Cannabis companies seeking real estate face limited choices and premium prices

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pricey and limited marijuana real estate, Cannabis companies seeking real estate face limited choices and premium prices

The popularity of online shopping has made warehouse space for cultivation and manufacturing scarce.

Experienced cannabis entrepreneurs know that ancillary companies such as construction and banking providers often charge marijuana businesses more than their non-plant-touching counterparts—the so-called “green tax.”

The green tax applies to real estate, too. Marijuana businesses regularly pay premiums for properties, whether they are retail storefronts, land or warehouses for cultivation and manufacturing.

“Yes, there is a cannabis premium,” said Berekk Blackwell, the chief operating officer at Scottsdale, Arizona-based Zoned Properties, a cannabis-focused commercial real estate leasing and investment company.

That premium, Blackwell and other cannabis industry observers say, has a few main drivers that most other industries don’t have to contend with—at least not to the same degree as marijuana businesses.

These drivers include:

  • Restrictive land-use and zoning regulations.
  • Holding fees that cannabis business owners pay landlords to keep property vacant until they receive business licenses as well as other contingency fees.
  • Landlords and property sellers who perceive cannabis businesses as cash cows that can afford to pay premiums—especially because of limited availability.
  • Landlords who perceive that renting to cannabis businesses puts their own land deeds, mortgages and bank notes at risk.

“The reasons are a little bit of everything. It really comes down to supply and demand,” said Chris Cox, principal with BeGreenLegal, a cannabis consulting firm in Sacramento, California. “The starting point is, if you’ve ever tried to get a land-use permit for cannabis, you’ll know that it’s pretty difficult compared to just locating any business. There are many requirements starting at the state level.”

The good news is that in more mature markets, real estate prices for cannabis businesses are softening, and there are strategies to minimize premiums in newer, still-evolving markets.

Land-use restrictions raise real estate prices

Among the most common inflators of cannabis real estate prices are zoning regulations and land-use restrictions.

“The first driver is restrictive zoning,” Blackwell said. “Municipalities will typically set up one or two commercial or industrial zones, but they’ll also layer in additional restrictions around setbacks from sensitive uses such as churches, schools, parks. When you layer in those two factors, the supply of available, compliant real estate gets pretty small pretty fast.

“When you have a high-demand area—maybe a metro area or just a desirable place to do business—but there’s only 12 compliant pieces of real estate, and you have many groups chasing those, it’s going to drive the price up.”

Ryan George, CEO of Sacramento-based 420 Property, added: “It’s the principle of supply and demand.”

Fees, financing and fear

A second driver is contingencies related to holding periods, Blackwell said. In many states, regulators require cannabis business license applicants to already have property secured at the time of application. Even when real estate isn’t a requirement, it can make sense to secure property before securing a license if that property or the real estate terms seem like winners.

But if it will take six to nine months for a marijuana company to secure a business license, the landlord will likely require some incentive to take their property off the market and let it sit empty until the license comes through.

Financing, insurance and similar services also are drivers of inflated real estate pricing.

“It’s expensive to hold property for cannabis use. You can’t have just a traditional commercial real estate loan on a cannabis property,” Blackwell said. “You need specific financing that is underwritten for cannabis use, which means your interest rates are going to be higher than market interest rates. Also, insurance costs are higher for cannabis properties.”

Fear of losing a mortgage or property deed can also drive up real estate prices. In other words, a landlord might feel they are taking a risk by allowing a cannabis business to operate on their property, George said.

“The risk is that the bank will call to see what their loan’s doing,” George said. Property owners fear that banks will find out they are leasing to a cannabis business and accuse them of violating the terms of their loan and either evict the tenant or exercise clauses triggering early loan repayments, typically 30-90 days.

“And they usually have to replace or pay off that loan with a much more expensive, hard-money loan or private financing of some sort,” George said.

While factors such as fees and zoning drive up real estate prices for cannabis businesses, so can the perception that marijuana companies have more money to pay premiums.

“Are there areas of the country where property owners take advantage of that story and make up even more inflated premiums? Yes,” Blackwell said. “Landlords have this initial reaction of, ‘Maybe I can bump up my lease rate or ask for something else.’”

