do quarterly uh statements, and it is not this strategy, it is not an income fund. This is a growth fund. So, what we're trying to do is maximize all the revenue, everything that we have, we're reinvesting into the business. And so this strategy is if you put in 100,000, we're looking to get you a four to five times multiple in four to five years. So that's our target within the current legislative landscape structure right now, which is a 20 to 25 percent targeted uh net IRR yield. But I think that that um we are hopeful that we can outpace that. The current landscape in the country is um, you know, because cannabis is federally illegal, cannabis is current currently uh considered a Schedule I drug, meaning that it it's the same as heroin, it there's no medical use for it. And why I'm going down this road is it's really important to know that on your federal taxes for all 25,000 businesses, which we track them all across the entire country, on their federal tax returns, they're paying taxes on their gross profit, not their net profit. And imagine having to not be able to write off your deductions and having to pay it on the gross profit. It's it's it's insane. So under the Biden administration, about two and a half years ago, um uh Biden requested the HHS uh go and look at rescheduling cannabis from Schedule 1 to Schedule 3, meaning that there's a medical use for it. That uh HHS came back and approved that, and now it's with the DEA to be approved. Trump has already um many times uh indicated that he would sign it if it got to his desk. Um, but this this is actually rescheduling is only in the executive branch and there is no uh Congress involved. And so this is really important to understand the distinction here. So right now um rescheduling is it at the DEA, and we're expecting POM Pam Bomb Pam Bondi to most likely uh give the final rule uh sometime in 2026. Why that matters is that once that is approved, now the IRS will only charge taxes on net profits. And so we expect there to be a 20 to 30 percent uplift to the bottom line of all businesses across the country on a revenue uh

Rolling Up Dispensaries And Margins

SPEAKER_00 51:50

on a revenue basis. But more importantly, the multiples is going to go from a four to five times multiple to an eight to ten.

SPEAKER_02 51:58

So there's you're really it's just unlocking more opportunity for investors, is what's happening.

SPEAKER_00 52:02

We're for the industry overall. So our our position is you need to be able to your business needs to work in the current ecosystem. And if it doesn't work in the you can't depend on legislation or executive orders um or executive actions to fix your business. If you can't compete in it successfully now, then you're it's not gonna work.

SPEAKER_02 52:23

Yep.

SPEAKER_00 52:24

But there are some things that could give us some significant enhancement, um, which we're we're pretty bullish on those happening at some time in the future.

SPEAKER_02 52:31

Okay, so so going back to the fund. So you guys open up a billion dollar offering, you guys are taking assets that you guys have already repurposed and now, in essence, generating income on the growth strategy. You're putting $140 million into this fund to show proof of concept that you guys have skin in the game, and now you guys are going after raising capital. And it sounds like you're gonna do it in a pace where as you guys have new assets that you guys are identifying, you are then strategically positioning those assets on your guys' strategy, whether it's you know, we're dealing with certain infrastructure, bringing in your product, whatever it is, because every every dispensary and every business has its own culture that you have to go identify and where they're missing, you know, what they're missing, what you where you can do to help. Once you've identified what can be done, you're then identifying that to the investors, putting it into basically, hey, here's another option that we're gonna go after and buy, and this is what your projections are gonna be after X amount of time.

SPEAKER_00 53:29

Kind of, but we can't tell the investors in advance. It would it's privileged information. Sure. Um, it so they will find out when we close on the stuff. So some of the things that we're working on are publicly traded companies. And so that it's not a standalone transactions where we have that opportunity to share that. Um we we would make our announcements in our quarterly reports and or publicly to certain certain things we're gonna announce publicly, certain things are only gonna be disclosed internally. So there's things that that we you and I discussed last night that um that are not proof of concept, fully uh eliminated 100% of execution risk of of some things that are um game changers for the whole entire country. And unfortunately, we can't share that yet because we have the first mover advantage. And um when that becomes discovered, it's gonna be a race to see how figure out how we did it. Yeah, and that's a whole nother asset that we figured out. And I can tell talk a little bit about that asset if you want.

SPEAKER_02 54:26

I just saw everybody so we're clear, at least I know that. Yeah, I know the real truth.

