The Intersection of Cannabis and Commercial Real Estate
As of press time, the use of recreational marijuana remains illegal under federal law. However, the buzzworthy botany is legal for recreational use in nine states and for medical use in thirty others. But while the fight for federal legalization wages on in our nation’s capital, commercial real estate experts have already capitalized on cannabis’ budding potential (pun intended).
Real estate licensed right out of college in 2009, Rick Payne, the CEO and co-founder of Cannabis Real Estate Consultants (CREC), initially began his foray into cannabis real estate in 2015. A business partner asked Payne to help with a cannabis delivery service in San Diego—however, when the city passed on ordinance stating that all delivery services had to be attached to a licensed brick-and-mortar location in the city, the business was put in jeopardy. Given Payne’s expertise in residential real estate at the time, he sought counsel from commercial brokers, only to find that these brokers were completely overwhelmed by the foreign world of cannabis regulations in real estate.
“They were really out of their depth, despite their 25 years of commercial experience,” said Payne. “They would send us a bunch of properties that wouldn’t work, and we would have to vet them ourselves. It didn’t make sense to them at the time because it was a new niche and because it still is so complex, and they didn’t have to go through as much work for traditional CRE transactions.”
So, rather than rely on others, Payne set out on his own, partnering with a group in Colorado who wanted to expand their cannabis practice into the California market. Four months later, Payne had secured four locations for them. Eighteen months later, Payne licensed his own business’ location and had it up and running. What, then, allows CREC to succeed in the cannabis space where so many other traditional brokers have failed? Much of it lies in the firm’s deep knowledge of cannabis regulations—and its strict CREC Certification process.
“Part of our certification process is looking at local regulations and at what zones are viable for cultivation, retail, etc.,” said Payne. “We actually vet all of our properties and confirm that there are no sensitive uses as per the local ordinance.”
For example, you legally cannot have a cultivation facility in a place of residence, and, in San Diego, cannabis real estate must be 1,000 feet away from certain other uses. It’s these legal nuances that CREC prides itself on being an expert in—offering up viable, vetted properties to its clients seeking out a brave new world in cannabis real estate.
“Even if investors are extremely savvy in tourism, multifamily, or other facets of real estate, they haven’t done cannabis—and they often don’t understand how complex and regulated the space is,” added Payne. “Therefore, the competent counseling that CREC offers is really invaluable in order to invest capital in the best way possible.”
After all, putting a lot of capital into a property and then not having it be licensed for cannabis use is disappointing, at best. CREC strives to avoid this scenario, as developers and investors want to invest in real estate that they know will be operated for its intended use. Of course, given the nature of cannabis law, this can lead to some pretty creative methodologies from Payne and his team.
“I think the core of the challenge is figuring out a way to structure these deals so the person investing isn’t losing money,” said Payne. “There’s still some inherent risk, but we mitigate it to the maximum extent possible.”
And as cannabis becomes more mainstream, Payne and his team expect their business to explode in popularity in the coming years. Whereas before big money players may have seen the space as too risky, now more institutional investors are coming into the space than ever before—and the numbers are growing by the month.
“In 2019 we’ll continue to see that,” said Payne of the industry’s growing popularity. “I do think that cap rates will start to level out, as well, rather than be all over the spectrum.”
CREC is expanding its scope, as well. The company currently has a few properties in Oregon, in addition to its extensive California-based portfolio. But Payne notes that CREC has been contacted by nearly every state that’s legal for business, including Massachusetts, Nevada, Michigan, Arizona, Washington, and others—and investors from all over the U.S. are reaching out to deploy capital in CREC’s current California offerings.
“I do think that we will be national, and that we will potentially franchise our business to other states and work with agents around the country,” said Payne. “For example, we are currently working out a deal in Alaska.”
All of this sounds rosy, but, at the end of the day, this is still a business of weeds.
“A lot of people expect this industry to be hand over fist because of the media and popularity now surrounding it—and it absolutely can be, and a lot of times it is,” Payne said. “But it’s very calculated and very strategic. It’s not just get rich quick. You really have to spend a lot of time researching and working with different people. And being realistic is extremely important, as this is a much riskier space than traditional CRE.”
Payne did acknowledge the elephant in the room of the federal government—and litigation is still what most people think of when they think of this industry—as there will always be inherent risk until cannabis becomes federally legal. However, the firm is hopeful that, as time goes on, the space will normalize and become even more like traditional commercial real estate investing, regardless of federal legalization.
“I encourage people to get into this space, but it is extremely complicated and does have a learning curve,” Payne concluded. “I would advise newcomers to work with qualified professionals that have a proven track record, not just people who are in the space because they see dollar signs.”
Therefore, whether it’s dollar signs or cannabis, soon all commercial real estate execs will be seeing green—or, at least, such will be the lot of those who approach the proper consultant.
For more information, please visit www.cannabisrealestateconsultants.com.
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