Cannabis in Commercial Real Estate

With the recent influx of legalized marijuana to the nation, there is no doubt that the green brings the green. According to Statista, global sales of the marijuana industry are expected to top $33 billion by 2025. But investment in real estate associated with the drug is not for the fainthearted.

From complicated utility infrastructure and sourcing financing to site selection and construction, cannabis-related real estate transactions come with its hurdles. They tend to be more complicated than the average deal, taking almost triple the amount of both time and money. Did you know it typically costs up to three times more per square foot to build out than traditional industrial space? Then of course there are regulatory issues amongst state and federal entities attempting to work with private parties to monitor a typically taboo subject.

This is not say it should be avoided. It’s apparent that it is a very lucrative industry, but it is important to note that cannabis in commercial real estate doesn’t cross the finish line like most transactions do. Understanding the industry and modifying expectations is imperative to crossing this line.

Site Selection

To begin grasping the depths of such a transaction, it is important to realize the difficulty in completing one of the first steps in attempting to establish a legal cannabis business: site selection. The search starts with sorting through a myriad of state and local regulations which often require sensitive use setbacks and specify how close to a school, daycare or church a cannabis property can be sited. Even if a property is found, finding a landlord that is willing to accept a cannabis tenant in the first place becomes difficult. It often comes down to if a landlord can offer a lease given restrictions in their mortgage and if they want to do so from a moral or philosophical standpoint. These building owners also often increase rents by double or more once they learn their property is suitable for cannabis operation.

Financing

This leads us into another major obstacle of the industry, which is obtaining financing. Many banks are hesitant to touch the industry because marijuana is still illegal on the federal level under the Controlled Substances Act. While more banks are participating, it is not to the level of a typical transaction. Additionally, asking lenders to back cultivation facilities that start at $300 per square foot in comparison to $100 for an average industrial property makes getting approved for traditional loans all the more challenging.

Infrastructure

Infrastructure is another important but difficult consideration for cultivation facilities. If the right research isn’t done regarding this matter, it can result in a lot of wasted time. It can take anywhere from two to three years for utility companies to power these kinds of sites adequately. Installing a Combined Heat and Power solution comes with an $18 million price tag, which is a technology that produces electricity and thermal energy and allows facilities to go off-grid. Access to a large supply of water is also a prevalent issue that raises questions about whether it will come from a city supply or require drilling wells. According to an Illinois State University study, such a supply is necessary considering cannabis crops typically consume twice the amount of water of commodity crops, taking in an average of six gallons of water daily per plant!

Despite the unique characteristics of cannabis real estate, industry experts agree that there is limitless room for growth. Knowledge and patience as the industry matures is key.