SPEAKER_00 54:29

Yeah. So the the entire cannabis industry is federally illegal, but uh statewise legal in the states that have approved it. And so what retail investors in you know in this industry they they don't they don't follow this, so they don't know. There is another uh landscape of licensing, and it's a f at the federal level, and nobody knows that this exists. And so uh there is a research license uh that the DEA has that has been around for I think over 40 years, where um the University of Mississippi had a DEA license issued to them for research. And so there are uh there was one cultivation license issued to the University of Mississippi, and then there was uh several, I don't even know at the time if there was any research or if they were just doing it themselves. Um and I should know this, but I don't know it. I'll I'll maybe we can edit it back in. But um some legislation passed where they actually um part of the legislation was to increase the universe of research on cannabis at the federal level. And what that did was it changed there was gonna be a total of seven cultivation licenses uh approved, and there was going to be only cannabis uh cultivated for research in the can in the uh federal ecosystem. So this is not going to be for retail, it is only for research. But now that is the genesis of where you get to have drug companies and do start doing studies at GMP certified facilities and and the quality that needs to be and and also research is cannabis is developed in a different pathway than recreational. Recreational is for how good it smells, how the high is um yields. Cannabis research is is specifically uh not for yield, not for smell, not for any of that, is to target what it is that you're trying to have have uh resolved. You know, and so it's it's a you're it's a it's a totally separate track.

SPEAKER_02 56:34

Right. And people don't when you think about it, it makes sense, but but how to consume it, how they're gonna, yeah, all of that stuff.

SPEAKER_00 56:39

It's gonna be a pill. It's going to be a different form factor.

SPEAKER_02 56:42

IVs. I mean, there's so many different things that can be done.

SPEAKER_00 56:45

Use and so in that um universe uh of that or that ecosystem, it's to just only produce cannabis to sell within those research uh labs across the country. It's a it's a it's a very profitable market, it's a it's a great market,

Billion-Dollar Growth Fund Structure

SPEAKER_00 57:00

but um what we were trying to do and what we were working on is one of our borrowers was in had one of these licenses. Unfortunately, we had to foreclose on that on that facility, and we we we got the license with it, which is one of the most valuable licenses in the country now. We've also now realized that we have been able to think about that license in ways that other people hadn't thought about. Um, one of them is that I can talk about is that we believe that the the VA, we have a four-star general that's the CEO of that company. We believe that we'll be able to get the the VA at some point to accept cannabis directly, even though it's not in the research ecosystem, because that uh I believe that we the Department of Homeland Security already has it approved. We're just not doing any product to them. So that ecosystem, and that's a big market, and that that in itself is is back to you know trying to help businesses, help the industry. This is this is a bigger thing than just us. We, you know, I'm not a uh a cannabis uh user, but I do believe in trying to mitigate the opiate crisis. Yeah, I do clearly I do want there to be uh regulated cannabis. I I I don't want uh kids being able to get out there to be age barriers. And you know, I think that there's a massive benefit here that we could uh that we could start looking at in something that we should have been looking at for the last 50 years. And so we're excited about that, but there's more opportunity that we realize that we started digging into this license. What's interesting about this particular license is that because cannabis is federally illegal, um, most licenses, you cannot have uh publicly traded companies that are US companies, domiciled in the US, on the US major markets. So the only cannabis companies that are on the major stock exchanges, US stock exchanges, are international companies. And so all the US listed companies are over-the-counter or uh Canadian company or Canadian listings. So what's unique about this DEA license that we have, we can take that public. We're gonna take that public this next year. Now man, how cool is that on a major exchange on NASDAQ.

SPEAKER_02 59:00

That's a big deal. Yeah. Yeah, and so ultimately you're just able to cast the net farther and wider, wider.

SPEAKER_00 59:05

And there's more to that story. Um, and it's a bummer that I can't get all the way to share everything about it, but there's a reason that we there's a reason that we have to keep that under wraps because of when it when it does come out, it'll change the valuation of everything we're working on. And then everybody's going to be tracing every trap that we laid and trying to figure out what it what it was and how we did it.

SPEAKER_02 59:28

Yeah, good for you though. But hey, that's sometimes leading the ship and creating that niche, like I said in the very beginning, you guys created a niche and you figured it out. And you guys, so that's a you know, kudos to Dan, too. And I know he's gonna listen to this at some point. He's always been that business strategist that has been able to implement amazing new techniques, but he's he's really compliance driven. He really makes sure that all of those, all of the features and all of the things to get from A to B and A to Z really is in place to get it done.

