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What to know about cannabis real estate, and what might be changing

Jan 8, 2018

alexandre-chambon-157651.jpgThose interested in the cannabis industry will have a lot to talk about in the coming months.

With the legalization of recreational cannabis sales in California, which went into effect on January 1, 2018, there are a total of nine states where the average citizen can purchase marijuana products, so long as they are over the age of 21. Medical marijuana is legal in a total of 29 states.

The softening of state and federal drug laws in recent years has allowed the cannabis industry to flourish, posting close to $29 billion in sales in 2018.

With this spike in demand for recreational marijuana came a dramatic increase in demand for cannabis-suitable real estate. While the laws and regulations surrounding this specialty are tricky, and can even foreseeably get brokers and other agents involved in transactions into legal trouble, professionals who take a chance on pot stand a lot to gain.

Meeting the unique demands for space

Cannabis companies face a unique set of challenges that other business owners just don’t need to worry about.

Most growers, for example, must find class C warehouse space, since landlords tend to be hesitant to lease out class A and B space for legal reasons. The class C spaces, however, typically require pricey upgrades that tenants are expected to fund, on top of rents that are 2-3 times higher than those paid by other types of businesses. Additionally, security concerns mean that these spaces, which are ideally stand-alone, need custom upgrades like perimeter fencing and “man traps.”

Another restriction that makes working in this industry particularly challenging is the fact that most marijuana businesses are not permitted to hold bank accounts or operate using credit cards. Without the ability to show these financial documents to a landlord, many business owners find their options for space extremely limited. Making matters more complicated, many cannabis business owners aren’t able to get licenses to sell without first proving they have signed a lease on an appropriately zoned property.

With all of these barriers in the way of aspiring cannabis business people, it can be difficult to imagine how anyone can make it work. But for the growing number of business owners and members of the satellite industries cropping up to support the marijuana trade, the potential for explosive earning is too great to give into obstacles. 

What it takes to specialize in cannabis CRE

With over 6 million square feet of class C commercial space gobbled up by marijuana businesses in Colorado alone since 2010, it’s easy to see why so many commercial real estate professionals are paying attention to the industry.

But because of the restrictions and risks surrounding the marijuana industry, it takes a particularly knowledgeable and brave real estate broker to shepherd a tenant through the commercial leasing process. Perhaps that’s why we’ve seen so many commercial brokerages dedicated solely to facilitating cannabis real estate deals popping up in places like Colorado and California.

Brokers who partake in this business undertake a certain amount of risk as well. According to the NREI 2018 Outlook Report, anti-money laundering laws apply to anyone dealing in the financials of promoting illegal activity, which would include the commercial brokers and owners facilitating the deals. However, the federal government has not historically enforced these laws, and because commercial brokers are far more removed from these dealings than the business owners themselves, the risk appears to be relatively low.

Trouble ahead?

Just three days after recreational cannabis became legal to sell in California, Attorney General Jeff Sessions announced plans to end a policy that prevented federal authorities from interfering in states where cannabis sales were legal. The Obama-era policy was heavily responsible for allowing the industry to grow into what it is today. While the implications are still unclear, this new ruling could threaten everything.

What is clear, is that if left to prosper, the legalization of recreational cannabis in California could have a dramatic impact on the state, far greater even than that which we’ve seen in Colorado. Some reports predict sales of cannabis products in California to reach $3.7 billion in 2018 and over $5 billion in 2019, eclipsing the total cannabis sales seen in Colorado since legalization in 2014.

Laws and restrictions surrounding the industry remain murky, but pioneers stand a lot to gain by going green.

Think narrow: Why commercial real estate brokers should specialize

Nell Gable

Written by Nell Gable

Nell Gable is a freelance writer who specializes in creating compelling content for CRE companies and startups.

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