‘A Land Seize’ for a Piece of New York’s Marijuana Enterprise

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‘A Land Grab’ for a Piece of New York’s Marijuana Business

It's only been five weeks since New York State legalized the use of recreational marijuana. The board of directors who will oversee the rollout has yet to be appointed, let alone rules for licensing cannabis companies. Legal pot sales in the state are still a year away. And of course, marijuana remains illegal at the federal level.

But it's already in a hurry to get a slice of a $ 4.2 billion industry in the Empire State.

Brokers talk to landlords about leasing storefronts to pharmacies. Representatives from non-governmental cannabis companies fly in to locate real estate. And medical marijuana suppliers are expanding in the hopes that they can branch into recreational sales.

Agricultural land in the hinterland is now being marketed as "in the green zone" for growing hemp or building cultivation houses for growing marijuana.

"It's a land grab," said Gregory Tannor, principal at Lee & Associates NYC, a realtor who has been talking to landlords in New York City since November and has already lined up nearly 200 possible pharmacy locations.

Despite all the excitement, there are significant challenges with cannabis real estate.

In a way, what is happening in New York has already happened in other states. California became the first country to legalize medical use in 1996. 36 states now allow it. With the signing of the New York Marijuana Regulation and Taxation Act, 18 states legalized recreational marijuana despite the South Dakota law being challenged in court.

However, the Drug Enforcement Administration continues to classify marijuana as a controlled substance. Banks are skeptical about lending to cannabis companies and are limiting their ability to buy and hold real estate, although that may change soon.

And many landlords won't rent to cannabis companies either because of the risk of having a tenant who breaks federal laws or because of the unsavory reputation still clinging to weeds. Those who were willing could calculate premium rates.

Zoning also puts pressure on properties available to cannabis companies and often relegates them to industrial areas. The municipalities require that a cannabis company has a certain distance from schools, churches and other cannabis companies – if they allow this at all.

In New York state, towns and villages have until December 31st to opt out of the new law, which has sparked heated discussions among local officials, some of whom "cannot fathom the idea of ​​the devil's salad business within their borders." said Neil M. Willner, co-chair of cannabis practice at Royer Cooper Cohen Braunfeld, a New York law firm.

But the pandemic may have softened the attitudes of some officials, given the jobs and tax revenue cannabis companies can generate after the ongoing health crisis decimated both. The state estimates the new industry could generate annual sales of $ 350 million and create 30,000 to 60,000 jobs.

In the meantime, funds are flowing into the industry to await possible legalization by the federal government. Some lenders will now do business with cannabis companies, and real estate investment trusts have sprung up to serve marijuana interests.

New York could have 700 to 900 pharmacies and four million square feet of acreage, said David Weinstein, managing director of NewLake Capital Partners, a REIT founded last year.

In part because their access to capital has been limited, cannabis companies have leased real estate rather than owning real estate. A company can buy a property that meets all of its needs, sell it to a REIT, and then lease it back.

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May 4, 2021, 6:53 p.m. ET

However, this may change, at least for the warehouses used for cultivation, processing and distribution. The National Association of Realtors said 29 percent of commercial members in states that had legalized recreational marijuana reported an increase in the purchase price over the lease over the past year.

"If banking normalizes for us – if we have the ability to maintain real estate debt as we do in traditional industries – we would rather own real estate in the future," said Barrington Rutherford, senior vice president of real estate and community integration at Cresco Labs. a cannabis company with offices in several states.

Cannabis real estate has matured in other ways too. A home industry of law firms, consultants, insurance agents, and accountants specialize in helping clients jump through regulatory frameworks. A listing service that is the industry's answer to Zillow offers a wide range of properties, from $ 65,000 lot in an industrial park in Lexington, Oklahoma to a $ 109 million 45,000 square foot add-on home in San Bernardino, California.

The stationary side of cannabis real estate has also evolved.

As marijuana growing has become more sophisticated, grow houses have expanded – they can be 150,000 square feet or more, with high ceilings, good ventilation, lighting, and security. Processing is usually done in separate buildings using high-tech machinery.

And pharmacies are becoming more stylish and delivering an undiluted retail experience. Experienced architecture and design offices have become active. There are even companies that specialize in equipping pharmacies and other cannabis properties.

And as marijuana gains wider public acceptance – and a certain celebrity glamor – with Jay-Z's Monogram and Seth Rogen's Houseplant, stores are opening up in prominent locations near traditional retailers.

"We're next to Starbucks in downtown Chicago," Rutherford said. "In Philadelphia, the store we're opening is half a block from Shake Shack and a block from Macy's."

"We are building a portfolio of websites that will be the enviable of any retail organization," he added.

New York State law also provides licenses for "consumption venues" and is expected to result in club-like lounges and cannabis cafes. The prospect of such a social setting has led to predictions that New York City could become the next Amsterdam.

These new storefront usages appear to be a godsend for the New York retail real estate market, where availability has increased and rents have fallen.

"A few years ago, when the market was stronger, it was harder to find landlords willing to play ball," said Benjamin S. Birnbaum, broker at real estate services firm Newmark. "What has changed because of the pandemic is that every landlord is ready to talk about it."

Another reason landlords might be accessible: cannabis retailers tend to rent large spaces between 3,000 and 10,000 square feet.

Large cannabis stores were a boon during the pandemic when huddling into a small retail store was out of the question. However, some wonder if, given the popularity of delivery services, business will shrink in the future. Uber will be open to investigating weed delivery if the federal government legalizes it, Dara Khosrowshahi, the executive director, said in a recent CNBC interview.

Regardless of the size, opening a pharmacy can be complicated and expensive, in part because states have required potential retailers to have control of a location through a lease or lease option before they can apply for a license. However, some states have limits on the number of licenses and there are no guarantees that a company will receive a license.

In Oregon, some applicants had to wait so long – a year or two, said Andrew DeWeese, attorney with the Green Light Law Group in Portland – that they eventually gave up and essentially sold their place in line.

"It's a catch-22," said Kristin Jordan, a cannabis lawyer in New York City. "You want to secure real estate, but you don't want to jump with a gun."

Still, the prospect of doing business in New York, a state of over 19 million people and a major tourist destination, is so enticing that cannabis companies are lining up their ducks.

Companies with medical pharmacies that have been operating since 2016 are in an enviable position as it is believed that they will have an advantage in securing additional licenses.

Cresco Labs has four medical dispensaries in New York, including one in the Williamsburg neighborhood of Brooklyn. It's unclear whether the state will allow recreational marijuana to be sold in these locations, but Mr Rutherford is hedging his bets, adding parking and, in some cases, expanding by renting a storefront next to an existing space.

"We are making sure these stores are ready for the future adult market," he said.

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