Importance of market age

Regional variations can be a factor in real estate prices, specifically the difference between new and mature markets—and variations between urban and rural areas.

When a state legalizes marijuana and creates a new market, prices for real estate to run a cannabis business will go up because of the buzz surrounding the new market—and often because there are a limited number of licenses and properties available, explained Cox of BeGreenLegal.

“The more that it becomes commonplace, the more the price is going to go down,” Cox said. “In California, we are now seeing a bit of a rebalancing, because over the last several years, prices have been typically higher. Now they are falling, because cannabis businesses have either gone out of business or they have never even gotten to the finish line because … they run out of money, run out of interest, whatever the case may be.”

George of 420 Property agrees: “California has had some time to mature, and a lot of businesses are failing because of their cost overruns. And a lot of the cost overruns have to do with legacy leases or legacy real estate purchases that aren’t sustainable. So you’re going to start seeing the premiums declining and stabilizing in mature markets—whereas, in newer markets, there’s still a premium to be asked.”

Cox noted that when states legalize a new marijuana market, cannabis entrepreneurs swarm the area searching for real estate.

“There’s going to be a fever pitch. Everybody’s going to be jumping in,” Cox said. “The better approach is to be thoughtful and methodical: Think about what your end goal is, and then go after what, analytically, is the best possible option. … It’s got to be (based) on analytics; you can’t just make assumptions.”

Cox added that waiting until the frenzy has died down can be a solid choice for business owners who don’t have large reserves of capital to spend on real estate.

“We’ve seen what happened in California, Colorado and Washington (state),” Cox said. “The people that first get into the industry are not necessarily the ones that make the money. It’s not so much about who gets first to market. It’s who gets best to market.”

Population and sector

Urban and rural areas come with their own advantages and disadvantages. For example, cultivators might want to consider locating their operations in rural areas to take less of a hit on real estate premiums.

“If you want to be a cultivator, I would not recommend that you do it in an urban area,” Cox said, adding that cost of permits, licenses, construction, land value and taxes are all going to be more expensive. “You’re growing a commodity that can be transported hundreds of miles without any problem. So, why?”

Marijuana retail operators, meanwhile, have different considerations.

“People are going to pay a particularly high premium to be able to open up, for example, a cannabis store where they have access to a large density of potential consumers … (who) have disposable income for cannabis goods. That’s going to be a very big factor,” George said, adding that the high costs are most evident in new marijuana markets.

Warehouses, too, are especially expensive now, thanks to the growing popularity of online shopping.

“The warehouse market has been a shining star in the commercial side of things. Warehouses have become especially popular because of the growth of online commerce, so cannabis cultivation owners are competing against other business owners who need warehouses to store online goods,” said Matt Christopherson, senior research analyst with the Chicago-headquartered National Association of Realtors.

Avoiding the ‘Green Tax’

There are a few ways to combat the cannabis premium, according to marijuana real estate experts.

One strategy is opening the search to include properties not considered “A-grade,” said Ryan George, CEO of California-based 420 Property. The owners of real estate that needs improvements, for example, might be open to negotiating a reduced price.

“If you are an operator that is well intended, and you have funding behind you, make it seem as if you’re in partnership with the landlord,” George advised. For example, tell the landlord you will invest significant capital into building improvements, but in return, you hope to have a long-term lease at a sustainable price, George said.

Another strategy: Seek out properties that are not yet listed on the market, according to Berekk Blackwell, chief operating officer at Zoned Properties in Arizona.

If a property is listed for sale or lease, the owner likely is looking for a transaction to happen soon and already has a price in mind.

Instead, try finding an “off-market” opportunity in a so-called “green zone,” or area allowed to host cannabis businesses. Visit stores, Blackwell suggested, and talk with business owners about whether they are considering moving or closing their doors in the near future.

“If you start that conversation with a property owner or a tenant … they might be wanting to move anyway. And if you’re trying to negotiate with a property owner … it’s an easier ask,” Blackwell said.

Of course, there are never any guarantees.

“There’s still going to be landlords out there and property owners with grandiose ideas about what their land and buildings are worth,” George said.

– Omar Sacirbey