The real estate market for legal cannabis has always been a complicated world. Conditional use permits are subject to municipal zoning laws which, for a long time, had had little or no direction from the state governments. Even now as more and more states are voting for the adoption of medical and recreational legalization, the federal government and the unknown stance of President Elect Trump’s cabinet has thrown another layer of confusion into this already confounding situation.
Here in California, we now have state guidelines set up for the permitting process, but it is still up to local governments to define the details that best fit with their zoning laws, master plans, and political affiliations. Cities like Adelanto, Desert Hot Springs and Oakland have all openly agreed to accept permits and have subsequently seen a spike in industrial real estate. Now, other cities are following suit by opening up their doors to this new industry.
As the local lawmakers are becoming more agreeable and transparent to cannabis operations major hurdles still exist due to the possibility of a less-than agreeable federal stance on the issue. The major influencer on the federal level will be whoever is appointed attorney general. Since the federal government views cannabis as a class one narcotic (a distinction shared with meth and heroin) the DEA has the legal right to enforce its ban even in states where it has been legalized. The last two A.G.’s under the Obama administration have stated that they would not use federal enforcement agencies to supersede states rights.
The current nominee for attorney general under President Elect Trump is Jeff Sessions, a Republican senator from Alabama. He grilled Loretta Lynch on her stance on legalizing cannabis during her confirmation hearing for attorney general. His firm stance against marijuana has given many in the industry reason for concern.
Although a disagreeable attorney general could slow down the movement, most people I talk to think that the economic critical mass that has already been achieved would make the legalization efforts next to impossible to overturn completely. Taxes from the sales of cannabis in legal states like Colorado and Washington have already surpassed estimates winning over many fiscal conservatives and providing an undeniable use case for decriminalization and regulation.
Fear of prosecution has only been a part of the problem for cannabis operators. Even in states where it is legal, the marijuana industry does not have access to banking or lending because those functions are regulated by federal agencies like the FTC and the SEC. Both of these limitations have far reaching effects on the real estate that has become so important to the permitting process.
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Many legal cannabis companies are hugely profitable. Story after story comes out in the news about “cannapreuers” that are getting rich off the the “green rush”. What these stories often fail to mention is that these riches come in the form of cash. Not being able to deposit profit in a financial institution and not being able to pay federal taxes on these profits has tied the hands of many marijuana business owners when it comes to raising money for real estate acquisition. Even if they were able to show potential lenders their net worth and profitability, mainstream lenders like banks don’t want the risk due to federal oversight.
This makes the leasing market for legal cannabis quite hot right now. Building owners are asking two to five times the market value for a compliment location. While a lot of these leases are getting signed, there is a conflict of interest for the business. For production and retail alike, there is an enormous amount of buildout that needs to be done. Under a standard triple net lease the lessee has to pay for this construction, even though it would would have no rights to ownership after the lease term is up.
Many companies are looking to the private mortgage lending community (“hard money”) to facilitate acquisitions and refinances of these special use “pariah” properties. Interestingly, even the most open minded, business savvy-private lenders are pausing, choosing to stand on the sideline because of certain, possibly outdated preconceptions of the drug and its role in America.
I recently spoke to one of the few private lenders who understands the space and is comfortable lending on cannabis-use real estate. Michael Waldman is in charge of Investor Relations for Private Client Investments, Inc. and doubles as an underwriter for legal cannabis opportunities at Los Angeles based Debtcraft Equities. Since 2012 Waldman and his partners have funded almost $8mm in marijuana investments, making up a fraction of the capital they have deployed in their more traditional real estate investments. He told me, “We saw an industry very similar to private money lending though with inelastic and untapped growth so we jumped in. For us it was not a moral issue, since we know first hand the enormous medical applications and general medical benefits… more important we knew we could add more value to our investors and our clientele by judiciously and carefully investing in marijuana. At the end of the day, they are who we have a responsibility to represent, not anyone’s personal moral stance.”
When I asked him about the intricacies of lending to this type of business he said, “It is really not that different than any other real estate investments. We look for good partners with quality track records, visions and levels of pure and raw energy that competes with own high standards and work ethics. Beyond that, and since most of the deals have real estate involved, we tap into our vast real estate IQ and resources and help to discover the best way to invest our capital, whether it’s debt or equity. Like VC firms, we see a lot deals each month–a lot of turkeys before getting an eagle…”
As a real estate agent that specializes in cannabis properties I can personally validate this statement. I have seen properties with limited services in the middle of the desert that are offered at $400 per square foot because of the ability to get a marijuana license from an agreeable local government. There is a danger that as more municipalities agree to grant legal cannabis permits the supply constraint will diminish and prices will eventually come down. But, for the time being, companies are eager to pay a price in order to get a legal base of operations for their high margin businesses.
Overall, I think legal cannabis has a bright, high-growth future, as does the real estate that it sits on. With the election behind us we have to look at the possibility of challenges that a Trump administration will create. But, I have faith that the industry will rise to those challenges. We should not forget that cannabis has overcome a strong social stigma that was present even ten years ago. Now, newspapers have entire sections dedicated to it, it is unabashedly talked about in pop culture and has been proven to have many positive medical benefits. We have gotten to a point from which there is not going back. The only question now is which is the proper direction forward.
Franco Faraudo is a licensed real estate agent specializing in leasing, purchase and financing of cannabis real estate. He is also a author, blogger and content strategist. Follow him on twitter @francofaraudo or subscribe to his blog CRE.tech or just send him an email at firstname.lastname@example.org.