Capitalizing on the Green Rush: Duncan Mendelsohn on Cannabis Real Estate and Strategic Investing

[00:01:24] Duncan Mendelsohn: Yeah, absolutely. I’ve enjoyed getting to know you and having the Colorado experience. So let’s see where to start. I grew up in Ohio and then I ended up going to Vanderbilt University for undergrad, and I didn’t have much business background. My dad was, and still is, a professor of mechanical engineering, so, it’s funny, I talked to my wife.

[00:01:51] The dinner table talk for me growing up was physics and, heat transfer and all that. All that good stuff. And my wife comes from the opposite. She comes from a very entrepreneurial business family background. But I knew I wanted to live in New York City. So when I graduated from Vanderbilt, I moved to New York and I fell into the mortgage banking industry, which was really a Vanderbilt connection.

[00:02:17] And right out of college I fell into the industry that I was in for 10 years in New York and 13 years in total. And that’s government-insured lending which is random, but ended up being a great industry for me. I found great people that I worked with. It all started with a woman who was my boss.

[00:02:43] I was her right-hand man all the way along. And we found ourselves kind of Startup junkies within the mortgage banking space. And so we started at a very small shop and then went to a company called Beach Street Capital, which then got later bought by Capital One. Beach Street was itself a startup.

[00:03:06] And Tyler and I, went to Beach Street to lead the HUD division and get out that off the ground. And that was a great experience at a really fun, young company. I get Altvia vibes from that just, about being the best, but also having a really good culture and having a lot of young, fun people in their twenties and early thirties and a lot of energy and it was great.

[00:03:32] And it was a great experience and it was me having a professional outlet at the next level. And then that company got bought by Capital One and most of my friends and close coworkers didn’t want to do the whole big corporate Capital One thing. And there are great advantages to that track, but that wasn’t our path, and then we actually threw around starting a hud lender ourselves and then we ended up finding really a perfect situation of partnering with a group that had already started and essentially were very aggressive, very successful originators at a different mortgage banking firm and have just started their own HUD shop and really brought us on.

[00:04:23] And I was not an owner in that company, but I was employee 12 or something like that. And my role was to lead the credit team. So in that world, it’s called chief underwriter which is again, leading the credit team. And when we started, it was just me and my buddy, who is also a co-worker, my right-hand man, underwriting deals all day and night.

[00:04:49] Brie Aletto: This is still Tyler?

[00:04:50] Duncan Mendelsohn: No. So Tyler was leading. Tyler was COO. And then I was chief underwriter. And then my friend Andy, and Andy and Tyler still work together. And there’s a whole crew that are working together. Based in New York, Andy moved to DC. There’s a team out of Birmingham, Alabama.

[00:05:11] So really all over the country and great people. And, honestly, where I am now, having started GoodSeed, I definitely think about those early days of Dwight and the drive and the hustle and needing to be on 24-7 and doing that to make it happen. But I learned a ton and, that started as a team of 12-15 people, total for the company.

[00:05:37] And by the time I left New York in December of 2018, I stepped down from that role. Then I was managing a team of 25 people. So it really cut my teeth in the managing angle, which was great. I learned a lot and I would be a much better manager now, a little bit more mature and older than I was then, but we figured it out and we were successful, and then kind of by the numbers, it was an annual pipeline of a billion dollars of closed loans. And so I was managing a pipeline of two to three billion overall in sizing and closing and, and all that. Very sizable pipeline and great experience. And yeah, that’s the New York HUD background.

[00:06:24] Brie Aletto: So you left New York in 2018, and then moved to Colorado when?

[00:06:30] Duncan Mendelsohn: So we moved to Denver, Colorado. So my wife and I were not married, not engaged at the time. Just took a leap and moved out to Denver together to give it a shot. We were between Denver and Austin, which millions of other people are…

[00:06:44] Brie Aletto: Sounds about right. Those are the two.

[00:06:47] Duncan Mendelsohn: We were between those two, and we chose Denver. And it was a great experience and I was still working in the HUD industry, in lesser roles, and then did some contract work, and my cannabis story started with getting pitched to invest in a cannabis REIT.

[00:07:07] So I got pitched to invest in a company similar to what GoodSeed is. And that was with a friend who worked at Dwight Capital who was a trader. He was an investor and we were going back and forth about maybe starting something. I still remember the text of him saying, you want to start a cannabis REIT?

