Commercial landlords soften stance on renting to cannabis businesses

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Image of commercial real estate under construction with sign advertising for new retail space.

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Cannabis companies that once struggled to find space to conduct cultivation, manufacturing and retail operations are benefiting from a tumultuous commercial real estate market that’s prompting landlords to reconsider leasing to marijuana-related businesses.

High interest rates, loans coming due and a glut of commercial space in the aftermath of the COVID-19 pandemic have made finding tenants for commercial properties challenging.

An estimated $1.6 trillion in property financing is expected to mature over the next two years, according to Washington, D.C.-based CoStar Group, a commercial real estate information and analytics firm.

At the end of the first quarter of 2024, $35 billion in loans were past due or in nonaccrual status, the highest figure in 11 years, according to the Federal Deposit Insurance Corp.

“People are starting to scramble to find tenants to make their payments,” said Ryan George, CEO of 420 Properties, a Sacramento, California-based marijuana and hemp real estate marketplace.

MSOs lease mainstream real estate

Christian Tremblay, a vice president in the Chicago office of Northmarq, a real estate finance, investment and loan-servicing company, said he’s noticed a big shift over the past three years as traditional retail developers shift their attention from tenants such as quick-service restaurants to marijuana stores operated by publicly traded cannabis multistate operators, which are willing to pay higher rents.

“If you’re investing in the larger MSOs, you can see all the financials online and get a sense of AUMs (assets under management),” Tremblay said.

One of the biggest changes, he said, is that cannabis companies can lease more traditional retail locations such as an outer parcel at a Walmart or an addition to a mainstream shopping center.

“Before three or four years ago, they were on secondary roads or in industrial corridors,” Tremblay said of marijuana retailers.

“More deals are starting to fall in line with other retailers; the inherent risk is less than it was a few years ago.”

Real estate risk averted

In the past, commercial landlords worried they would be subject to civil forfeiture laws if they leased property to cannabis businesses.

Civil forfeiture laws allow authorities to seize property – cash, cars, houses and other assets – suspected of being connected to criminal activity.

However, George said assets were seized only if the tenant was breaking the law and the landlord knew it was happening.

“A lot of the main objections to cannabis operators have proven to be unfounded at this point,” he said.

Banks also have eased restrictions on cannabis tenants as long as they’re in compliance with state regulations.

Meilad Rafiei, CEO of California-based Cannabis Real Estate Consultants, said when his firm contacts landlords on behalf of its clients, the conversations are easier than they were four years ago – although many still need to be educated about the industry.

“There’s just a lot of folks who have no clue what’s happening – in their head, it’s still ‘Reefer Madness,’” Rafiei said.

“They don’t want it tied to their name because they view it as providing a sinful product to society.

“But even if they put up a stiff wall the first few times, they ask questions and get more comfortable.”

Cannabis real estate

In mature markets such as California, some landlords have been dealing with cannabis businesses for decades.

“Some were in the illicit market, and the landlords got burned and said, ‘No more cannabis,’” Rafiei told MJBizDaily.

Rafiei said he’s been able to negotiate better rates for his cannabis clients by illustrating the math to landlords.

“You tell them, ‘This is now the industry is doing, this is how your tenant did when you charged this amount of rent, and this is what you can charge,’” he said.

“It’s a matter of mathematics: Present them with that math and precedents that have been set about how the cannabis company will fail if rents are too high.”

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Impact of rescheduling

Moving marijuana from Schedule 1 – the federal government’s list of the most dangerous drugs – to Schedule 3 would lower cannabis operators’ tax liabilities and open the door for more lenders to enter the space, Northmarq’s Tremblay said.

If investors can get more traditional lending terms, more buyers will consider cannabis properties because of attractive lease structures and higher cap rates.

“Balance sheets will look better and show positive net incomes,” Tremblay said.

“It’s not going to happen overnight; you still need 12 to 18 months of data to show a change.”

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.