Recently, I had the opportunity to moderate panels on cannabis and commercial real estate at programs held in Los Angeles and Chicago. I won’t say it was the best of times or the worst of times, but I will say “it was the age of wisdom; it was the age of foolishness.”
It was interesting to compare the programs and the audiences in the two cities. In Chicago, where medical marijuana has been legal since 2014, and recreational marijuana has been legal for just over a month, people from many facets of the real estate industry — brokers, architects, contractors, real estate owners — came to learn about the new opportunities and pitfalls of the cannabis industry. To be sure, some were experienced, having participated in the medical marijuana business, but others were, well, naïve about how pervasive local, state and even federal laws are in regulating cannabis use of commercial real estate.
In LA, where medical marijuana has been legal forever and recreational for three years, the commercial real estate industry has had enough experience with the cannabis industry to experience the impact of various laws and regulations on commercial real estate. The audience came prepared to hear about how the cannabis and commercial real estate industries were addressing some of the issues resulting from the intersection of the industries.
Here are some key takeaways from the two panels:
The Black Market. – By some accounts illicit weed accounts for up to two-thirds of marijuana sales in California. In LA, the city has been trying to address the problem of illegal dispensaries popping up in various locations. It seems as quickly as they shut down, another pops up across the street. Efforts to date have met with limited success, and the city announced it would start going after landlords who lease to illegal dispensaries. Stay tuned.
Leave it to the Pros. – Marijuana entrepreneurs cannot do it all. As more and more entrepreneurs are learning about their own strengths and weaknesses, back office or support businesses in the cannabis industry are on the rise. One of the panelists is addressing the deficiencies in the supply chain and provides a “white label” facility for growing, developing new products, and analyzing technical data, among other services. Another panelists runs a full service creative and compliance agency for the cannabis industry. Look for an increase in these type of businesses as the industry grows.
O Canada. – Access to US capital markets is becoming increasingly difficult for the cannabis industry. More and more, cannabis entrepreneurs are turning to the Canadian capital markets. No, this isn’t about investing in Canadian cannabis stocks; this is more about private equity and, yes, the public markets in Canada providing much needed capital to US cannabis businesses. One mini trend is the rise of Canadian SPACs (special purpose acquisition corporations) to meet the capital needs of commercial real estate serving the cannabis industry.
280E. – That is the section of the Internal Revenue Code that denies deductions of business expenses by plant touching businesses, in some cases doubling tax rates and minimizing or eliminating cash flow. Cannabis entrepreneurs must pay more attention to this in their financial projections.
Repurposing Real Estate. – One topic that drew a lot of interest was the subject of repurposing vacant real estate for cannabis use. Panelists sounded a cautionary note: that abandoned warehouse might be great for a cannabis facility, but will it be economically feasible to “heavy up” the utilities and modify the building to meet more stringent security needs? That abandoned bank branch with the massive vault may seem like a great piece of real estate to repurpose–after all, dispensaries need a vault. But wait. Dispensary vaults cannot be on a wall that abuts the exterior of the building. Most bank vaults are on a wall that abuts the exterior of the building.
Talk to Your Community. – Thinking of opening a dispensary? Meet early and as often as necessary with officials in the community in which you plan to do business. Let’s face it. Most people are really nervous about a dispensary being in their community. You will need the support, and, in many cases, permission, from local authorities. Talking to local authorities will go a long way toward easing the process.
It Really is Different. – In a conversation with a very experienced architect, I asked if he had done a cannabis deal. No, he said, but he had done secured facilities, medical facilities, and bio-tech, so “it’s just going from A to B to C to D.” When I repeated this to a number of experienced cannabis professionals, I got the same response–laughter. Cannabis really is different.
Taxes, taxes, taxes. – See discussion of 280E, above. In addition to federal tax issues, state and local tax burdens can be very high. Local governments often see cannabis as a “cash cow” and impose taxes high enough to make it challenging to do business.
One thing panelists in both cities agreed on–one year in the cannabis business is like five years in any other business.