Why Illinois' Medical Marijuana Industry Isn't A Huge Economic And Real Estate Driver ... Yet

Based on the success of the medical marijuana industry in Colorado and Washington, Illinois could bring in between $212M and $354M in tax revenue each year from cannabis alone. Real estate professionals have expected the industry to be a significant driver of industrial and retail space. But so far that is not happening.

Illinois’ pilot medical marijuana program allows for 22 cultivation centers and 60 dispensaries (51 were licensed as of last September) in the state, and covers 41 conditions to qualify for a medical marijuana patient card.

In its first year (November 2015 to October 2016), marijuana sales in Illinois hit $23.5M. As the monthly sales rise, so too do dispensaries' appeal in retail properties.

SVN | Chicago Commercial vice president Deena Zimmerman said retail real estate professionals should add dispensaries to their client lists. She believes opening a dispensary in a neighborhood could have ancillary benefits for complementary retail. She feels there is a great opportunity for holistic and wellness-based businesses to capitalize by doing business near a dispensary.

But Illinois' cannabis program is one of the most restrictive in the country, and that has deterred many dispensaries from setting up shop in Chicago.

Mindful Medical Marijuana Dispensary (one of Zimmerman's clients) is one of those that has been turned away because of Chicago's tight rules.

General manager Kurt Berry said he was discouraged by Chicago's vague initial statements about where dispensaries could be located, and because finding a site within the city limits that fit the state’s restrictions (for example, a medical cannabis dispensary cannot operate within 1,000 feet of a school or day care center) was too much of a hassle.

He decided to open a storefront in Addison instead last year because the village made it clear that it would welcome dispensaries within its boundaries.

He said business has been great; Mindful has 150 patients and growing after eight months. Berry has been proactive in educating the community about the pilot program and he said he will soon be turning a profit.

Community stigma is another significant challenge for dispensaries. Residents and aldermen on the city's North and Northwest sides are trying to block cannabis uses, voicing concerns that opening a dispensary would lead to a rise in crime.

Zimmerman said these fears are unfounded. State law mandates that dispensaries must account for every gram of inventory, and the transfer of product and money is meticulously recorded and guarded.

Zimmerman said the best locations for dispensaries are on the South and West sides, and south and west suburbs. (She's working with a client now considering setting up shop on the South Side.) Zimmerman said that as more residents are educated on the program, they’ll realize that medical marijuana will not attract riffraff; it will bring out their neighbors who need it.

The cannabis program is already helping Illinois' bottom line; the state collected $5M in application fees when the program was announced. Cultivators pay a $200k licensing fee and a $100k annual renewal, and dispensaries pay $30k to be licensed with a $25k annual renewal fee. The cannabis pilot program generated two new state taxes, a 7% sales tax when cultivation centers sell to dispensaries and a surcharge per ounce.

And the state is starting to loosen its grip, which could allow the industry to blossom. Gov. Bruce Rauner signed legislation last July extending the program until July 2020, and added those with post-traumatic stress disorder and patients suffering from terminal illness — defined as those who have less than six months left to live — to the list of those allowed to participate in the program.

The Illinois Legislature will debate adding migraines, post-surgical chronic pain and irritable bowel syndrome to the list of conditions during its current session.

Most significant to real estate, the City of Chicago proposed relaxing zoning restrictions that would allow dispensaries in nightlife districts and residential areas.

Berry believes the slow rollout of medical marijuana in Illinois will be to the benefit of dispensaries long term. He said the state is adding 1,000 new patients each month, which indicates that demand for medical marijuana is so great that patients are willing to undergo the strict background checks, fingerprinting and limits to how much cannabis they can buy (2.5 ounces every two weeks) to obtain licenses.

What’s keeping medical marijuana from truly taking off in the Land of Lincoln, Berry said, is support from large medical groups. Although more doctors are cannabis-friendly, what can truly turn the heads of the doubters is having the big medical groups getting involved and allowing their doctors to approve patients.

But JLL vice president and “dean of industrial research” George Cutro is not convinced cannabis will ever be the huge real estate driver some project.

He said the possibility of increases in crime when a dispensary opens should not be completely discounted. Dispensaries are cash-heavy retail establishments and, even with the strict security called for under the program, the chance of a robbery remains.

Cutro does not see medical marijuana having a huge benefit to the industrial sector. When the state began discussing the pilot program, firms hoping to land one of the cultivation center licenses tied up smaller warehouses intending to start retrofitting the buildings once a license was in hand. Between the fees to obtain a license and the costs of buying, retrofitting and adding security systems to cultivation centers, players in the medical marijuana game are laying out a lot of capital before the first plants are harvested.

Cutro said there is also a concern that local tax revenues would taper off as more dispensaries and grow houses open in a tight market, similar to what is happening with the high concentration of casinos in the greater Chicago area.