Real Estate - The New Cannabis Investment?
A large portion of the decision to operate a cannabis business revolves around the location of the business. Real estate is an essential piece and is tough to navigate. In fact, the second step in Licensing Qualification requires information that is specific to the physical location of the business. Additionally, a license cannot be issued unless the municipality in which the licensee is intending to operate has enacted an ordinance authorizing marihuana facilities. That statement alone is sometimes confusing as it can be difficult to find out if a municipality has opted in. If you would like help navigating the licensing process including obtaining real estate, we might know someone who can help. Hint...It is the staff at Sparrow Consulting.
How big is the business of cannabis real estate? Because of the status of cannabis in the US, we look to Jones Lang LaSalle Canada, a brokerage firm in Canada, for information. They have recently said that the amount of cannabis real estate in Canada by 2020 will be about the size of Amazon’s Seattle headquarters or roughly 8 million sqft. of cannabis canopy. To give a size comparison, that is approximately 139 football fields, or consider that 8,000,000 sq. feet of office space fills almost three Empire State Buildings. If made legal in the United States, I would expect that amount would be greater.
The business of real estate in the marijuana industry is a way current marijuana businesses can increase revenue and reinvest fund that banks will not touch. Some marijuana businesses are expanding beyond the idea of growing and selling marijuana to leasing land and agricultural resources to other cannabis growers. The reason this is extremely profitable is that there are few available industrial spaces for cannabis use so scarcity has allowed the rent to increase dramatically.
Additionally, few businesses have the resources to be able to start up their own business and purchase the land at the same time. Again, banks are unwilling to take a risk and lend money to these businesses to help them purchase land as marijuana is still federally illegal. The business owner then needs to rely on renting the space. Land and industrial space owners are aware of this dilemma and make the most of it by charging high rents.
The banking industry, as I mentioned above, makes it difficult to reinvest profits made from cannabis. Real estate becomes an alternative in another way, as companies that are profitable turn those profits around and invest in the infrastructure of their own cannabis business. By investing this cash back into real estate companies can avoid using a bank for their investments. If cannabis business also owns the property, they are more apt to make improvements to the property thereby increasing the value of the property.
One challenge property owners are facing is that because growing marijuana is illegal, there is still that chance that assets will be seized. If you are only property owner and not the business owner, you could have some protections in that you are not the one who is technically violating the law, and therefore your property may be safe. That being said, the government does not need to prove the owner committed a crime, they just need to show the connection between the property and the crime.
What are some other drawbacks to owning property in the marijuana industry? As an investor, you have to be sure that your tenant is able to pay the rent associated with the property. You have to ensure that your tenant knows how to grow and manage a business so that they can pay the higher fees associated with marijuana based real estate. Another hurdle if you would like to invest in real estate is that the market has become competitive, driving up prices to where a casual grower may not be able to afford to rent or buy space to be able to begin their business, or a casual investor may not have the funds available to be able to invest. That leaves many people out and leaves the door open for out of state investment companies.
Where are these investors searching for cannabis real estate? It is not the western states which have already legalized marijuana for recreational use, but rather they look at the states which are on the cusp of legalizing marijuana. These states most notably include Michigan and New Jersey. The one gamble with jumping in too quickly for investors is that the laws have not yet changed, and there is still a chance that legalization will not happen. The investors are closely watching these markets to see how they are polling and the final outcome to be able to take advantage of a buy low and sell high strategy.
What does that mean for local buyers? It means that real estate will be more expensive, be tougher to come by and you will likely need some help navigating the market. If you have questions, need a second opinion, or are looking for someone you can trust give our team a call.