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.