SPEAKER_00 59:55

I call him a financial engineer. Um and and he's just he's just a data process-oriented guy with with principles that he's implementing in that whole ecosystem of what he's trying to do. And he just reiterates and reiterates and reiterates and looks and tries to find a way to make something happen. And once he has an idea, a lot of people, I think it's more common than people realize of coming up with good ideas. It's the execution of the idea that that you can do it in a timely fashion fashion, raise the capital and make it profitable. And Dan has done that successfully many, many times. And um, sometimes in that process of of getting to the other side, there's some places where it it feels uncomfortable and you know. Um uh you know, your investors may have doubts that you know we didn't we never plan on taking back this much in real estate. Um luckily we had an element built in to be able to stabilize and to take advantage of that situation. But if we didn't have that, we we wouldn't be in a significantly different situation.

SPEAKER_02 1:00:57

Yeah, it's so yeah, encumbering the business was unbelievable. And then obviously, because really what you did is you said, hey, we have a special purpose building, right? And we can't just repurpose this thing without burying a bunch of money or taking a hit on the exit, just fire sell this thing. We need to bring in an operator. And so you guys got smart and said we need to go find the right operators that are real business oriented.

SPEAKER_00 1:01:17

Let's talk about that for a minute. So we're tracking um through our own portfolio of existing borrowers in our book. We're looking at with the in our own data company, we're we've established the means uh of each license type in each state and each latitude. And the reason I say latitude is that uh if it's an outdoor grow, or sorry, if it's a greenhouse, we don't do outgrow growth, so we

Regulation, Rescheduling, And Multiples

SPEAKER_00 1:01:40

only do commercial buildings or greenhouses. Every uh 1% loss of of light is 1% loss in production. And so the higher up in latitude you go, you've got shorter days, uh, or sorry, you've got um longer, potentially longer days and longer lights, or shorter days and shorter nights, but also you have fog, you have fog and or clouds, and that's impacting. And so all of this information we had to put into our underwriting, and every borrower that came to us only has the universe of their transactions, or maybe the company they worked at before, or maybe their peers in the area. We have the entire country. Yeah, we have seen this happen. Every single I'm an unlimited license state. Limited license states, and we're watching what's happening. And then we also have the flow of deals that are coming to us, and we're re-re picking up new data points that haven't closed yet necessarily. We can see price discovery on transactions before it's closed. So we have market climbs. We might not have done that transaction, but at least we know with the market what's out there and what's happening. All that data helps us to refine and understand what we're looking at for best practices. And where I'm going here is that as we started taking transactions back, we already knew who the best operators were. So if it's an operator within our book, we would then say, Hey, can you want to operate this one for us? That's our that we want to try to the least amount of uh execution risk as possible. We don't want to have to operate everything ourselves, but we would go to our own existing people. And if we don't have somebody, we knew who the best people were in the area. Um, we also, you know, because we're private, come from private credit, we understand structures, we understand the equity because we had to underwrite the equity, but we weren't operators. And this is where a lot of investors, um, as we talk about this, say, well, what do you guys know about cannabis? Well, we don't we don't know about cannabis, but we do know what what makes the businesses work, but we don't know how to, we don't know, we don't run them ourselves directly. So we've know who the best operators are in the country. So we brought on the top advisors to help us. We brought on um uh co-founder of Cresco Labs, we brought on uh, which is Joe Cadabiano, we brought on Charlie Jackson, um, one of the most prolific um early investors into the sector, uh, son of Phil Jackson. We brought on um many different environ advisors, um, one of the earliest guys from KKR. These guys have been in the cannabis industry for decades, and and um really refine that process of operational execution and know how to run those businesses. And so we just bring in as a fund manager, we can't possibly know all the nuances of every single one of these types of different types of business, different types of licenses in different states and all the compliance. So we just hire the very, very best that we can possibly get for each transaction. We build that team, we build those ecosystems. So back to Statehouse, what the strategy was there is that we brought in the who we felt would be the best CEO to turn that transaction around. We oversee it, we make decisions with them, but they're executing and running those businesses at that level.

