The cannabis industry is in a strong growth phase. By 2027, worldwide spending on cannabis is expect to reach $57 billion, with recreational use making up 67% of the market and medical use making up 33%. Marijuana is gaining more acceptance in the mainstream culture and has become legal in a number of American states. As a result, many investors are interested in acquiring their own operations. The industry offers excellent profit potential, but it does present complications, including legal and property issues. Also, increased competition will eventually cause prices to drop, impacting a company’s profit margin. Those interested in cannabis production and sales need to consider all these factors before entering the industry.
One of the oldest industries on Earth – real estate – is about to join forces with one of the newest – the sale of cannabis and hemp-related items. The result is Cannabis Real Estate. Take a closer look at one of the most exciting new sectors for investment in the property market today.
The profile of states that have legalized marijuana and its derivatives is changing rapidly. In 2018, The majority of states fall into one of three categories:
- · Marijuana is legal for recreational and medical use;
- · Marijuana is legal for medical use only;
- · Marijuana possession in small amounts has been decriminalized.
In states like West Virginia and Louisiana, the legalization only covers businesses that sell for cannabis-infused products, such as oils or pills. In other states where it has not be legalized, like Virginia, doctors are permitted to write a recommendation, not a prescription, for cannabis-related treatments. In addition, 15 states are considering legalizing or amending marijuana laws by 2020. All of these changes will open up many unique real estate investments related to commercial interests in the years ahead.
Cannabis-related Property Types and Their Values
While the first type of commercial real estate that comes to mind is customer-facing, either a retail storefront or a medical dispensary, there are many parts of the supply chain that have to come first.
Property types include:
- · Cultivation areas, either on a farm or within a greenhouse
- · Manufacturing plants that turn the raw materials into Cannabidiol (CBD) oil or other compounds
- · Distribution hubs that handle secure storage and manage logistics
- · Delivery companies that assure the right packages are delivered to the right destination within tight windows
- · Testing facilities that assure quality to meet regulations and the guidelines of oversight bodies
- · Micro businesses that sell and support the equipment required to operate the retail and medical locations
- · Offices for online companies such as medical staff that review marijuana prescription cases over the web
The values for these properties can run from the thousands for a pre-built medical dispensary to the multi-millions for shovel-ready development parcels.
Once the establishments are built, real estate investments follow the profile of commercial development for any other industry, such as funding for regular tenant improvements of the property and projects to make the business more energy-efficient.
Cannabis Zoning Requirements
Even though cultural views have shifted about marijuana, the Drug Enforcement Agency (DEA) still classifies it as a Schedule I drug, which impacts where marijuana-related businesses can be located. 32 states and the District of Columbia have established “drug free” zones that extent 1,000 feet in every direction from the property lines of elementary and secondary schools.
Many of those states have expanded these zoning laws to protect public parks, churches, daycare centers, and public housing. Map that out and it becomes clear there’s not a lot of options for where these businesses can be located, except far from the city center. In Missouri and West Virginia, the definition of school includes colleges and universities. In Arkansas, the zones include all of those areas plus public recreation centers, skating rinks, Boys’ and Girls’ Clubs, and substance abuse treatment facilities.
In California, the laws are a bit more relaxed. For example, in Los Angeles “blue zones” indicate where dispensaries are permitted inside areas already zoned for retail and industrial uses. The required set-back area is 800 feet in every direction from schools, public parks, libraries, and drug treatment or rehab centers. In addition, dispensaries must be separated from each other by at least 800 feet.
Similarly, in San Francisco “green zones” indicate where cannabis retail locations are permitted, which must be at least 600 feet in every direction from public or private schools, both elementary and secondary. “Purple zones” grant permits based on a conditional use authorization and “brown zones” allow these businesses to be located there only with a special microbusiness license.
Conditional Use Permits and Licensing
Every state and many municipalities within those states have special laws and procedures covering permits and licenses for specific business types. Entrepreneurs would be wise to invest in a legal/government affairs specialist to do all of the necessary research and meet all of the requirements early in the planning process.
