By Bryan McLaren, Zoned Properties
With the shift towards medical and adult-use cannabis legalization, more than half of the U.S. population now has access to some form of cannabis across 37 states. Eighteen of those are adult-use markets that allow marijuana sales for individuals over age 21.
The potential of this growing cannabis economy is tangible, with legal cannabis sales increasing 46 percent from 2019 to reach $17.5 billion in 2020. According to MJBizDaily, the economic impact of the marijuana industry in the U.S. is forecast at $92 billion in 2021. These numbers will only propagate now that two of the largest markets in the east have legalized marijuana. New York and New Jersey are both expected to generate multi-billion-dollar sales revenues in a span of a few short years after implementing their programs.
Previously an untapped market for the commercial real estate industry, investors are now acknowledging that the benefits might well outweigh the risks as more states continue to legalize. In 2022, it is expected that more mainstream commercial real estate professionals will enter the cannabis industry, but they will face a steep learning curve. Understanding the compliance and zoning nuances involved with a cannabis transaction as well as the important referrals needed to complete a deal and mitigate risk will ultimately determine their longevity and success in the space.
Identifying risks for your client
The emerging cannabis industry will attract millions of hopeful entrepreneurs, but only a few will succeed long-term. The common denominator to securing a space in the industry is having the right team or brain trust in place. In cannabis real estate, there are common pitfalls that can be avoided to ensure projects stay on track and are in line with local municipality rules and compliance regulations.
Since every state cannabis market has its own unique program, there is no “one” road map to navigating a smooth real estate transaction. Amazing opportunities exist within the industry, and for investors, high risks offer the possibility of high rewards.
This comes with experience and insight to the current happenings in the industry. First, it is important to create partnerships with subject matter experts across the entire real estate development process: land use attorneys, escrow and title officers, and capital.
Without these resources, many things can go wrong. One thing that Zoned Properties has witnessed is when an owner or project team does not actually hold an equitable title to the property that it is pursuing. Without this ownership, the project can be defaulted. Another potential project default could arise when a license holder or operator does not know the municipalities that it intends to do business in.
Make local conversations a priority
Many new brokers in the cannabis space don’t realize the importance of working with local municipalities. Even with state level legalization, each city or municipality has its own community ordinances, sometimes creating exemptions. If a broker does not do their due diligence, they could waste time and capital misinterpreting local cannabis rules leading to missed or failed opportunities for a client. When evaluating a project here are some essentials to consider when working with local municipalities:
- City ordinances: Oftentimes the state and local verification of licensing is overlooked because a broker does not ask the correct questions.
- Zoning Authorizations: Cannabis properties have their own zoning requirements and special use permits. Often, you will have to work with local officials when finalizing a development deal in order to move forward on a cannabis project.
- Service providers: There are several service providers needed in a purchase or lease deal to fulfill the project on time and compliantly. Some of these team members include a land use attorney, escrow officer, insurance agent, general contractor, engineering team, etc. If these sections within the project do not have cannabis experience, it is important that there is a “tour guide” that can coach along the way.
Most importantly, the team members of the brain trust must have a master plan for the overall project that can adapt with changing laws or new regulations. Each plan should include a short, mid- and long-term strategy to show decision makers and the local community that even after a cannabis operation is approved to open, there is a plan for later down the road.
Securing the right capital
One of the biggest hurdles for all aspects of the cannabis industry is federal legalization. Until cannabis becomes fully legal across the nation, banking institutions are deterred from associating with such businesses. This also hinders investors from being involved with companies that sell cannabis or related products.
As a broker or REIT putting a cannabis real estate deal together, you must understand what type of capital can be used in the deal whether there is a private investor involved or not.
In November of 2021, the latest federal legalization bill was introduced, named the “States Reform Act” (SRA). This bill would remove cannabis from the Controlled Substances Act (CSA), yet preserve states’ authority to regulate or prohibit cannabis. This will be one of the first steps in helping businesses attached to the cannabis industry to safely and securely deal with monetary transactions. Until then, having expert insight to secure proper transactions is a significant piece of the cannabis real estate puzzle.
The future of cannabis real estate
Though cannabis real estate poses risk and uncertainty, there is no doubt it is one of the top sectors to watch in 2022 as the U.S. moves closer to potential federal legalization.
The States Reform Act, a Republican-led initiative to legalize marijuana at the federal level, proposed by U.S. Rep. Nancy Mace of South Carolina, is paving the way for bipartisan marijuana reform. The act creates a federal regulatory structure that is molded to systems already in place, treating cannabis much like other traditional industries that are regulated by federal oversight in agricultural, retail, and pharmaceutical categories. On a local level, more states are pushing a community-forward approach in their programs and how development projects unfold.
These federal and state-led initiatives will create a heavier interest from investors into the industry. As the market has quickly evolved, the passing of these initiatives could pave the way for less risk in the industry.