SPEAKER_02 1:04:37

Oh, dude, I love it. So and obviously their their track record and their history and what they've seen already for being it for years and years. I'm assuming what you guys are looking at from a numbers perspective, you have all the data points, they're coming in and going, okay, boots on the ground, here are the deficiencies, here's how we can adjust.

SPEAKER_00 1:04:54

So we so from our level, we're not the operator, but we can say, look, you have um you are 20% underperforming for what the average is of all of our data. So it's possible. We can tell you it's possible. Um now, here's what we're where we think that this the way that we've seen it being done before, and this is you know, this is this is how we would suggest doing it. And now you go and execute on it.

SPEAKER_02 1:05:19

Oh, dude, I love it. And and and your team's getting access to that data too.

SPEAKER_00 1:05:23

Yeah, now uh it conversely, yeah, we can see somebody that's outperforming by 20%.

SPEAKER_03 1:05:28

Yeah.

SPEAKER_00 1:05:28

And we're like, okay. Either way, we need to know what it is. And so when we see that outperformance is just as important underperformance is just as important too, is we want to keep reiterating to be looking for those things. But when we see those, that outperformance, we want to know is this something we can anonymize and start providing this to our whole book to help them stabilize and be more efficient? Because if they don't do this, they're gonna get wiped out by the competitors. And so we want to help them get in front of that. And I'll just kind of share what one of those are is that we can reduce the uh cost of labor by up to 90%. Um, and labor is and energy are your two kind of largest costs in the sector. Um, and there's another way that we can get another 20% production out of the uh the crops, and this is now kind of widely known, so I'll share it. Is that um uh previously the uh LED lighting it didn't work, um, and it was because nobody had built in what we would call full spectrum of lighting. It was just LED lighting.

SPEAKER_02 1:06:31

Uh the circadium rhythm, right? The real lighting.

SPEAKER_00 1:06:34

So it's a plant, it's something living, and the regular fluorescent uh the regular LED lighting wasn't built for plants. And so the first thing was is to put in full spectrum, and most people never once they what happens in this industry is people try things that don't work and then they never come

Confidential Pipelines And Public Listings

SPEAKER_00 1:06:50

back. But in reality, uh the a bunch of people tried um uh LED lighting and it didn't work and they they they never came back. But in reality, the guys that were top producers reiterated they changed it to full spectrum, that started working, so now they're saving money on electricity, which is massive. But we ultimately realized that we could get the lights closer to the plant and we could put the lights under the plant, and that got 20% yield.

SPEAKER_02 1:07:17

Are you guys doing like water filtration, air filtration, all that stuff?

SPEAKER_00 1:07:20

Oh, yeah, that that's all that is.

SPEAKER_02 1:07:22

You ever heard of a company called Daylos Wellness? No. So Daelos, this was a uh a group that we were tied to years ago. Um, probably actually, believe it or not, right after like you know, uh I opened up Paradigm, um, there's a company called Daylos Wellness. What they were doing is they were chasing down, so they they partnered with IBM, obviously, and then they partnered with uh Cleveland Clinic and Mayo Clinic. What they did is they were taking all the LEDs and all the synthetic lighting out of homes, offices, all the space, because we spend 70% of our lives indoors. What they did is they went after real synthetic or real uh circadium rhythm lighting, right, that goes with the sun, uh, all the way to where you wake up. They tracked, they took human beings and put them in air filtration, water filtration, and all this lighting into the Cleveland Clinic and Mayo Clinic, and they studied them for weeks, like two weeks at a time. And they looked at like health-wise, like from um yeah, you know, from sleep uh trends, like all the chemicals that your body would create, right? Just with certain foods and what have you. And they were able to track stuff down to like um Alzheimer's and some of these like diseases, the house, a lot of it can actually be tracked, it doesn't help off of synthetic lighting. And I was really impressed. And I was like, it was funny because I was like, I wonder if they're gonna use that for the grow industry, because that's exactly what, and plus uh and air, right? And then obviously water. So I was wondering if you guys were probably you know knee deep and all that.