In some states, these laws are streamlined to facilitate rapid expansion and revenue generation. In California, there are three state licensing authorities: the Bureau of Cannabis Control, the Manufactured Cannabis Safety Branch, and CalCannabis Cultivation Licensing. The type of license required (such as cultivator, retailer, testing lab, and so one) determines which agency will issue the license.
In other states like New York, it may already be too late, unless there are more changes to the law. Only Registered Organizations can manufacture and dispense medical marijuana and the New York Department of Health is no longer accepting applications to become a registered organization.
In the next five years, the legal cannabis industry is expected to have a steady compound growth rate of 27 percent. With a current estimated value of nearly $10 billion and rising, it is not surprising that there has been an upsurge in the acquisition of real estate in America for the purpose of legal cannabis business.
What may have caused this recent increase?
It is quite simple: despite the fact that the risks are high, the returns on investment in also really high and this makes investors want to have a part of the industry. In addition, some states now have laws that deem the cannabis business as legal and this has further opened up the market. However, the recent boom in cannabis real estate can be tied to the perspectives and activities of investors.
The current federal legislation concerning cannabis makes it very risky for the traditional modes of investment to thrive, hence the need for alternatives. Investors would more readily put their money into real estate than into the actual production of the product. This is quite logical because real estate is believed to be safer in terms of investment security in cannabis business than other items involved in the production and distribution of cannabis.
In addition, the existence of an expansive network of loyal consumers further contributes to the appeal of the industry. Investors are aware of this and the potential effect it would have on the industry in the nearest future and so they want to tap into it in the safest way possible. You guessed it: real estate.
To provide more fodder for the already burning fire, there have been reports of some private equity fund recording returns on investments of over 50% per annum, thereby prompting more investors to join the feeding frenzy.
The truth about these high returns
The cannabis industry is a very fast-paced one, rife with risks but also with incredible returns which could be as high as 25% for cash on cash annual returns. In other cases, the prices of real estate doubled and even tripled in some cities where the production of cannabis was legalized.
The high returns are real but what about the associated risks?
It is quite easy to get drawn in by the possibilities of immense profit and incredibly impressive returns on investment. However, it is important to note that the cannabis industry is very complex, still evolving and has a lot of factors at play that could determine the direction of the market.
Firstly, the industry is regulated by so many regulations that even a slight change could affect the market outcomes. For instance, if more states and cities legalize the business, then the profits would keep increasing but if the regulations are made stricter, then it might impart the market negatively.
In the same vein, there are a lot of regulatory agencies and the authorities are constantly clamping down on illegal cannabis markets. The current estimated value of the illegal cannabis market is $46 billion (which is one of the reasons investors are so excited) but what happens if these illegal businesses are shut down by the authorities or they overshadow the budding legal businesses? It goes without saying that the small legal businesses will have more room for growth if illegal businesses are shut down.
Furthermore, the price of marijuana would also determine the market outcome. If the prices continue to fall, tenants would be unable to pay rent and the erstwhile high returns real estate may become a liability for a while.
Other factors that may impact the industry includes heavy taxations and overbuilding. These can affect the operations of small legal businesses and also result in oversupply of real estate which would now become a problem due to excess vacancies.
How long will these good times last?
The conditions of the real estate market vary from state to state depending on the phase of the market as well as the location itself. States like Colorado and Washington are currently experiencing an oversupply of real estate due to overbuilding while other places like Nevada actually have a shortage. A typical real estate market goes through four phases: expansion, hyper-supple, recession and recovery. California, with the recent legislation is in the expansion phase where the vacancy rates are low and more buildings are springing up. Colorado, on the other hand has high vacancy rates and is in the hyper-supply phase because construction hasn’t reduced.
With favorable legislations, it is expected that the expansion phase would stretch for a while, maintaining a steady increase in construction and low vacancies. However, it would be difficult to accurately predict when the expansion phase would end because the industry is quite unstable and has too many influencing factors.