[00:07:28] And I thought that was insane. I didn’t know much about the REIT structure. I had a lot of commercial real estate lending experience, but, and exposure therefore to the investment side, but I’ll admit five, six years ago, I didn’t have a ton of experience on the investment side. What I did have was a very good friend who is an advisor, and partner in GoodSeed.

[00:07:57] His name is Jordan Scheiben, one of my oldest friends, we’ve known each other since first grade. We’ve had comically similar life paths: Same school, K through 12, both went to Vanderbilt, and both ended up in New York in commercial real estate. He was banking for a few years and then pretty quickly moved into private equity and he’s been in private equity commercial real estate investing now for I don’t know, 13 years or something like that.

[00:08:24] Brie Aletto: Good partnership.

[00:08:26] Duncan Mendelsohn: I bring the lending experience and I’m really putting everything together with GoodSeed. And then Jordan brings that pretty deep private equity and structuring experience.

[00:08:36] Brie Aletto: So that was in 2018 that you took this leap. And gosh I don’t know exactly where we were in the path of cannabis legalization and how the industry was thinking about it. Was it daunting to get into that space or did it seem very natural because the market was responding and you’re starting to see legalization?

[00:08:59] Was that involved in your decision-making?

[00:09:03] Duncan Mendelsohn: Yeah, so I mean there wasn’t a decision to get into the industry immediately. I will pat myself on the back for letting it all flow naturally and come to me. So moved out here, in December 2018. So this is 2019. I’m still in some minimal capacity in the HUD world from afar and still receiving some income, and also a few years before that, Jordan and I had started putting together some side hustle, commercial real estate deals.

[00:09:38] We were thinking multifamily cause that was more my background. We had a project Cannabis came across my desk, so to speak, and my natural thought was, let me just talk to everyone that I can, friends of friends, second, third, and fourth-degree connections. Let me just talk to people and see what people have to say.

[00:10:00] In that process, maybe six months into that, a live deal that was small under a million came across my desk, and came as an opportunity. And Jordan and I figured it out and we put it together and we syndicated it with friends and family money. It ended up being a relatively structured type of investment, which was a little much for being so small, but it was really a test case to see if we could do it and see if it was something that I enjoyed.

[00:10:32] And we figured it out and we got it closed and we brought in a bridge lender to be senior, and it ended up paying off and we got an exit from that in 2022. And, so that’s after we had made more progress with GoodSeed, that’s really how it started.

[00:10:53] Brie Aletto: You got a taste of it and it’s addicting.

[00:10:56] Duncan Mendelsohn: I realized a while ago that I’m a deal guy.

[00:10:58] Brie Aletto: Yep. Love it.

[00:10:59] Duncan Mendelsohn: I’m an execution, deal guy. 

[00:11:02] Brie Aletto: I think we have a few listeners that are deal guys. And gals. Exactly. It becomes addicting is what I understand.

[00:11:09] Duncan Mendelsohn: Yeah, it’s funny. It really is. That’s what it’s about.

[00:11:11] It’s about getting it done and, putting all the pieces together and figuring it out. And, the other probably biggest aspect of this venture for me, has been learning and curiosity and I love picking and choosing little bits from people, little kind of snippets, quotes that I repeat in my head over the following weeks. And with cannabis, there’s so much of that, and I’ve just, I’ve absolutely loved that. To your question about where we were in the cannabis life cycle in 2019.

[00:11:52] So there was what has now been dubbed the green rush. And that was, I think, 2017 to 2019, and so this is speaking to the cannabis opportunity generally at a high level. And so there was a lot of excitement and, I hadn’t thought about it until you just asked this question now, but yeah, that’s probably part of why I was excited about the opportunity because there was a lot of buzz and there still was a lot of excitement and then 2020 world falls apart, actually ends up being good and bad for cannabis.

[00:12:32] It crushes valuations, really brings valuations back down to earth. But at the same time, I don’t know if you know this or a lot of people remember this, but there’s this term, essential, of course, and cannabis was deemed an essential good. I actually remember in Denver in March of 2020, the big question amongst our social circle was, are the liquor stores going to stay open? And then are the dispensaries going to stay open?

[00:13:02] Brie Aletto: I remember that very vividly.

