If you’ve read any real estate headlines over the past few months, you’ve noticed one word pop up: “Cannabis.” With the rise of cannabis comes hungry entrepreneurs. Everyone wants in on the cannabis game, and why not? The business is expected to skyrocket. According to a report from Flowhub, a Colorado-based cannabis inventory firm, cannabis sales increased 67% across the country last year in a cannabis industry worth over $61 billion in America.
A recent report from the National Association of Realtors showed that the demand for cannabis real estate in 2020 was mainly in states where medical and recreational marijuana have been legalized for at least three years. In those states (like California and Colorado) there has been a 42% increase in demand for cannabis warehouses, with a 27% increase in demand for cannabis storefronts.
Just as more states are legalizing cannabis across the country — most recently New York, Virginia and New Mexico — 17 states in total are legalizing cannabis for recreational use. 36 states and four territories have legalized it for medical use. Over half of the country is making cannabis legal, with a cannabis real estate boom happening in the Northeast.
Before jumping on the green leaf bandwagon, cannabis real estate comes with its fair share of complications, from investing hurdles to insurance fine print.
Cannabis carries greater risk with insurance coverage. The U.S. Food and Drug Administration approved THC-based medications in pill format, used for cancer patients undergoing chemotherapy, while other marijuana-based medications are currently undergoing clinical trials. It’s a work in progress.
“It’s the combination of a saturated business surge — in other words, everyone is buying it so much, and therefore prices are driven higher — so with higher purchase prices, people turn to taking on more debt, but there is limited debt available,” Gottlieb said.
He explained that many investors and developers are still hesitant to enter the cannabis real estate space because of debt.
“In general, almost all banks carry FDIC, federal insurance backed by the government for their depositors, and therefore are subject to federal law,” he said. “This limits the capital that banks are privy to lending in the CRE space. The drug is still considered a prohibited substance under the federal Controlled Substances Act, and banks that provide services to cannabis businesses can be penalized under federal money laundering laws.”
“Federally-insured banks are not able to lend to an asset that is associated with a partially national illegal substance,” he said. “Without traditional financing solutions offered by banks, many of the industry’s top investors have stayed far and clear from the industry as a whole.”
What have cannabis companies been doing for cannabis financing so far? It’s been mostly on an all-cash basis.
“Less fortunate groups have sought out phantom debt funds and private equity shops who lend to the ‘risky’ industry, but for a hefty price,” said Gottlieb. “The average interest rate is in the mid to high teens, roughly 13% to 18%, and it typically includes some ownership stake in the business.”
It’s also a complicated road map, literally, as transporting cannabis by land through interstate highways across state lines could prove illegal in some states (hemp is allowed to be transported, while marijuana is not). All this legal flip flop from state to state will likely carve out a “green trail” of transport from the west to east coast. Until then, cannabis companies, including dispensaries, growing farms, labs and kitchens, have to all be prepared with the right paperwork and processing without tiptoeing onto other states where cannabis is not legal.
Also, insurance is a multi-layered snag. You’ll need a variety of insurance types, firstly against asset seizure and forfeiture of real estate and business assets from the federal government. You’ll also need insurance against heightened crime, against bacterial outbreaks, like mold onsite in grow rooms, and the possibility of transmitting communicable diseases through the plant.
Some experts speculate that cannabis real estate is risky and expensive. Just think of the electricity bill for growing the plant indoors, in large quantities. Even though energy-efficient solutions abound, like solar-powered and low-energy solutions, it’s still a work in progress.
“The risk of our nation completely de-legalizing the cannabis business again will always exist, however the trajectory of that narrative coming into fruition does not suggest so,” said Gottlieb. “Additionally, and more specifically to real estate, one way to diminish the risk is to ‘lighten up’ your association with the ‘plant.’ This refers to when real estate investors purchase an asset with cannabis associated to it, they create a separate “LLC” or Operating Company to do these kinds of deals.”
That means that this separate LLC will be completely exclusive to the owners of the other businesses, and therefore, there will be no crossover risk for one company’s reputation.
Until the country sees the federal decriminalization of cannabis, business owners who are hoping to cash in on cannabis real estate should know it still proves a risk, going forward. But even with signs of hope along the way, and now that laws are changing, a key target is debt.
“Debt will be available in the near future,” said Gottlieb. “So you can buy these types of real estate properties now for ‘all cash’ and assume in three years, you can refinance with a bank at very low standard rates.”