It is important to mention that this boom is also expected to have an effect on residential real estate based on the fact that the expansion of the cannabis industry would result in an influx of people into cities where the business is legalized because jobs would be available and this would translate into a demand for residential real estate.
This “cannabis boom” sure holds a lot of promised but for how long?
In recent times, there has been an increase in the acquisition of cannabis-bases businesses. The reason for this activity could be linked to the recent laws passed in some states legalizing the business. This has opened up the market space for retail operations to thrive but to do this, they need a license. Some states have provisions for application for new licenses but in most cases, potential business owners would rather buy out existing businesses and take over their license. Some of these businesses are either failing or their owners simply want to sell.
Whatever the reason, it would seem this is a perfect time in many states to acquire a cannabis-bases-licensed business. This article talks about the process of purchasing a cannabis-bases business on a very high level (no pun intended).
Most of the existing cannabis-bases business deals were carried out by buyers and sellers directly via 420 Property, or through the small community of cannabis-bases business owners. Brokers have been known to put together such deals. However, they charge processing fees and there are many pitfalls that the unwary could fall into. For instance, your broker only earns their commission when there is a successful deal. You are not expected to pay them upfront when signing an agreement or if you do all of the work of making the deal go through by yourself.
It is advisable that you get legal counsel when trying to acquire a cannabis-bases business. There are a lot of complex legal issues in the industry and only a good counsel would be able to ensure that your deal covers all the bases. Here are some things that should be clearly stated in a purchase contract:
- The obligations of all parties
- Due dates of the obligations
- Conditions for the validity or otherwise of the obligations
- Warranties, representations and/or assurances provided by both parties to make the deal go through
If your agreement contains the above items and they are stated in clear terms, then you may proceed to sign. However, if any of the above is missing, you should probably have a rethink.
With respect to business acquisitions, the obligations of the parties involved are quite straightforward: you make payments of the agreed price and the seller hands over the financial details, LLC membership, stock, and so on. The challenge usually arises with the duration and how long it would take both parties to fulfill their obligations. One of the factors that could determine this includes the requirements of the state licensing agency because they have to approve the acquisition, run background checks and so on. Additionally, you would not want to hand over your money until you are sure the business is yours, and the seller would also not want to have to deal with any problems that may arise from you. If this is dragged out for too long, it would affect the time the deal would go through.
It is advisable that rather than wait for one party to finish their own obligations, both parties should do their part simultaneously. Thus, while waiting for the state agency to approve the acquisition, both parties would continue the purchase process. This would ensure that you save some time and all you would be waiting on would be the approval from the state licensing agency.
When stating the conditions that may invalidate the deal, it is important that you include regulatory approval as a condition. Therefore, if the state approval is not granted, then both parties can go their ways as per the agreement.
With respect to warranties, representations and/or assurances provided by both parties to make the deal go through, they must be included in the agreement. Some examples of standard representation include:
- Both parties are certified to sign the agreement
- Both parties are legally recognized by state laws
- There is full disclosure of all lawsuits brought against each party and their potential effect on the deal
- The financial situation of both parties, including their debts, credit, etc. has been fully disclosed
These warranties are essential to assure the buyer that the company is honestly represented and they have the true understanding of the state and strength of the business they are acquiring.
These steps are highly simplified in this article but it is very important that you follow due diligence when acquiring a cannabis-bases business.
Unmarked warehouses are popping up across the country, and many individuals are unaware of what they contain. In the past, these structures may have been home to a granite cutter, a screen printer, machine shop, or an industrial business of another type. However, today, they’re now home to many marijuana operations across the county.
The legalization of marijuana has upset many citizens, as it defies societal norms in the eyes of numerous people. On the other hand, the cannabis industry has become a source of tax revenue that has become extremely lucrative in recent years. But the cannabis industry has gone much further than this–it has significantly altered many real estate markets nationwide.