SPEAKER_00 1:08:45

All of that is uh so the the the original industry was basically created what we would call the illegal industry, we call it the legacy industry. And you say it you basically have um uh guys that uh originally were just growing outdoors and just trying to figure it out and making it making it work, and then they started moving to their mom's basement, and they weren't um from the ag industry and trial and error, and some of those guys are some of the best out there, and they've they've really figured it out, but they didn't have the um experience from big ag from mainly the um ornamental industry is what would be most similar to cannabis in the uh sophistication of of growing. And so they didn't know uh how do you scale something from your mom's uh basement at you know maybe uh a hundred lights to 333,000 square feet with you know that a scale. And they didn't know how to implement those systems and to refine those processes and things that big ag had learned a long time ago, these guys figured it out on their own, but they didn't know why. And so, and and they didn't know what things were were so important, um, and but they they landed on it somehow, but they didn't know that that was the variable that was changing it. So today, um, we were one of the first to bring in a uh PhD ornamentals guy. Uh, and this is kind of an interesting story. So normally when you underwrite a transaction, um, let's just say we were doing a loan on a um uh furniture commercial building, we'd look at the financials and just see that they're doing fine, and you're gonna make that loan based on his uh on the business financials and their, you know, um the appraised value. Well, in this industry, we realize that that's not enough. We actually need to uh go in and review his furniture building processes and the SOPs and look at the entire thing because we need to make sure that they are set up to be competitive with their peers. And if they're not, and and remember, everybody is starting on their own path. So there is no um, there really aren't some best practices. Now, now over the years, there's some some stuff out there, but we had to go in and start having our underwriters send in our cannabis reposition team on the front side to let us know, no, this building, the roofs are too low. They're always gonna have a humidity problem, no matter what they do. And they don't know it yet. And you can't tell somebody that's already 10 million in that look, guys, this will you're always gonna have a problem with this. And until you solve for this, you're going to be less

DEA Research License And VA Potential

SPEAKER_00 1:11:30

efficient uh over time.

SPEAKER_02 1:11:32

So, yeah, if our air filtration is all gonna be important. What about what about buildings, like building compliance, like to city codes and stuff of that nature? So fire, yeah, fire protection.

SPEAKER_00 1:11:42

Yeah. Um so think about this plants uh feed on carbon dioxide and produce oxygen. So in our indoor cultivation, part of the things that we're solving for um is not only lighting uh and humidity, but also we're solving for we can get more yield out of those crops by injecting uh carbon uh CO2.

SPEAKER_02 1:12:08

Wow.

SPEAKER_00 1:12:09

Now, the problem is that CO2 is toxic to humans. Yeah. And so um bunch of people falling asleep in there. Well, uh so and and the thing is you wouldn't notice that that's the case. And so all those sealed, hermetically sealed rooms with no with only one door, you know, and no windows have to have an alarm. And you know, these are all these facilities are built at when you go into our facilities, if you look at our website and some of our pictures or videos, you can see that it looks like a a lab facility. Yeah, I mean it they're they're well wearing lab coats and and they are top top tier facilities. It's just the product happens to be a plant in there. So all that stuff is factored in and that those uh we have contamination, all that, right? One facility that we were the lender on, the uh alarm failed for uh, but nobody knew it just went out and didn't indicate that the m that the room was um was toxic. And you know, that that becomes a problem, obviously. So you've got to watch out for some of the stuff.

SPEAKER_02 1:13:11

Yeah. So yeah, so and then all the way down to contamination, soil, all that stuff, man.

SPEAKER_00 1:13:16

Yeah, and it's way more proper scientific, it's super uh difficult to manage. And each of these rooms could be 600,000 to a million dollars of gross revenue per room. And if you have a contaminated crop, you have to freaking wipe that whole room, and it also make messes up the whole sequencing. So basically, you'll have a facility that might have eight different rooms rolling sequentially every week. One more one room is dropping. And so that that by the time that whole eight weeks goes by, you're just on a continuous flow of product all year round. Right. And so if you have one that fails, it throws out your whole sequencing and and it becomes a problem.

SPEAKER_02 1:13:56

What about elevation pressure?

SPEAKER_00 1:13:59

You know, uh, that's the first time anybody's asked me about that.

SPEAKER_02 1:14:03

Well, the reason I ask is I have a lot of friends that are growing like they're like Tahoe guys, they go up to Tahoe and they're snowboarders, right? And they're kind of like, and but they like to grow up there. And I didn't ask until it just popped up to my mind while you were talking, going, I wonder if anybody I wonder if that's a thing.