[00:13:04] Duncan Mendelsohn: Everyone was stocking up and it stayed open. There’s been, I think, a very healthy bringing down to Earth of expectations regarding cannabis from 2020 really until now, until 2024. Operators have been forced to really tighten up and there’s a perspective at a high level, the largest, what are called MSOs, multi-state operators, to just be as big as possible, and what I understand the tech mindset to be is to grow revenue as much as possible and focus a little less on profitability, but there’s been a nice evolution, and so that’s overall, the cannabis arc over the past few years as I see it.

[00:13:53] Brie Aletto: Yeah. And so talk about, we’ve ebbed and flowed a little around Goodseed, but want to give you a chance to really talk about Goodseed and how it’s ebbed and flowed and evolved over time with market conditions and whatnot.

[00:14:05] Duncan Mendelsohn: Yeah, absolutely. To that kind of 2019, 2020, me networking and putting together, that specific investment, I realized pretty early on that with Jordan and I, we realized we had enough real estate, but we needed cannabis experience and I could learn, but I couldn’t learn enough and couldn’t learn fast enough.

[00:14:27] And so I knew I needed a partner and, just luckily who’s now become a friend and a business partner in GoodSeed. His name is Chuck Smith. He’s been a cannabis operator for 15 years. Actually, he’s been a Colorado guy. He co-founded Dixie Elixirs, which is one of the older, more well-known, established, manufactured products brands in the industry, and now it’s under a house of brands thats a multi-state operator in nine or ten states, and he took that company public, and, he’s done most of the work of what has been done in cannabis. 

And he’s also since put together a team to go after a license and one of the limited license states. So he’s just done it all. And the timing worked out well, where he was stepping down from his day-to-day role of CEO of Dixie, which is now Bellrock Brands, and looking for other opportunities, and he also has a real estate background and we just came together.

[00:15:33] And we went that fund route and hired Top Shelf Legal and have a very strong service provider team in place. So we have Reed Smith, which is a global law firm. We have Cohen Resnick teed up for audit. And then we have a really strong fund admin, third-party accounting, which I don’t remember their stats offhand, but they manage something like 50 billion of assets.

[00:16:07] I imagine some of your clients also use Catalyst and Cohen Resnick. And then of course, and I advertise it in my deck and talk to you about it with investors, the Altvia platform is certainly a great aspect for us. We have a really strong management team in place and then third-party service provider team.

[00:16:28] And as far as deal flow goes, it’s been slow and it’s been tough over the past few years. We have that transaction from a few years ago that we have the successful exit on and, just a little bit more specifically on that. That was a debt deal before rates popped and we underwrote a 14.5 percent return and ended up getting a 16 percent net IRR. And again, it was a very small transaction, we beat our projections and that was, I think, largely because we had intelligent and thoughtful structuring in place. And then another example of a transaction is a dispensary right outside of Portland, Oregon.

[00:17:12] So technically not in Portland proper. So not having to deal with the Portland government in a different municipality, we ended up maneuvering a bidding war between the existing dispensary tenants and two other dispensary tenants. We ended up with, I think objectively, the highest quality credit tenant, which also, probably not coincidentally, had the highest bid.

[00:17:43] And that lease is just incredible. It’s two times the non-cannabis market rent, as well as a revenue share that’s 3 percent of gross revenue. And so that ends up, this is a deal with just one investor. The investor has, we had a going-in cap rate of six and a half percent, and now it’s cash flowing 10, up to 10 and a half, almost 11%.

[00:18:10] Brie Aletto: Yeah. I have multiple questions spawning from that. You talk a lot about your competitive edge. Your investment strategy, does that evolve as cannabis legislation evolves as well? It sounds like you’re going into multiple states. I can’t even imagine having to stay up on all the local legislation, and stipulations that vary based on jurisdiction.

[00:18:33] Again it’s probably exhausting and mind-boggling in just its own job. But how does that potentially evolve your investment strategy?

[00:18:42] Duncan Mendelsohn: Yeah, absolutely. I guess first, just real quick so there’s the cannabis industry, and I will answer your question, there’s the cannabis industry, and then there’s the real estate cannabis opportunity.

[00:18:55] And we could talk for hours, we could talk for days about the cannabis industry and what directions that, that may head. The real estate opportunity is actually relatively straightforward at this point in time. Cannabis is not regulated at the federal level. As a result, the majority of institutional capital is not in the space.

[00:19:24] But at a high level most institutional capital not being in the space leads to what we call mispriced tenant credit, so we believe at this point in time in the underlying mismatch of supply and demand of capital.