More than half of the states have now legalized the use of marijuana (medical or recreational), and this number only continues to grow. As a result, a growing number of structures are being repurposed specifically for the cultivation, processing, and sale of this substance. This includes self-storage facilities, factories, warehouses and strip malls in the suburbs.
Landlords are cashing-in as a result of this boom. The industry comes with some risks and landlords and property managers find they’re able to charge a premium for businesses wanting to partake in the cannabis and hemp industry.
What makes this real estate trend so unique is the fact that it is taking place in numerous parts of the country. The marijuana industry is changing the face of the market in diverse parts of the nation, transforming blighted areas into thriving neighborhoods and sending real estate property values skyrocketing. For certain Denver neighborhoods, the warehouse space average asking lease price has increased by greater than 50 percent in a five-year period, and the city is now home to more retail pot stores than Starbucks in a stand-alone building. The ratio is actually five-to-one.
Investors are taking note of this boom in the real estate market as well. Innovative Industrial Properties, Inc. (NYSE:IIPR), a Real Estate Investment Trust (REIT) was set up for the purpose of acquiring and leasing warehouse space to marijuana cultivators and retailers.
One reason for the high demand for real estate devoted to the growth and sale of marijuana is the popularity of this substance—another is the lucrative retunes being made in the industry. In 2016, medical cannabis sales in the United States reached $6.7 billion dollars. ArcView Market Research predicts this figure will top $20 billion by 2021, thus as cannabis sales increase the need for facilities to cultivate and dispense cannabis will follow.
Some experts wonder if a new real estate bubble could be forming. Numerous landlords are converting old warehouses to structures suitable for the cultivation of cannabis at a rapid rate. The strong demand for cannabis properties has created opportunities for startups like 420 Property, which is a Zillow (NASDAQ:Z) like real estate marketplace specifically for cannabis properties, businesses, and professionals.
The experts, however, wonder if medical marijuana cultivators won’t turn to greenhouses to grow their crops, as this is a less expensive way to do so. Furthermore, as more states allow for the sale of cannabis, federal regulations may be loosened with regards to the transportation of this substance across state lines. Another concern is the federal government may find a way to impose regulations on this industry, and this could have a major impact on the industry and marijuana cultivators. However, businesses currently in the industry don’t appear to be worried about what could happen in the future. They are simply taking advantage of the boost in business and filling buildings that once sat empty.
Although Denver is a hot spot for those involved in the cultivation and sale of cannabis, this isn’t the only part of the country benefiting from these products. Investment firms are offering properties in California, Nevada, New York, Oregon, and many other areas. 420 Property has real estate business listings available in all 29 states that allow marijuana.
Before a property is converted, however, risks must be assessed. There is a great deal of capital needed for the tenant improvements needed to convert these buildings, and the cost to run the building once operational is extremely high. For example, powerful 1,000 watt lights are needed to grow marijuana, and this leads to high energy bills and a requirement for an enhanced electrical system. Furthermore, these buildings must be kept humid, which can bring about mold and mildew issues. As more businesses enter the industry prices of cannabis products will inevitability drop due to increased demand and competition, needless to say, diminishing profit margins will be realized by all, and therefore, high rents and property values will be economically unsustainable.
Today, however, business is booming. Certain locations are bringing in tens of thousands of dollars every day with no signs of sales slowing. Investors are taking advantage of this and profiting while they can, as no one can predict what the future will hold. With so much money to be made, it’s no wonder marijuana has attracted the attention of countless individuals looking to make a profit and be a part of history.
The normalization of cannabis as an industry is spreading like wildfire and it is now arguably out of its infancy and starting to bud into adolescents. But those in the Real estate sector remain perplexed with over valuations, demand anomalies, and financing complexities that have been created by the cannabis industry.
