401(k) Specialist Issue 1 - 2019 - 22

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Despite widespread state legalization, cannabis
is still considered a Schedule 1 drug
under the Controlled Substance Act, putting
it in the most restrictive category under
federal law-and making investors wary of
jumping into the industry.
In early 2018, then-U.S. Attorney General
Jeff Sessions tried to pour more cold water
on the industry by rescinding the Cole
memo, which limited a prosecutor's ability to
enforce criminal marijuana laws in states that
had legalized its usage and in turn, opened
up markets to be governed by state laws.
The hardline that Sessions hoped for has
largely not materialized, and in fact, policymakers
on both sides of the aisle are pushing
for changes that will likely invigorate
the legalization movement even more.
In April, senators received assurance from
President Trump, who appeared to walk
back Sessions' earlier move and instead
allow states to best decide how to approach
cannabis in their locales.
Sessions resigned in November and until
his replacement is named, the cannabis
enforcement environment will likely remain
unchanged.
22
ISSUE 1 2019 | 401kSpecialist.com
Non-traditional asset classes can be the shiny new
toys on the shelf. As a 401(k) advisor, when is it
responsible, and potentially a fiduciary obligation, to
consider them for an investment menu even if they
have a potential taint of controversy-like cannabis
or cryptocurrency?
Let's start with cannabis, which one researcher
says is expected to grow in the U.S. from $8.3
billion to nearly $25 billion in 2025, a compound
annual growth rate (CAGR) of 14.7 percent,
with other reports that its CAGR could be as
high as 26 percent.
For comparison, the U.S. video game industry
is expected to reach $20.3 billion in 2020, which
represents a 3.6 percent CAGR.
Still, the lack of a federal mandate creates
investment uncertainty and advisors are
looking for ways to stay on the right side of
regulations, while also wanting to satisfy their
clients' interest in the fast-growing market.
Getting Around Cannabis
Uncertainty
Richard Acosta may have found a way
to capitalize on the cannabis market, while
minimizing risk and uncertainty. He's CEO of
Inception REIT (I-REIT), which is billed as a
first-of-its-kind platform, focusing exclusively
on providing real estate debt and equity capital
solutions to the rapidly growing U.S. medicinal
and adult-use cannabis industry.
The lack of state and federal continuity
has created an obvious gap in the capital
market for cannabis, according to Acosta,
keeping traditional financing sources away
from the industry.
" At a high level, the I-REIT fills the void
that occurred when banks were unwilling
to work with the cannabis industry after the
Department of Justice issued their statement, "
says Acosta. " We are acting in their role as
lender and landlord by providing loans, as
well as buying real estate and leasing the
buildings back to cannabis operators. "
He notes that there is a " supply and
demand mismatch " for cannabis real estate
capital that has provided his company with
higher-than-expected returns. If traditional
REITs average 4 to 5 dividend rates, he
estimates that I-REIT's returns are double
that average.
I-REIT's approach also provides a layer of
protection if a black swan event occurs, such
as the federal government cracking down
on cannabis. If the drug became illegal
tomorrow, Acosta's group would still have
mortgages and assets and they would just
find new leases.
" We are backstopped by the value of our
real estate, so we would reposition the portfolio
to service non-cannabis clients. "
Though the I-REIT provides some
guardrails to cannabis investing, the fund
still isn't being marketed to advisors directly.
But that could change.
Plan administrators are initially hesitant
about cannabis funds for all the expected
reasons (regulation, valuation), but with
millennials investing in cannabis stocks at an
explosive rate according to the trading app
Robinhood, the hesitancy could give way to
employee demand.
For now, investors can use a self-directed
IRA to move funds from a traditional
IRA and invest in a vehicle like I-REIT.
This could allow them to earn potentially
high single-digit dividends off of retirement
savings and grow it more quickly by investing
in an under-capitalized market-one
that's growing even faster than the DotCom
boom.
Or they can invest in the manufacturers
that supply cannabis grow operations.
Acosta sees these as good options for individuals
who don't have large cash savings,
especially millennials and xennials, to invest
with a portion of their long-term IRA
funds and potentially receive higher yields
on those funds. It's also another way to diversify
a portfolio with a more recession-resistant
investment.
As cannabis lights up the investing space,
Acosta thinks interest will increase, as well.
" No question, I think people are starting
to get religion around the exuberance in
the cannabis space. "
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401(k) Specialist Issue 1 - 2019

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