[00:19:47] On the flip side, another perspective on that is arbitrage. That is a really interesting opportunity for investors at this point in time until federal legalization occurs. And, the best guesses are 2028. I’d probably take the over on that for federal legalization.

[00:20:08] But, that’s really the cannabis real estate opportunity at a high level.

[00:20:14] Brie Aletto: But before that, was another question of mine. There is a huge opportunity for those specific type of investors is what you’re saying, before all the institutional capital potentially could become interested?

[00:20:25] Duncan Mendelsohn: Exactly. So basically, and I have a bunch there are so many quotes that kind of go through my head of people who have described this opportunity and situation very accurately, and I try to not reinvent the wheel and borrow from other people when I can. 

[00:20:45] One of the best quotes that I’ve heard is there’s a 0.00001 percent legal risk regarding the federal illegality. There’s the Cole Memorandum, and there’s plenty of guidance, both official and unofficial, that has been issued that says, the federal government won’t or can’t use funds to go after state-licensed cannabis operators. Nonetheless, there’s still that minuscule nonzero chance.

[00:21:13]  And because of that, J.P. Morgan, Wells Fargo, all those groups are not yet in the space. And so those of us who are willing to take on that nonzero risk, there is a really interesting opportunity. And then real estate is not tech. Cannabis real estate is not an operating business.

[00:21:32] We are not offering 5X returns, 10X, that’s not what it is. This is a high-yield dividend opportunity, plus for Goodseed specifically direct upside in the cannabis operator. So what Goodseed is doing, which admittedly there’s not much of a moat to, but we’re the only ones focusing on it at this point, intentionally wrap in either revenue share or warrant coverage with the real estate. And it’s being done, we’re not the only ones doing it.

[00:22:10] We’re the only ones intentionally focusing on that for as many of our transactions as possible. So what Goodseed offers, which I firmly believe is a really interesting superior risk-adjusted outsized returned all of those terms opportunity, is true, relatively low to medium risk. high yield current cash flow, plus exposure to cannabis companies, which we vet and are very selective regarding, towards the end of the investment term.

[00:22:51] Brie Aletto: So you do not need to know a lot about cannabis should you be interested in wanting to get into this space, but maybe you know something about real estate, right? And that’s what’s really intriguing as an investor is getting into the real estate side.

[00:23:03] Duncan Mendelsohn: Yeah. Investors. I mean at a high level are in two buckets.

[00:23:08] There’s folks who understand real estate, might be real estate investors, owners themselves, and are not afraid of cannabis or personally enjoy cannabis and have fun and are excited to just have that exposure to the industry and the real estate is an entry point. And then on the other side, It’s folks in small, not institutions, small family offices, high net worth individuals who have thought about cannabis but haven’t, maybe haven’t thought about the real estate angle or just haven’t been comfortable or, I’ll plug for us, haven’t found the right sponsor, haven’t found the right manager.

[00:23:53] I coincidentally connected with a friend’s father who has a small family office that makes many real estate investments, and they thought about cannabis, but they weren’t comfortable until they connected with us, and I have a personal relationship with them. So because of that, I got them comfortable and it’s only going to grow.

[00:24:16] And those premiums that we’re charging that the market is demanding right now will shrink over time. But that’s where we are right now.

[00:24:29] Brie Aletto: You talked a little bit about getting into kind of investing or exposure into the cannabis operators, but it led me to thinking about, will your real estate strategy expand into other strategies?

[00:24:41] And maybe that’s more of the one you’re referencing, but are there others?

[00:24:46] Duncan Mendelsohn: Yeah, it’s funny, the more common question that we get is are you investing in the psychedelic space?

[00:24:54] Brie Aletto: I was thinking it.

[00:24:57] Duncan Mendelsohn: We’re not. There are only so many hours in the day. And understanding and having a firm grasp of the cannabis opportunity certainly fills our days.

[00:25:07] So one of the quotes that I remember is Cannabis is a mega trend with significant volatility along and that’s very aptly put, most likely accurate. There are tons of different estimates for the U. S. cannabis market and the global cannabis market’s growth over the next 5, 7, 10 years. There’s a 10 to 15 percent compound annual growth rate that is pretty much agreed upon.

