Cannabis industry investors remain optimistic despite regulatory, compliance, and financing challenges.
With sales approaching $10 billion in 2018, the emerging cannabis industry looks to establish itself despite obstacles related to nonstandard property development. The modern cannabis industry was established in 1996 when California became the first state to legalize medical marijuana, but more states continue to allow for its use.
A recent survey by Apto, a real estate software company, found that 76 percent of commercial brokers believe cannabis deals tend toward above-market pricing. But those heftier price tags come at a cost, with eight in 10 respondents saying cannabis-industry transactions are more complex than conventional deals.
Federal law prohibits the production, sale, and consumption of marijuana, though enforcement has waned in the past decade. Despite this outright ban, states have passed legislation allowing its use, ranging from specific medical reasons or full recreational consumption. These patchwork - and sometimes contradictory - laws can be a headache for commercial real estate brokers, says Dominic Sergi, CEO of Clear Height Properties and a co-founder of Cresco Labs, a Chicago-based cannabis cultivator, processor, and retailer.
“In commercial real estate, it's all about location, location, location, and while that's true in the cannabis industry, it's really about compliance, compliance, compliance,” he says. “You need to make sure that the site works with state and local ordinances, that it meets zoning requirements, and it has the necessary approvals for a successful venture.”
Still, momentum continues to grow toward legalization. In November 2018, Michigan became the 10th state to allow recreational use of marijuana along with Washington, D.C., while medical use is allowed in 33 states.
“The slow but steady legalization of marijuana across more states is beginning to have an impact on real estate markets as local jurisdictions grapple with zoning and other issues that affect the availability of sites, be they for cultivation and storage or for retail sales of cannabis,” says Tanner McGraw, founder of Apto. “[It's suggested] that there is somewhat of a shortage of sites, likely because allowable zoning has not caught up with demand.”
Financing Growth
Banks are hesitant to offer traditional financing to such operations due to the federal prohibition. A financial institution that provides services to a cannabis operation could, by the letter of the law, be charged under federal law for aiding and abetting a federal crime in addition to money laundering, according to the U.S. Department of Justice, even if enforcement remained a low priority.
“...Smart, sophisticated local banks that understand compliance see financing projects in the industry as an incredible opportunity to beat their competition.” - Dominic Sergi, Co-founder of Cresco Labs
“Conflicting laws at the federal and state levels portend a thicket of regulatory compliance issues for participants in this industry,” McGraw says. “Commercial real estate brokers are affected by these issues - be it location and siting or capital and credit - as they work to serve the market.”
In addition to private funding sources, cannabis growers and retailers are receiving some attention from smaller, state-level banks.
“Traditional bank financing from the major national institutions doesn't yet exist, but smart, sophisticated local banks that understand compliance see financing projects in the industry as an incredible opportunity to beat their competition,” Sergi says.
Even if the federal government overturned its prohibition of cannabis tomorrow, the industry would face challenges specific to its production, cultivation, distribution, and sale. The reuse of a cannabis growing facility, for example, might negatively impact the value of the real estate because of the specialized nature of the crop. But such obstacles, when factored into the cost-benefit analysis of entering the emerging cannabis industry, are not enough to diminish what appears to be a promising market.
“We are bullish on the market overall. The landscape for capital over the past 36 months has become increasingly more interested in the space and sees this as a long-term opportunity that should not be passed up,” Sergi says. “Over the next two or three years, we see the capital markets normalizing to a level where institutional capital will be playing. We're already seeing them poking around asking questions.”