SPEAKER_00 1:14:16

So um I could ask that question from our PhD guy, and they're probably I'm sure he would have an answer for me. I don't know uh how much elevation has to do with it, but I will tell you that the climate from you know Humboldt being one of the main areas, and we have a facility up there, is relatively close to sea level. Um I I think that I suspect that you're not gonna go too high up. Um and yeah, and I do know that some states uh that you're gonna that the the the basis is gonna be higher in that state, but I I don't have I don't have the answer.

SPEAKER_02 1:14:50

Isn't that kind of crazy though? Because you know, like you know certain plants won't grow based on elevation. So because this is such a sensitive and everything's so scientifically designed.

SPEAKER_00 1:14:59

It'll probably grow, it's just the yield would be down. And so that's part of that. But I don't have that. That's one one I haven't I'm sure we I can get.

SPEAKER_02 1:15:06

Now you're gonna get back in the car and then we have like, you know, what if Ryan asked me about that? I wonder if that's a thing, you know. But that'd be I I'm now I'm curious.

SPEAKER_00 1:15:13

I'm sure it's a I'm sure it's a thing because there's less oxygen higher up. So I think it's a um you know an incongruent uh uh uh uh just the higher you go, I think the less production you're gonna have.

SPEAKER_02 1:15:24

Yeah, I was gonna say I'd say probably what is it, Joe?

SPEAKER_01 1:15:26

It says higher elevations, the atmosphere's thinner, plants receive more UVB radiation, so therefore more THC, thicker resin, and stronger turpines.

SPEAKER_02 1:15:37

So in essence, higher, so what Joe here, our uh our video editor here and our research team in the back end here is saying that in essence with higher elevation, higher THC, but does it have does it have anything to do? So in essence, it's better, but does it does it say anything about like the speed in which it's produced too? Because that would that's a big deal.

SPEAKER_01 1:15:57

So as elevation increases, the air pressure drops, oxygen availability decreases, so lower oxygen equals slower growth. So it really I guess what it's trying to say is higher elevation is better for thicker.

SPEAKER_02 1:16:14

So ultimately, higher elevation is better.

SPEAKER_00 1:16:17

I don't I don't I think I think I think that it depends. So for instance, your facility, if it's built, if it's indoor, if it's indoor, you're not gonna capture the UV and all that stuff. And so now you're just in an elevation that has less oxygen. So when we're in a closed facility, we can adjust the oxygen. We would be we would be adjusting, we would be adjusting this the CO2. Um, and theoretically we could pressurize that as well. And in fact, just so you know, we do have the facilities pressurized so that it is um uh negative pressure to outdoor, so that we're always pushing any door that opens, you pushing out so that any contaminants so you're constantly pushing air in. And you'd be you'd be um shocked at how easy it is to contaminate the plant.

SPEAKER_02 1:17:01

I know. It's I I hear horror stories.

SPEAKER_00 1:17:03

It yeah, every time you enter, you're going through a foot bath uh and you're wearing you we have to suit up and all all kinds of stuff because it's it's just microbial stuff, then becomes it, it just starts going crazy in in there.

SPEAKER_02 1:17:16

It's like the it's a virus, it's like a pandemic. It's it's a micro pandemic, like a micro pandemic just for plants.

SPEAKER_00 1:17:21

Essential workers was the word I was trying to work up for before.

SPEAKER_02 1:17:24

Okay, so uh to we to sum this up, what would you like our audience to know and to build awareness for your investment opportunity? Let's talk about that right here. What would you like to pitch?

SPEAKER_00 1:17:34

So, you know, Pilores Capital Group is a specialty asset manager platform.

Ops Excellence: Lighting, Yields, Compliance

SPEAKER_00 1:17:40

And, you know, we're here to um bring an alternative asset uh type to investors that they probably don't have in their portfolio.

SPEAKER_02 1:17:51

Which by the way, alternatives is where it's at right now. Yeah. I mean, the volatility in stocks and stuff like that. People are stressed out, tired calling me all the time, going, I'm tired of waking up stressed out.

SPEAKER_00 1:18:00

And and if you're if you're looking for an alternative asset class that is positioned to capture the upside of a sector, I think that this is a pretty compelling um argument. And, you know, we're not here to uh pitch anybody, we're just here to educate. And we will be rolling out more and more series of of educational videos and information that shows these assets. We do tours of our facilities and we we just show you what it is that we're doing. And if it's interesting, we're available.

