News hit the virtual wires on Wednesday that Subversive Capital’s real estate SPAC is going to acquire a portfolio of cannabis properties and mortgages, allowing it to de-SPAC and convert from a blank check company into a public real estate investment trust (essentially, a tax-advantaged real estate holding company). (link) In order to fund the acquisition, per the press release, the SPAC has arranged an underwritten (explained here) debt financing from a group of investors - $40mm of four-year, 6% convertible (into equity) debentures (a fancy word for loan) with a $25mm greenshoe (basically, an option to issue more loans within 30 days of closing), three year non-call (a period in which the loans can’t be paid off early by the company), and original issue discount (explained here, if you really want to know).

In SPAC deals, both cannabis and otherwise, the sponsor group that forms the SPAC usually retains a portion of the SPAC’s stock (generally, 20%, similar to a private equity fund) as incentive for getting the deal done. (link) According to the press release, it looks like the debenture investors negotiated with Subversive to give up some of that incentive (upside) in order to get the deal done – “[i]n connection with the Private Placement” (meaning the debenture issuance), the sponsor has agreed to relinquish a portion of the equity, a limitation on distributions from the post-closing REIT, and potentially relinquishing additional equity if the REIT doesn’t achieve return thresholds over time (typically, this is an internal rate of return calculation to determine the profitability of an investment, based on price gains and distributions and adjusted for time (net present value)), similar to an acquisition earnout (which I discussed here).

Assuming I’m correct (this is all based on my read of the press release, not on actual knowledge), what does this mean? To me, this shows the current market dynamic – lenders have negotiating leverage because there’s a lot of demand for their money right now; SPAC generally need that debt financing (particularly in real estate) to make the deal pencil out; and there are a number of SPACs looking for deals, so sponsors have to be competitive (although there aren’t as many cannabis real estate-focused SPACs). It will be interesting to watch how this dynamic unfolds as markets continue to evolve and SPAC lifespans shorten.