Retail marijuana dispensaries and commercial grow operations must meet specific zoning and setback requirements–which are referred to as restrictive zoning requirements. Some cities even have sanctioned “Green Zones.” For example, San Francisco, one of the most affluent cities in the world, home to many of the world’s leading tech companies, has sanctioned “Green Zones.” Cannabis dispensaries are not allowed to operate within 1,000 feet of a public or private elementary or secondary school; or a community facility and/or a recreation center that primarily serves persons under 18 years of age. In a City that is dense and culturally diverse, these zoning requirements leave approximately 462 acres of real estate zoned for cannabis use–when you factor in existing tenants and owner users and existing cannabis dispensaries –not many properties are available for new cannabis businesses. And as basic economic principles dictate–what lacks in supply when in high demand must increase in price… But in one of the most expensive cities in the world, how much higher can real estate get? Well, there is not enough data available (yet) to state a factual number as any such number would be impacted significantly on the demands and ambitions of both the buyer and seller in any given transaction, BUT in some instances, agents in San Francisco have reported as much as a 30% premium for desirable “Green Zone” locations.
Overvaluations are just one difficulty of buying a cannabis real estate– financing is a whole other issue. Because there is no true asset type or risk baselines established for real estate specifically used for cannabis, in conjunction with the fact that institutional financing is not yet available due to the federal legality of cannabis, the only financing available for cannabis-based business is from private investors, or private money lenders, which only lend on the asset. A typical private money loan will not exceed 65% loan-to-value (LTV) of the market value/ appraised value OR the 65% of the cost (LTC) of the property–whichever is less. These loans are short term (3-5 years, with hefty prepayment penalties, fees (between 3-6 points), and interest rates (between 8.99-14.99%). This is where things tend to get more complication–even know the lender is making a loan based on the value of the assets–the borrowers need to provide verification of funds needed for the loan–which can be problematic if you have been denied access to bank accounts like many of those in the cannabis industry. Now, if you are lucky enough to get in contract on a compliant property and get approved for a loan, one last hurdle to overcome– the appraisal of the property. If you are in contract to purchase the property of a reasonable value– you have nothing to worry about, but if not, the appraiser will not take into account of the value of the property for cannabis use. However, if you have the capital and the capacity to pay cash, and don’t mind paying a premium–most of these hurdles can be eliminated. And once you own the property, you can tap into your equity if needed (using private money of course).
The cannabis industry is still maturing and buying real estate for the specific use of cannabis may be difficult–but not impossible. Aligning yourself with the right professionals and capital sources will always be your first step. For a free real estate financing consultation for your cannabis business submit a request for financing on 420Property.com.
An apparent lack of “420 Friendly” Real Estate has been realised nationwide as many legal growers and dispensary owners scramble to locate properties to lease or purchase at affordable prices. Strict zoning requirements have put constraints on the supply of compliant retail, industrial, and land properties for cannabis-based business use, and not all building owners and landlords will accept medical marijuana tenants because of implied risk associated with cannabis-based businesses and moral reasons which make locating a complaint space even more challenging. Many of building owners and landlords who are “420 Friendly” are reaping the benefits of the Green Rush as they are collecting premiums on the property leases and have the upper hand in negotiations when selling a cannabis complaint property. Due to the lack of Federal support, banking and financing solutions are not easily obtainable unless obtained from a non-traditional institution which also has led to the increased difficulty of purchasing properties for many medical and recreational marijuana dispensaries and grower.
Previously undesirable industrial buildings are now a hot commodity in many U.S. States due to the emerging legal cannabis industry. Medical and recreational marijuana operations have fed a growing demand for industrial spaces of roughly 3,000 square feet to 40,000 sq. ft. and underutilised retail spaces are now home to many cannabis dispensaries which have helped fill empty buildings, drive down vacancy rates, and push rents to higher levels.
420Property.com, a “420 Friendly” real estate and professional marketplace launched in March of 2016 to assist in relieving the difficulties many cannabis-based business owners are facing when it comes to locating “420 Friendly” properties. 420Property.com is now the ‘go-to’ real estate resource in the cannabis industry and assist in locating “420 Friendly” properties for sale or lease, existing businesses for sale, business/ franchise opportunities, landlords, real professionals, real estate lawyers, property insurers, financing providers, and investors.
Get started with 420Property.com today.