SPEAKER_02 1:18:31

I love it. Cool, right on. And so you're moving it, you guys are looking. So you have small family offices, you probably have a bunch of big family offices trying to reach out to you, but you like more of the you like more of the smaller um retail investors that really get an in-depth uh knowledge, right?

SPEAKER_00 1:18:44

Yeah, so in reality, the because of the um compliance risk that um asset managers perceive as being in this sector, even though we explained to them there is no uh prosecution in the sector because it's been defunded, we actually did bring in institutional investors and we showed them how to get in through our uh structured financial products that we do. But um what we learned over time was that anytime you go into a uh uh somebody that has a an attorney in in that decision group, the attorney is not participating in the uh yield. And so they only have if if they only have um, there's no power in saying yes for them. And so we try to start with their uh compliance people first to show them that um look, uh if uh BlackRock and some of these other asset managers are are in the sector, you're probably okay too. Yeah. And we show them that they're already in the sector. And so, but um basically we've realized that in reality, for where the sector is at today, that retail is what we prefer to work with. And as more and it becomes bigger and bigger, we do have family offices. Um, we're we're talking with one of the larger ones that I mentioned to you last night. Um, but it's taken almost a decade to get them to where they're comfortable. And this is this is a very, very large one. Even in that, they have they are outside the box thinkers, and you know, you happen to know who it is I'm talking about, but so they have that ability to think about that that way. But but most of them, it's they they bring it to their um compliance department, and the compliance department says, Well, look, you know, if we had to take this back, we could lose all of our banking stuff. Well, you're not the one that would be taking it back, it's us. And so we can we can navigate all that, but once you start hitting those series of no's, it's just it's not a good use of our time. So we we focus on the velocity of we're built for retail investors. That's how the fund was structured was to facilitate for them. And and to go back, um, this this particular fund, the Polaris Growth Fund. Is not an income fund, it's a growth fund. And the way that we look at it is that as we start to have liquidity events for each of these transactions, you then take all your chips off the table, your pro out of portion of that, what was invested, plus the upside of the unrealized gain you get at that time. That yield that you pick up would be significantly higher than what an income fund would be.

SPEAKER_02 1:21:02

You know what? I think this is important for people to know. One of the things that one of the reasons why a lot of our investors want to invest with us is because, like, for example, let's say they go into the secured income fund. That's a lending fund, right? Short-term bridge loans. It's, you know, all secured by real estate, no need to trust, whatever. The reason why investors like that is because they know I'm willing to get my hands dirty, foreclose. You guys are obviously as well. You guys have a lot more experience than I do. However, you guys are hands-on. You guys will physically and focus on repurposing that asset to save the investors, but also figure out a way to make more money. That's exactly what's gone on here. And that's what's happened with us because we're developers as well. They know that, hey, you're giving me an opportunity if you foreclose. Unfortunately, we don't want to. That's not our goal. We want to just make our yield, get our investors paid, and move on. But if we have to get our hands dirty, we're comfortable in that space and we have the resources and knowledge to re repurpose that asset and exit it and obviously and hopefully make some money. So that's a difference between fund managers. And I want a lot of people to understand the difference between most fund managers that have a strategic business strategy. And it's usually if something's go goes bad, they really don't have the mechanisms in place or have an understanding of what they have to do. Or experience. Yeah, I like you said, you know, name a fund manager that's actually gone through a couple, you know, downturns and what did they learn from that? And what what are they implementing now? So the fact that you guys are encumbering businesses along with the license and the real estate, but you guys really lent on the basis of the real estate is key. But you nailed it like special purpose vehicles, special purpose assets. Like it's a it's a it's a science in essence, literally on everything you're doing, but it takes a lot of mental horsepower and it takes a lot of time to perfect that approach. I I respect you guys completely because I can only imagine.

SPEAKER_00 1:22:46

Massive bandwidth. Yeah. Um, and you know, we've built a team. Um, you know, I I started off earlier of what did we learn? And we we try to have just the very, very, very best core team and then third party everything out. So now we have a team of 12 um that are some of the top uh analysts and people in the sector that have really uh learned the industry with us and and were part of the whole process. So they really understand it and have have really come up with some innovative ways to be thinking about things. And also the other thing I would say it's relationships. Um Relations, if you don't have relationships, you're not gonna, I don't care how good you are. If you've burnt everybody in the industry, we wouldn't be able to execute on the opportunity we're doing right now.

