The cost of real estate can have a direct effect on a cannabis business and the value of the business’ marijuana license. There are a few key reasons for this, including:
- Limited real estate options due to strict zoning laws
- High rents charged by landlords who want to offset the risk they put themselves in when they rent to a business that grows, processes, or distributes a federally illegal substance (and those who just want to profit from cannabis license holders who have few rental options)
- High interest on loans, which makes it extremely difficult for marijuana license holders to buy and own commercial property (so they’re forced to rent)
Before we go any further, it’s important to understand the situation cannabis license holders face. In many states, marijuana cultivators, processors, and dispensaries can’t get marijuana licenses unless they’ve secured property for their operations before they submit their license applications. That means the businesses have to pay rent while they wait to see if their applications for licenses are approved.
Some marijuana businesses end up spending hundreds of thousands or even millions of dollars on high rent payments before they even have a marijuana license in hand. What happens if they aren’t approved for licenses? And what happens if the property’s landlord makes things difficult by increasing the rent, adding fees or stipulations, or trying to cancel the rental agreement entirely?
The risk is very real. BTHHM Berkeley LLC, owner of The Apothecarium dispensary in Berkeley, California, learned that lesson last year when it was forced to sue its landlord who refused to allow the business to move into the location it had been paying rent on for 18 months while waiting for its marijuana license application to be approved. According to the lawsuit, after BTHHM got its marijuana license, the landlord doubled the rent, nearly quadrupled the security deposit, and added on new property taxes and fees to bring the building up to code (approximately $700,000).
Clearly, real estate can create challenges for marijuana businesses, but it’s a key factor in determining the value of a marijuana-related business and its marijuana license. Across the country, the price of real estate for marijuana-related operations keeps going up. According to the New York Times, property prices and lease rates have doubled in recent years, and marijuana businesses are paying well-above market value in states like Massachusetts, California, Maine, and more.
In Denver, Colorado, cannabis businesses paid two to three times above the market rate for rent between 2014 and 2016, and according to research published in 2017 by real estate services firm CBRE, cannabis cultivators are being charged $12 to $18 per square foot of warehouse space in Portland, Oregon, where the same space typically rents for just $5 per square foot to non-cannabis businesses.
In addition, buying commercial or industrial property isn’t feasible for many cannabis license holders. Since marijuana is still illegal at the federal level, banks are unlikely to give cannabis businesses loans to purchase property, and if a business can secure a loan, the interest rates are typically very high. With property rates skyrocketing in areas where marijuana has become legal, particularly for adult use, only businesses with deep pockets can buy property today.
Ray Schiavone, CEO of Tahoe Hydro shares, “I’ve seen a ton of different real estate deals in the last few years. For instance, in Salinas, California, my friend bought a 10-acre greenhouse property for $1.2 million, and then had offers for $7-$10 million a year and a half later when the county decided to legalize recreational marijuana. In Sacramento, my business partner, Mark, and I were going to buy a 45,000 foot concrete tilt up for $1.6 million that is worth about $4 million now.
“You’re almost guaranteed 100% return when buying something in an area prior to marijuana being legal there. It just depends on the market. All of the commercial real estate in Sacramento has gone from around $50 a foot to over $100 since Sacramento issued permits.”
Leveraging Real Estate to Increase Marijuana License Value
The value of a marijuana license is greatly affected by the success of the license holder, and success usually means controlling costs. As Tim McGraw, Founder and CEO of Canna-Hub, a California-based real estate development and property management company for the cannabis industry, says, “Overhead matters. You need to operate where you’re going to make the most money. If you’re giving up too large of a chunk of your revenue, you’re starting out behind from the beginning.”
Tim’s company works to take the hurdles out of the way for marijuana-related businesses by doing much of the work that license applicants must conduct before and after they obtain a license in California. Canna-Hub also develops cannabis business parks where all marijuana businesses except dispensaries and outdoor growers are allowed to operate.
“We did the legwork and negotiated excellent local permitting fees,” explains Tim. “We offer space to marijuana businesses for the lowest price per square foot in California, and we don’t charge businesses a fee based on a percent of gross revenues every year to keep their permits. The lower a business’ local permitting cost is, the more valuable that business is to banks and investors.”
Canna-Hub allows businesses to keep more money than they would if they leased space elsewhere. The company also takes away many risks for business owners by acting as a go-between between the businesses and the city. In addition, Canna-Hub provides security for businesses at its campuses, can help with design and build-outs, and expects to sell out its second park by the end of November 2017 with a total of 100 operators.
Tim explains that marijuana businesses can benefit from economies of scale in a Canna-Hub park. He says, “It can take a marijuana business months to get permits and everything else in place. It’s much faster with Canna-Hub. We help businesses save time and money ($1-$2 million per year for large operations).”
To combat skyrocketing rent, some marijuana businesses prefer to own the real estate where their businesses operate if they have the money to do so. Sally Vander Veer, co-founder and CFO of Denver, Colorado-based Medicine Man – a marijuana cultivator and retailer, told Inc. that owning real estate is, “The only thing we can control in this industry.” She says it is, “essential to long-term success.” Josh Ginsbert, co-founder and CEO of Native Roots, says his company purchases property to maintain control and to avoid investing a large capital outlay to build-out a facility that his company doesn’t own.
The Kalyx, a real estate investment trust, is investing in properties in states where marijuana is legal and renting those properties to marijuana businesses. The benefit to renting from Kalyx is simple. The company agrees that marijuana businesses will not incur rent increases higher than 3% per year, which is much smaller than the 50%, 100%, or higher increases that are common to the marijuana industry. Inc. reports that Kalyx is already leasing space in Denver to three well-known marijuana brands, Medicine Man, Dixie Elixirs, and Strainwise.
The debate over which option is better for marijuana-related businesses – owning or renting property – is still open, but the good news is there are options that can help license holders retain or increase the value of their marijuana licenses.
The Importance of Real Estate in the Marijuana Industry
As Tim McGraw says, overhead matters, and that includes the price marijuana businesses have to pay for facilities. Local rules related to zoning, permits, and so on vary greatly from town to town, so navigating the process to obtain real estate, ensuring it will be acceptable for marijuana-related operations for the long-term, and avoiding paying high rent or fees based on revenues are critical to ensuring a marijuana license holder’s property investments add value to the marijuana license rather than reduce it.
Currently, many investors are trying to get into the marijuana industry, and property has become a key focus for them. Until laws change, banking options increase, and there is enough property to meet demand, cannabis license holders will likely have to continue paying high rents.
What do you think about the excessive rents charged to cannabis license holders? Leave a comment below and share your thoughts.
Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.