Marijuana, Money, And Real Estate

Hi readers, Mo here 👋

This article was inspired from a conversation I had with a friend who dealt with cannabis investments. The thesis of the conversation was the owners of the real estate leased to a cannabis company were the real winners.

Let’s explain why.

Cannabis Legality

Cannabis, marijuana, weed, or “grass” (whatever you want to call it) is medicinally legal in 38 states and recreationally legal in 24 states in the United States. It’s still known as a schedule 1 drug under the Controlled Substance Act from the DEA.

Since it’s known as a schedule 1 drug, there are many laws in place designed that prohibit cannabis from being sold recreationally on a federal level – this hampers abilities to own and operate real estate leased out to a cannabis facility.

Allegedly, there is talk of moving it from a schedule 1 to schedule 3. This would impact how marijuana is taxed – meaning the US government would be allowed to take a cut from a marijuana business. Currently, as a schedule 1 or schedule 2 drug, the US Govt is not allowed to tax take revenue from anyone associated with production or distribution of drugs.

Insurance & Financing

Insurance

Since marijuana remains federally illegal, many major insurance companies are hesitant to provide property, liability and crop coverages to cannabis businesses.

This makes it difficult to get proper insurance protection.

Some specialized insurance providers offer cannabis insurance policies, but options are limited and premiums are often extremely high due to the perceived risks.

Lack of insurance can make it harder to get financing and expose businesses to catastrophic losses from fire, theft, crop failures or liability claims.

Financing Obstacles

Traditional banks and lenders avoid the cannabis industry completely since they could be accused of laundering federally illegal proceeds or aiding criminal enterprises. This cuts off a major source of real estate financing.

Some private equity firms and non-bank lenders are willing to provide financing for cannabis real estate, but at substantially higher interest rates and down payments than traditional commercial mortgages.

Limited options drive up costs of acquiring, developing or refinancing properties for cannabis businesses.

The federal illegality also means cannabis companies lease or own their real estate at risk of asset seizure or forfeiture under certain circumstances related to drug laws.

Sale-leaseback transactions have emerged where cannabis firms sell their properties to investors who then lease it back to them in order to unlock capital. A sale-leaseback helps operators own their real estate while separating liability between the cannabis operating company & the real estate holding company.

Zoning, Space Needs, and Infrastructure

Zoning

Cannabis dispensaries (retail locations where marijuana is sold) prioritize visible retail locations with easy access and ample parking in high-traffic areas. Ideal properties are endcaps or standalone buildings on major roads.

Most range from 3,000-8,000 square feet, though some exceed 15,000 square feet. Layouts need sufficient space for product displays, checkout areas, waiting rooms and consumer education spaces.

Cannabis cultivation facilities often require large footprints, typically 20,000 square feet or more, to accommodate functions like growing, processing, trimming, curing, packaging and storage. These facilities need:

• Ample power sources for lighting and HVAC systems

• Proper climate control and air filtration

• Extensive plumbing for irrigation and dehumidification

• Customized spaces like vegetation and flowering rooms

• Security systems to protect crops and products

• Loading docks for shipping and distribution

As a result, cultivation operations frequently retrofit older industrial/manufacturing buildings, though some opt for new ground-up construction as well. Siting these large energy-intensive facilities near affordable power sources is advantageous.

Space Needs

Local municipalities carefully control where cannabis manufacturing businesses and dispensaries can legally operate through zoning laws and ordinances.

Common zoning rules include:

• Prohibiting cannabis facilities within certain distances from schools, daycares, parks and other sensitive use areas

• Restricting them to industrial, manufacturing or agricultural zones

• Density controls on how many can operate in an area

• Buffer requirements between cannabis sites and residential areas

Properly zoned spaces that meet all regulations are in limited supply, driving up costs. It is also very costly to build the facilities in attractive areas.

Sometimes dispensaries and cultivation (grow houses) are combined into one building.

Upscale buildouts creating an appealing retail environment are common. Strict security systems like cameras, vaults and secure entrances are also required due to the cash-intensive and regulated nature of the business.

Infrastructure

Since a cannabis company has to physically grow and sell the marijuana (assuming an indoor operation), they have to put into place many systems to prevent destruction.

Some examples are:

• Security plans, tracked inventory, age verification systems

• Air filtration/odor control methods

• Waste disposal and environmental plans

• Testing, packaging and labeling requirements

• Safes for safe cash management.

Staying compliant is critical, as licenses can be revoked and properties become non-compliant assets if regulations are violated.

Premium Rents for Dispensary

Locations Due to the limited supply of properly zoned retail spaces and the lucrative nature of the cannabis dispensary business, landlords can charge premium rental rates well above average retail rents in their markets.

Typical asking rents for dispensary properties can range from $30-$60 per square foot triple-net in many major U.S. markets. But prime locations in high-demand areas have seen rates surpass $100 per square foot.

For example, a 5,000 square foot dispensary in Los Angeles could face rents of $300,000 or more per year. In Boston, some dispensaries pay over $75 per square foot annually. (Once again, it is all market dependent).

Landlords can also command highest-and-best rental rates due to intense competition for a limited number of viable dispensary locations. Well-capitalized multi-state operators are often willing to pay top dollar to lock in coveted spaces.

In addition to base rental rates, many dispensary tenants also pay percentage rent provisions, giving landlords a cut of their sales volumes. Percentages can range from 5-10% of gross sales.

Conclusion

Owning a piece of property leased to marijuana companies are quite challenging.

Securing properly zoned industrial spaces for cultivation and viable retail locations for dispensaries is extremely difficult, resulting in high real estate costs and risks. However, those able to obtain and maintain the right real estate hold a major competitive advantage in this dynamic industry.

For both operators and investors, specialized knowledge and guidance from experts is crucial for navigating cannabis real estate. Further legalization could dramatically increase opportunities if regulations ease.

I hope you enjoyed this newsletter. Share this email with anyone you think might find it useful. If you want to discuss real estate further, email me for more!

-Mo