SPEAKER_02 1:23:29

Yeah, we talked

Underwriting SOPs And Facility Realities

SPEAKER_02 1:23:30

about it on the way here.

SPEAKER_00 1:23:31

Yeah. So that that is important as well is to make sure that you're not burning people in the industry. You're you're you're you're doing what you can to support the industry. It's not always gonna work out for everybody on the counterparty side, but um, you know, we're we're doing what we can to save the assets, save the jobs that we can, and um to work through a difficult time while the industry is maturing.

SPEAKER_02 1:23:54

And like I said, you know, I love the fact that you said this. And this is another thing that I think maybe people don't understand or maybe overlooked. When you guys, as a fund manager, have an operator that's not performing but is willing to communicate with you and spill the beans on what their hurdles are, you guys step in and help them. Where if they're like I do it too. If a borrower comes to me going, right, I'm having a hard time, I had to fire my contractor, can I get an extension? You bet, no problem. We'll give you an extension. Make sure you come current, whatever the case may be. But if you just go dark, I have no other option but to foreclose on you. So it's really uh it's it's really that relationship between their lender and the operator is unbelievably important.

SPEAKER_00 1:24:32

We actually probably see it we know what's happening probably better than them because we'll start to see it in their financials. So they're they're required to provide quarterly reporting, and we can start to see the numbers go down. And we might say to them, look, your uh labor is is not uh in what is market to everybody else. In fact, we found uh a bad actor that way. Um it turned out that he had two facilities and that he had moved all of the employee payroll to the facility that we were lending on so that the other facility that he had better economics in was free and clear. And the way that we discovered that was from doing our analysis of what the costs were uh uh per per um employee. And then when we saw it wasn't adding up, we started we started using satellite uh photos to look at the parking lot to see how many cars were parking there. And uh, we kept calling him and saying, look, we've got a guy doing a drive-by today, and that there's nobody, we don't see any cars there. We weren't telling him how we were uh inspecting it and said, Oh, it today was a it was a day off, or we we had a power outage, and so everybody was uh wasn't here today. And we're like, okay, well, what about the day before? Um yeah, well, you know, that was a normal work day. We're like, yeah, no, it wasn't. Um and so so we stunned once you break the credibility with us, then it's a different you're considered a bad actor.

SPEAKER_02 1:25:52

Yeah.

SPEAKER_00 1:25:52

And um, you know, people do start doing desperate things at different times.

SPEAKER_02 1:25:56

You just have to get in front of it.

SPEAKER_00 1:25:57

You gotta get in front of it. And so in that particular circumstance, we immediately put that in receivership instantly without telling him. And so the next day, doors are on that he's locked out.

SPEAKER_02 1:26:06

Wow. Yeah, that's the way it goes. Yeah, gotta be honest. That's the way it goes. Well, Rob, thank you very much, man. This was killer. I think this is gonna be one of the most watched and listened to podcasts I've ever had. Very sophisticated. Obviously, you were my mentor. Everyone always wants to know where the hell I came from. And I tell them I'm a little spot in Orange County somewhere. But I love you, man. Thank you for being here. I appreciate you coming out here, spend the night with me, and just recalibrating and reconnecting with you and hearing all the stuff about Dan. Tell Dan, I love him. I'll call him. I'll text him. I'll give him a ring.

SPEAKER_00 1:26:33

This is this has been awesome. Uh, I look forward to coming back and seeing where the projects are the next time I get from.

SPEAKER_02 1:26:38

Well, I think some of our uh I think our network's gonna see more of us. I'm gonna, I'm gonna, I'm gonna build some more awareness for you guys. I want my team to really consider um, you know, investing into you. You know, I think a lot of other uh fund managers go, Oh, I don't want my investors to invest in other people. Well, that's not that's not necessary. I want my investors to win. I want them to diversify. I don't want to put all their have them put all their eggs in one basket, right? So I only I'm I'm I'm only gonna uh represent the best of the best, and that's why you're here, man.

SPEAKER_00 1:27:02

Right. Thank you for having me.

SPEAKER_02 1:27:03

Cool, thank you, buddy.