[00:25:45] Granularly, there’s state markets opening up medical and then converting from medical to recreational. At a higher level, I think the more accurate way to look at it is the illegal market converting into the legal market. And that’s both in mature existing markets like Colorado, and California and those newer markets.

[00:26:09] And for years, folks in the industry have been talking about Big Pharma, Big Tobacco, Big Food, CPG, which a lot of people don’t think about, but cannabis itself is a commodity, but the manufactured products are CPG product.

[00:26:29] But that’s my long-winded explanation of why the MNA opportunity for Goodseed could make sense because there’s been a bit of a lull of consolidation and MNA activity, but that is likely to pick up over the next two, three, five years and at some point for us, it might make sense to go get a broker-dealer license and help with the various operators.

[00:26:57] And also, something I wanted to mention, I wanted to touch on, there’s one of the reasons I love cannabis is the entrepreneurial aspect, and I guess two pieces there. One, I actually do believe that cannabis, weed, marijuana, whatever you want to call it, I do believe it’s a net good for society right now.

[00:27:23] Back to the quotes that I’ve heard over the years. There’s a Jim Belushi quote. He started a cannabis company, fairly successful. And I vividly remember reading him quoted as saying, he carries around his vape pen and he takes a hit every once in a while, and for him, that takes away the need to be right. 

And that was just very powerful. And I think more empathy, more kindness, more softness. I really do believe that this product helps move society towards that direction. And that helps me sleep at night.

[00:28:08] Brie Aletto: I agree with so many of the things that you’re saying. To that end, you talk a lot about the opportunity, the good that it’s doing in the world.

[00:28:15] Again, I totally agree with all that. So if you’re an investor and you haven’t invested in this space before, whether it’s cannabis directly or in your instance, the real estate side, how does that vary or what are you thinking about or what’s the due diligence differences between, a typical commitment they might make and what they would look at, versus looking at somebody like Goodseed?

[00:28:36] Duncan Mendelsohn: Yeah, part of the opportunity for sponsors, investment managers, and investors in the cannabis space is to be a good, honest business partner. And I do think most of our competitors in the space are that.

[00:28:58] I think most of the capital providers that are not good business partners are not still here today. There are still a good number of smaller cannabis operators who are not being honest and are not doing the right thing and trying to make a quick buck, as they say, and are getting caught.

[00:29:28] And, the cannabis industry has a headline challenge because that news dominates the headlines at times. But again, just if you’re an investor, be careful, and whether it’s GoodSeed or some other experienced capital provider in the space, invest with them or at least get their opinions on it.

[00:29:54] For us, we have the luxury and other capital providers do as well, but with, our management group, we’re able to get a behind-the-scenes opinion through the industry by making two, three, four phone calls regarding any operator that we’re potentially investing in. And if we can’t get definitive feedback from our networks, we’re not going to proceed. 

It’s necessary for us, and I would recommend that sort of discipline for other investors. So there’s a lot of opportunity and there are a lot of landmines and it’s prudent to again, at least consult with with folks who have been in the space.

[00:30:56] And then we, of course, would love the opportunity to have that covered.

[00:31:02] Brie Aletto: All right. Last question. And I’m going to put you on the spot here because you mentioned, and I’ve loved your insertion of quotes that you’ve brought in. Any last lingering quotes that you live by or that come to mind that you want to leave behind?

[00:31:20] Duncan Mendelsohn: There’s one cannabis-related quote that I do not live by, but really resonated with me when I heard it. The cannabis opportunity, a good way to think about it is value creation upon actualization of regulatory catalysts. So a little bit of a dense quote, but it’s this opportunity either real estate or cannabis directly to gain value, gain direct investment return from likely or anticipated regulatory change.

[00:32:01] And again, how we recommend our operators work, and honestly, they all do this without us having to say it. Have a strong going concern business without regulatory change, without rescheduling, which we didn’t even talk about, but rescheduling would lead to significant positive tax impacts for every single licensed cannabis operator in the country.

[00:32:30] All these operators, the operators that we work with, have a strong business model, a durable business model without that regulatory change, but will have significant value creation after that. Similarly with individual states, especially states that are converting from medical to recreational.

[00:32:49] Brie Aletto: So interesting. I appreciate you so much for being here. I’m sure you’re going to pique some interest. Thank you again for being here.

[00:32:56] Duncan Mendelsohn: Thank you. It’s been so fun, been a pleasure. I love the Colorado connection. And let’s do it again sometime.