When the Smoke Settles: Cannabis Property and Sale Issues Explained

When the Smoke Settles: Cannabis Property and Sale Issues Explained

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.

Real Estate Prices

Warehouse prices and rents are rising at a rapid rate, and experts say marijuana investors are the driving force behind the increase. Marijuana farmers are willing to pay more to get the facilities they need and are paying higher than the average warehouse leases in their area of operation. Those who already own warehouses are in great shape due to this trend, but those looking to buy or lease will pay more this year than last and more next year than this year. For instance, the prices of small and medium sized warehouses in the Sacramento area have been rising around 30% to 40% each year. Since most marijuana producers prefer to grow their product in warehouses, these prices are a significant factor in an investor’s decision to enter the industry. They must assume that property prices and rents will continue to rise at a fast rate.
Cannabis retailers are making excellent profits from their shops, which has benefited property owners. In Seattle, which has an established marijuana industry, the average sales per square foot reached $1,513 compared to the US retailer average of $325. Cannabis is still a hot commodity.

Zoning Issues

Any potential investor must thoroughly research zoning ordinances in their desired area or operation. Getting a state license for production and sales is difficult enough, but once that hurdle is jumped, local towns and cities can raise other issues. Zoning ordinances in many areas have not caught up to the industry and do not specifically mention cannabis. As a result, some companies have established their operations within the city limits of a certain town and later been told they were violating local zoning laws, often after citizen complaints.
Some municipalities ban all cannabis business in their boundaries, while others will allow medical marijuana and not recreational marijuana. Some cities will require special permits for cannabis companies, adding substantially to operating expenses. All of these issues need to be completely resolved early in the process of establishing a company. Too many of these businesses have been derailed after they already began operation.
The issue is complicated by state and federal law. Some states have made recreational and medical marijuana legal. Others only allow medical marijuana, while some forbid any and all sales of cannabis. Also, federal law still makes it illegal to produce, sell and use cannabis, although the government is not currently enforcing these statutes in states that have legalized it. Still, this legal confusion makes some places reluctant to allow any cannabis company inside their city limits.

Price Pressure

Currently, marijuana prices are still relatively high, which makes production and sales profitable. As always, increased competition will lower these prices, so those entering the industry need to factor in that element. In Colorado, cannabis has been legal since 2014, so competition is greater than in most other states. In the summer of 2018, the price had dropped more than $400 since January 1, meaning marijuana was below $1000 per pound for the first time. The average price was $846 in June. At the beginning of 2015, that price was $2007 per pound. Colorado monitors cannabis production to prevent oversupply, but the price is still on a significant downward trend.
Supply and demand largely determines the price, so trying to establish a cannabis business in a state with an already thriving market is risky. States where the industry is relatively new should keep prices higher, at least for a while. Investors must do market research and factor in an inevitable price decline before setting up shop.
In Colorado and California, the cannabis industry smoke has already cleared somewhat. Businesses are well-established and community norms are set. Competition for warehouses has driven up their prices and their monthly rent. The price pressure on cannabis, or price drops due to increased market competition, also has the potential to affect real estate prices. While the industry is still highly profitable, it is not a get-rich-quick scheme.
Other states are newer to the process, which means they may offer a more profitable market. Investors will face less competition and be able to sell their cannabis for higher prices. Of course, these areas also pose more complications for investors, particular in the area of zoning.
As with any business endeavor, research is key to the success of a cannabis company. Investors must know their market as well as state law and local ordinances. All start-up businesses are somewhat risky, but the marijuana industry still promises significant financial rewards.
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September 30, 2018Comments Off

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