The legalization of cannabis in California followed – and in some ways even preceded it – a rush of real estate investment to meet the new demand. While there is excitement and appetite for cannabis-related assets, which include retail stores and industrial manufacturing facilities, investors are also proceeding with caution as the new asset class also presents significant challenges.
"Appetite is strong, but careful" Seth Weissman, Partner in a law firm Jeffer Mangels Butler & Mitchelltells GlobeSt.com. “There are significant challenges that can offset some of the opportunities. First, cannabis use is heavily regulated. These start at the land use level. In many places, cannabis use requires a conditional usage permit or similar claims. Such CUPs can be saddled with numerous admission requirements. Growers use a lot of electricity, so operators may need to increase their amperage. Building adequate space, including roofing systems, can be costly. "
In addition to the challenges of preparing the physical building, there are also challenges related to permits that can affect rental terms. "Operators must also obtain local operating permits and a state license," says Weissman. “These take time to procure and are subject to extensive background research. Prospective tenants don't want to commit to long term leases without reassurance that they can operate. Therefore, tenants are looking for rental options or rental agreements with termination rights and / or a significantly reduced rent for the first 6 to 12 months. "
While landlords face challenges in managing this new use and understanding the operational and legal nuances, they can protect themselves from the risk of owning cannabis-related assets. "Landlords should seek some protection against default and / or bankruptcy of the tenant, including guarantees and / or substantial security deposits or letters of credit," Weissman added. "There are also challenges in transacting with tenants who are still struggling to establish normalized banking relationships."
Despite the challenges, there are still great opportunities in the cannabis consumption market. “On the landlord side, investors looking to take advantage of the cannabis market are seeing potentially higher rents for properties suitable for cannabis companies,” Weissman says. "This includes retail stores, but also industrial facilities that can be adapted for cultivation, extraction, manufacture, distribution and storage."
And investors who can find properties in approved areas are seeing strong rents and rental growth. “For properties that are located in areas where operations are permitted, rents are higher than for other permitted uses and the upper limits are lower, provided that permits can be obtained and suitable space can be developed,” says Weissman.