Cannabis Real Estate Evolution: What you need to consider

By Jacques Santucci

The cannabis industry is evolving rapidly and so is your view of the real-estate market

From coast to coast, America’s real estate markets are facing considerable shifts due to the advent of the legal cannabis industry, prompting once derelict store fronts and industrial warehouses to skyrocket in price, with competition for precious land and buildings zoned for cannabis uses set to increase significantly on the horizon. In San Francisco, already notorious for real estate prices in the stratosphere, it is not unheard of for land that once sold for $50,000 an acre now going for upwards of $300,000. In Santa Ana, CA, one cannabis business owner reports paying over double fair market value for buildings that can house cannabis related uses, a phenomenon familiar to cannabis real estate seekers nationwide. Colorado, a leader in the industry also reports skyrocketing values, with industrial now running at over $9 a square foot, over 30% over the national average.

This isn’t only a West Coast phenomenon though. In Maine, where industrial and to some extent commercial real estate once proved the hardest sell (even in the most favorable of markets), the market is now being led by value increases in these spaces prompted by the arrival of the legal cannabis industry. Industrial vacancies now sit at about 1%, down from over 7% just five years ago. This comes as municipalities, once often weary of businesses that might disrupt the calm tenor of small-town life, have come to realize the economic benefits of welcoming the legal cannabis industry by amending zoning laws to allow for these uses. And other states in New England, like Massachusetts, are seeing the same trend. Landlords are advertising their sites in any way possible in hopes to find the perfect lucrative tenant.

On the macro scale, this has translated into massive deals that are altering the game in all pockets of this hot market. Pelorus Equity Group recently announced a successful $25 million funding round to finance their cannabis real estate ambitions. In New York, Kalyx Development also closed a $25 million round of funding, with intentions to invest in cultivation properties in Colorado, Washington and Oregon. With all of this money flowing around, we wanted to provide insight into what cannabis industry professionals should keep in mind as they acquire and develop buildings and parcels in the tightest of markets.

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• Location: Location has always been the primary consideration when looking at real estate, that’s no doubt why it’s at the top of our list, but when it comes to cannabis, the due diligence on location needs even more focus than a typical real estate transaction. Make sure to refine your list to municipalities where zoning laws and community leaders strongly support the development of cannabis businesses. Just because a municipality has decided that they will allow cannabis uses in certain zones, does not mean the town or city is an automatic lock in supporting an influx of cannabis related development.

Beyond just the legal and cultural ramifications of location are the harder to measure business externalities. While most retail developers have long track records and finely tuned skill sets to determine what traffic and positioning advantages favor a certain site, many cannabis businesses are going in with limited experience in this crucial component of successful commercial real estate investments. Do your homework and consult with professionals.

• Legal: When it comes to the question of renting or buying, legal considerations should be front of mind. Recognize that leasing any property for a cannabis related use can be even more unstable than a typical commercial lease. Strongly consider that buying a property gives you far less concern and far more freedom when it comes to the future of your business. Now that some local banks are becoming more open to the industry, buying real estate is feasible. I know it is a difficult tasks and that only a few banks will allow it but they do exist despite what you can hear.

If you do choose to buy, setting the legal groundwork for your cannabis real estate investment is critical to reduce risk and liability, as well as realize potential tax savings. Many articles in www.CannabisBusinessExecutive.com highlight the importance of maintaining a legal entity (LLC) for the ownership of the property that is separate from that of the business. Not only does this inoculate your real estate investment from potential changes to cannabis laws, it also allows you to realize tax benefits from profits or losses in your real estate separate from the complicated laws governing your business.

On the other hand, if you do choose to lease be aware of ways to structure the lease to ensure maximum flexibility in the event of an unforeseen business change. Early termination clauses (ETCs) can be an important factor in a lease that allow you to exit early if needed. While these might be a harder sell for a landlord in a tight market with lots of competition for space, it can be essential if you find out down the road that laws changed and you can’t be located in a certain place, or you grow beyond the footprint of a space.

• Construction: Make sure to keep in mind that construction is already an arduous and frustrating process, before you even introduce the cannabis factor into a real estate development project. From zoning and permitting, to the actual construction or rehabilitation and all the inspections and meetings with officials in between, you must be prepared for a lengthy timeline. Often, cannabis real estate developments are happening in places with little experience in applying newly passed zoning laws. So unlike a traditional real estate purchase, both the town officials and the business owners will face steep learning curves in applying new zoning laws to complex projects.

As we know time is money. Therefore, it is also important to include a healthy contingency in your real estate budget. There are too many externalities that can affect the delivery date of your opening in a new industry like cannabis. Plan accordingly and account for the potential of a development process than can often take over a year.

• Operations: Local ordinances are not strictly concerned with simple zoning measures. Often, where you choose to buy can have a noticeable impact on your ability to operate. For instance, some municipalities stipulate that a certain percentage of your employees must live in the city or town where you operate. While this can be easily solved with enough foresight, it can become an insurmountable headache if you decide to place your business in a small town with one of these ordinances that doesn’t have housing for employees you intend to hire or doesn’t have the labor pool skill sets within city limits that you need to successfully operate your business.

Other ordinances to keep in mind when acquiring real estate for cannabis purposes can be even more detrimental to your bottom line. Specifically, taxes charged by municipalities can differ significantly from town to town, even among towns in the same states. If one municipality has a 10% sales tax, a neighboring one might have one that is either dramatically lower or higher. You can experience severe miscalculations in your pro forma if you don’t account for where you locate your business.

Also keep in mind what you want your distribution network to look like when you’re up and running. While a cultivation facility in a remote place with cheap land or industrial real estate might seem like the cost-conscious move at the start, consider distances between cultivation facilities and retail stores and the higher costs associated with longer distances. Often it can be worth the upfront investment in a more convenient cultivation space if it significantly reduces distribution costs in the long run. And don’t forget that the cost of real estate has an impact on your cost of doing business and on your margin. Knowing all the factors that impact your margins and being able to control your cost of goods is the key to your success.

Real-estate selection, appropriate planning and budgeting can be the factor that will make the difference in your successful cannabis operation. The cannabis industry is evolving rapidly and so should the real-estate management of your company.