The Highs and Lows of Managing Cannabis Real Estate

BY PATRICIA KIRK

Pardon the pun, but pot is a growing business. Legalization of cannabis continues to spread across the United States. In fact, at last count, 11 states plus the District of Columbia have legalized marijuana for adult recreational use, and another 22 states have sanctioned medical marijuana. As a result, cannabis sales are projected to grow from $10.8 billion in 2019 to about $100 billion over the next five years, according to the National Institute for Cannabis Investors.

That’s good news for commercial real estate. In those states that have legalized cannabis, demand for warehouse space jumped 42 percent over the last three years and demand for storefronts and land increased 27 percent and 21 percent respectively, according to a National Association of Realtors (NAR) report.

BUMMER

But, NAR notes that industrial building owners in 32 percent of these states have created lease addendums that exclude growers. Interestingly, they commonly cite concerns about smell, theft, moisture and fire hazards, rather than cannabis’ illegal status as a Schedule I drug under federal law.

Without a doubt, says Tracie Hager, vice president of Asset Management for Innovative Industrial Properties, cannabis tenants present unique issues, and understanding the business risks is a complex endeavor. (Innovative Industrial Properties owns and manages cannabis-related assets in 15 states across the United States.)

KNOW YOUR TENANTS

When entering the cannabis real estate market, Hager suggests building owners and property managers learn as much as possible about the industry. This includes regulations and guidelines in the states and the local jurisdictions where their properties are located, as well as specifics of the prospective tenants’ operations. Getting to know tenants and develop a working relationship with each are critical, she notes. Owners and managers also need to understand the processes and how the space can be adapted to best fit tenant needs.

It’s important to understand and avoid the misconceptions surrounding this budding market. Prime among these, according to Hager, is that licensed cannabis businesses lack basic banking services. In fact, many financial institutions now provide banking services to the industry in a federally compliant way. While federal law continues to limit the number of banks servicing cannabis businesses, financial services company The Motley Fool reports that 723 financial institutions nationally now do. These include Bank of America, Wells Fargo, JPMorgan Chase and Citigroup.

Cannabis regulations vary by state and local government jurisdiction, which further complicates the leasing process, especially when interstate operations are involved. Hager stresses that property managers typically are responsible for ensuring that cannabis tenants have the proper licenses and local regulatory approvals and keeping them in good standing.

“All of our tenants must operate with a valid state license and comply with all state and local requirements,” Hager says. “We monitor them to confirm their continued good standing, and we request quarterly updates on compliance.”

Another misconception comes in service providers lumping cannabis real estate firms together with cannabis businesses. “Even after explaining that we’re a real estate firm and don’t deal directly with cannabis production or sales, there are some vendors that I have long-standing relationships with that will not provide services to our properties,” she explains.

PREMIUMS FOR POT

High demand for industrial space has created a shortage of warehouse space in general. But, the federal stance that places marijuana on par with heroin has made space available for licensed cannabis operations even scarcer still. As a result, cannabis entrepreneurs are willing to pay a significant rent premium to secure space to grow, process and sell their products. There are reports of these tenants paying as much as nearly three times the asking rate to willing building owners.

Older, obsolete warehouses are being renovated for cannabis operations, as low ceilings are actually preferable for cannabis production. Andy Poticha is a principal at Cannabis Facility Construction, a division of Mosaic Construction focused on renovating real estate facilities for cannabis operators; he offers some practical advice for building owners and managers considering marijuana tenants:

  • Don’t rush pre-construction planning. Poticha explains that building owners must take time to confirm that all regulations are addressed, from cannabis-specific rules to the location’s unique building codes. “They need to understand all city, county and state regulations before construction begins,” he says. Consider such issues as “ingress and egress requirements to get both products and customers in and out of the building.”
  • When planning renovations, prioritize security. Poticha says that building owners should understand local community and law enforcement expectations for securing cannabis facilities above and beyond what is required by state or local laws. This ensures that design and construction will be approved for operational use.
  • Build for flexibility. Facilities designed to meet medical marijuana regulations will require significant renovation to comply with regulations for adult-use recreational cannabis growth, processing or sales, Poticha notes. Planning for this transition from the start will save time and money down the road.
  • Build for efficiencies. Besides state and local regulations and building codes, Poticha recommends that cannabis companies look to successful practices of manufacturers and other industries, like e-commerce distribution centers, for strategies to create efficiencies.

Cannabis growth and distribution can only increase from this point, as the statistics indicate. Building owners and property managers who want to tap into this exploding market are wise to heed the advice of veterans like Hager and Poticha to deliver the best service in this new-age field and ensure long-standing tenant satisfaction.

ABOUT THE AUTHOR: Patricia Kirk is a freelance journalist whose work has appeared in National Real Estate Investor, Urban Land Magazine and Bisnow.

This article was originally published in the March/April 2020 issue of BOMA Magazine.

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