The cannabis industry is one of the fastest-growing sectors in North America, with the potential to achieve colossal ROI as it grows. Over 40 states and the District of Columbia have legalized either medical or adult-use cannabis. Sales are predicted to pass $15 billion by the end of this year, and COVID-induced safer-at-home orders have radically propelled cannabis use in legalized states.
However, the plant’s varying legal status across city, state, and even country lines makes it difficult to navigate each region’s regulatory framework and successfully start a new cannabis venture. Whether you’re a grower looking to expand your crop size or an investor throwing money into a dispensary, it’s essential to arm yourself with knowledge of the industry and legal requirements. To make it easy, here are the basics you need to know about investing in cannabis commercial real estate.
What is your cannabis business?
Are you growing cannabis plants indoors or outdoors or in a greenhouse? Are you an extraction processing company? Or do you plan to open up a retail dispensary and sell products to consumers or patients? It seems obvious, but each of these cannabis business models requires particular building types that you must be mindful of before hitting the market.
Depending on the city and state in which you’re operating, tax requirements will vary. Since IRS and federal organizations don’t recognize cannabis entities due to the plant’s Schedule I FDA status (defined as drugs with no currently accepted medical use and a high potential for abuse), business owners cannot write off cannabis-related expenses on their commercial real estate-related filings. Too, states and municipalities will have enacted local taxes, all hoping to capitalize on the “green rush.” It’s essential to keep these in mind as you’re calculating operational costs and facility budgets.
Another thing to note: almost all states with cannabis legalization require the entity filing for a license to exist within the state. Out-of-state owners can acquire cannabis commercial grow facilities or dispensaries, but they must operate within state lines to stay exempt from federal regulations.
Zoning commercial property for cannabis use
Different states will also have different legal requirements for what kind of buildings can house cannabis businesses. First, for example, the land or greenhouse must be zoned for cannabis cultivation. Potential processing centers typically must be outfitted with property security systems. Some states require a lobby for retail dispensaries to check their guests’ IDs before entering.
Buying and renting cannabis real estate can quickly become confusing for new investors to the sector because laws vary so much, depending on the location. Strategy-wise, choosing your business location will determine tax rates, advertising availability, licensing, and security requirements.
Other states have caps on how many cultivators, processors, or retail dispensaries can operate in city or county lines. Not to mention the hefty application and licensing fees involved in applying to become a legal grower or retailer. It’s always important to do due diligence, but in acquiring cannabis property, it becomes critical.
Finding the right cannabis property for your needs
When you know your cannabis business, it’s time to find the perfect property. Regulatory bodies will require marijuana businesses to acquire a property or, at least, show intent of acquisition as a part of their license application package.
Indoor vs. Greenhouses vs. Farmland Growing
The fundamentals of cannabis grow facility or outdoor cropland are similar to any indoor or outdoor agricultural commercial property, such as tomato or flower producers.
If growing your cannabis indoors, you’ll want to find a building with proper lighting and water systems. You’ll also want a facility that enables you to raise your plants with the desired cultivation techniques. Are you using soil or hydroponics? Are there enough room and climate control capabilities for airflow to circulate, preventing mold from too much humidity? Do you have enough space to keep different cultivars (the types of cannabis) separated from one another to avert cross-pollination?
Your plants will also require plenty of light: 18 hours of direct light and 4 hours of darkness make up a typical cannabis plant’s growing cycle, and the ratio changes to 12:12 right before the plants produce buds. Is your grow house capable of providing high wattage light that mimics natural sunlight? A greenhouse or growing on outdoor land will reduce electrical costs here, while indoor cultivation minimizes the risk of pests and weather-related hardships.
All this must be considered before selecting a property. Luckily, many indoor and greenhouse facilities exist on the market and ready to support plant production. These turnkey solutions reduce much of the logistical headaches of making sure you have a space that fits all your crops’ needs.
As long as the growing property is zoned for cannabis and meets both your business and local requirements, you’re in the clear.
Retail property for cannabis dispensaries
A similar list of specifics as the above applies to investors seeking to acquire or lease a dispensary. When you’re on the market for a retail cannabis building, you often are also buying the business itself. Outside of the more considerable costs associated with acquiring a business, you’ll need to go through the same licensing steps within the state’s application process as other cannabis properties.
If you’re looking to outfit an existing retail property into a cannabis store, you’ll have to keep your local and state requirements in mind as you update the building. The dispensary will need space for product displays and guests to browse shelves and interact with staff. The building will often need a lobby entrance and security systems and personnel to align with state law.
If you’re a medical retail store, too, some states require a room or rooms on site for physicians to consult with medical marijuana patients.
Processing and manufacturing centers
Manufacturing cannabis means processing the plant matter to create a product other than the flower itself. Edibles are an example of processed cannabis products. Depending on the type of processed cannabis product you seek to make, you’ll also need to find an appropriate building.
Edibles typically require commercial-grade, cannabis-zoned kitchens with proper storage, refrigeration, and security features. Other cannabis processing plants are usually within warehouses with the necessary utilities set up to power the heavy machinery required for commercial-scale operations.
Keeping zoning and licensing requirements in mind, industrial properties and warehouses are the most commonly acquired or leased for these cannabis business types. However, it’s important to note that many master industrial leases prohibit cannabis use, particularly if the property is owned by an institutional investor.
While cannabis commercial real estate is fraught with complications, it has the potential to be as lucrative as industrial and other top property types. Cannabis property values are likely to rise with the limited amount of spaces and opportunities available. If you’re prepared to invest the time and capital, a cannabis commercial real estate asset will likely be a shining diamond in your portfolio.