By some accounts, the cannabis industry is the fastest growing industry in the United States, and whether those businesses are retailers, manufacturers, cultivators, labs or otherwise, sourcing proper real estate is an essential part of their success. Cannabis businesses have to consider all the same factors as other industries when sourcing real estate: convenient locations for customers and employees, renovation costs, parking, building codes, etc. But there is also the added complexity of needing to adhere to special state and municipal laws regarding where these businesses can be located.
Here are five tips every cannabis company needs to consider while prospecting commercial real estate for their next location.
1. Navigate the legislative environment with policy experts
The cannabis industry has continuously been forced to operate in a state of flux with vastly different regulations underpinning each state and municipality in which the plant is legal. When it comes to investing in commercial cannabis real estate, companies must work with consultants who understand the legislative environment and how it relates to the real estate market. In fresh markets like New Jersey and New York, they must familiarize themselves with newly written laws and regulations to prepare for the future.
2. Location, location, location … and timing can be critical
The legislative environment also plays a pertinent role in timing. Cannabis businesses must be mindful of timing in relation to the releases of regulations, the submission of applications and the awarding of licenses to keep contingency periods in mind. Cannabis businesses might have to negotiate longer due diligence periods or lease contingency periods than is standard in the real estate industry. However, once a cannabis company is awarded a license, it will want to break ground as quickly as possible to get ahead of the competition and begin bringing in revenue.
In states like New Jersey, there are some types of licenses that require real estate to be sourced before submitting an application, while other types of licenses granted for social equity applicants don’t require real estate. Businesses should formulate a strategy that takes into account the license type they are applying for and develop a specific plan around the timing of their purchases or leases.
3. Don’t underestimate the time and cost for construction
Cannabis companies must estimate construction costs and time conservatively, as the process often goes both over budget and over schedule, particularly given the many challenges of COVID-19. The process can move swiftly after initial license approval, so it is imperative that construction research is done in advance.
For example, in Georgia, companies must be fully operational within 12 months of receiving a license or the license will be revoked. Twelve months leaves little room for error given that companies must construct their facility, go through an entire plant cycle, extract and manufacture the oil and package products for consumers.
Networking is vital at this stage to line up vendors and plan for the construction process. Address your construction budget knowing the needs of your cannabis business and try to leave large budgets for contingency for any problems that may arise.
For cannabis cultivators in particular, formulating a financing strategy is also essential. The current trend is for companies to purchase a property, do any needed construction to the structure of the building, add in the cultivation equipment and then do a sale or leaseback to cannabis real estate investors. In most cases, the cost of the equipment is greater than the real buildings and land, so many operators find it better not to invest in properties with crumbling infrastructure or environmental risks.
4. Be transparent, but strategically
Honesty is usually the best policy when it comes to commercial cannabis real estate. If renting, it is critical to be transparent with your landlord about the intended use of the property; otherwise, you may risk wasting everyone’s time when it inevitably becomes clear of the use during the lease negotiation process or, worse, in a landlord-tenant court.
In some cases, however, property sellers do not need to know what the intended use of a property is. Sometimes, the seller may upcharge to sell the property to a cannabis business due to an understanding that there are limited locations available for cannabis businesses. Find out the price before noting the property is intended for use by a cannabis business. The market rate also comes into play in this matter. If your cannabis venture finds a property you could revamp but is designed for a specific use, take this into consideration.
Ask as many questions as possible during the purchasing process and be sure to remain upfront with those you want to work with.
5. Consider tax deductions — or lack thereof
A final consideration to make when looking to advance your cannabis real estate strategy is gaining familiarity with Internal Revenue Code Section 280E. The 280E tax code rejects deductions and credits for any amount paid in business trades of trafficked or controlled substances — including those made in the cannabis industry.
For cannabis commercial real estate, this means 280E does not consider lease or interest payments as deductible for cannabis businesses. These expenses cannot be deducted from taxes, thereby increasing costs where another business could count on a decrease. It’s vital that cannabis businesses consider this and other key legal codes when making decisions or it could cause immense financial strain and decrease overall profitability. Ensure you are working with a properly trained accountant who knows the ins and outs of the cannabis industry.
On the positive side, sometimes jurisdictions will provide tax benefits or expedited zoning approvals to cannabis companies for bringing jobs to the community. It is always important to involve jurisdictions throughout the process when acquiring or leasing real estate for your cannabis business.
The cannabis industry is one of the most exciting, fresh industries to be part of. For those looking to make a splash purchasing property, it is fundamental to be in the know about potential challenges. If you are a cannabis business looking to break into commercial cannabis real estate, be sure to be as prescient as possible before signing the first check for your site. Understand the risks involved and employ the right professionals for the job, and you will be more prepared to handle what comes at you.
Matte Namer is the founder of Cannabeta, a real estate brokerage dedicated to serving the needs of cannabis businesses in New York and New Jersey. Prior to Cannabeta, Namer served as principal of Alfa Development, overseeing more than $500 million of construction projects in downtown Manhattan with a focus on sustainable development.