'Put On Your Snake Boots': Cannabis Real Estate Is Harder Than You Think

If putting together an average real estate deal is mired with pitfalls, stitching together a deal in the cannabis sector can make one feel like Indiana Jones — the pits are full of snakes.

With global sales expected to top $33B by 2025 and more states legalizing recreational use every year — most recently Connecticut, New York, Virginia and New Mexico — big money is flocking to the green pastures of the marijuana industry. But cashing in on real estate tied to legal weed is not for the fainthearted, with hurdles at every turn, from site selection and construction to complicated utility infrastructure and finding sources of financing.

“Our industry is preyed on by snakes and sharks,” American Cannabis Co. co-founder and CEO Ellis Smith said on the Real Estate Behind the Reefer panel at Bisnow’s National Cannabis Real Estate Summit held in Chicago on, appropriately enough, 4/20. “I have to wade through the BS every day, all day long. All of you will, too … Make sure you put your snake boots on.”

Panelists warned that cannabis deals are far more complicated than average real estate transactions, taking two to three times longer to complete and costing up to three times more per square foot to build out than traditional industrial space. Then there are regulatory issues, the fact that a disconnect between state and federal law around legalization means each company has to replicate infrastructure in every state in which they operate, and a lack of ready financing and lease opportunities.

That isn’t to say opportunities aren’t abounding in the young industry. WBS Equities founder and CEO Wendy Berger noted that partnerships between commercial real estate and cannabis operators offer tremendous upside, and Anthony Coniglio, president and chief investment officer of NewLake Capital Partners, said the time to jump on the cannabis train is now.

“People ask, ‘Are we in the second, third or fourth inning?’” he said. “I'm not even sure we’ve come out of the dugout yet. It's a great industry and there's phenomenal opportunity long-term.”

However, he said, commercial real estate needs to understand it will be playing a different game than it’s used to.

“Everything that we see our tenants do in the cannabis industry takes longer, is harder and costs more money. To everything you're thinking, multiply it by two,” Coniglio said. “It rarely gets across the finish line in the way you think it does in ‘regular way’ real estate world. So you really need to understand the industry and modify your expectations in the way you're interacting.”

The differences start with site selection. Newmark Director John Gaines, who co-founded the firm’s cannabis practice group, said a search starts with sorting through myriad 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. That can be a shock for those used to typical retail site selection, he said, as can what Gaines called a green tax — building owners “seeing green in their eyes” upon learning their property is suitable for a cannabis operation and jacking up rents by double or more. 

That’s if a landlord is willing to accept a cannabis tenant in the first place, Berger said, adding it often comes down to what she called the can/will question: Can a landlord offer a lease given restrictions in their mortgage and will they do so from a moral or philosophical standpoint? That has become less of a problem with time, however.

“The world has opened up and there are a lot more lenders who will accept a cannabis tenant in the property they have a mortgage on and there are a lot more landlords who, now that they've seen that dispensaries do not look like old-fashioned head shops, understand where we are.”

Finally, infrastructure, especially power, is an important consideration for cultivation facilities. ARCO/Murray principal Patrick Hidder said he heads that expensive issue off before showing clients industrial properties.

“It's down the wrong road pretty quickly if you're not doing the right research on that piece of property and a lot of wasted time,” Hidder said, adding it can take anywhere from 24 to 36 months for utility companies to power cultivation sites adequately, while installing a Combined Heat and Power solution, a technology that produces electricity and thermal energy and allows facilities to go off-grid, comes with an $18M price tag. 

Access to water — and lots of it — also comes into play, Hidder said, raising questions about whether that will come from a city supply or require drilling wells. Cannabis crops typically consume twice the amount of water of commodity crops, according to an Illinois State University study, sucking down an average of six gallons of water daily per plant.

Financing can cause other snags. In the early days of the legal cannabis industry, deals were made in cash with funds raised from investors, typically friends, family members and the odd high net worth individual. Today lenders are more willing to get into the real estate side of the business, Berger said. Of the six cannabis properties owned by WBS Equities, two carry traditional mortgages, one from a community bank in Ocala, Florida, the other from a mid-tier East Coast bank.

Even so, she said, convincing lenders to back cultivation facilities that start at $300 per SF versus $100 for an average industrial property makes getting approved for traditional loans challenging.

“People can't raise money for construction projects the way you can in a normal industry because of the limitations on banks participating,” Coniglio said, referring to the fact many banks are hesitant to touch the industry because marijuana is still illegal on the federal level under the Controlled Substances Act. “We're seeing more and more banks participate but it's still not to the level where you can have a regular way transaction.”

NewLake, a publicly traded REIT focused exclusively on the cannabis sector, is one player that has stepped into the breach. It now owns 28 properties across 11 states, including industrial facilities used for cultivation and retail locations. The properties were mostly purchased as sale-leasebacks, a boon for operators as “one thing we know for sure [is] cannabis industries have a voracious appetite for capital, much of it on the real estate side.”

Despite the unique peculiarities of cannabis real estate, panelists agreed there is near limitless room for growth for those who jump in with their eyes open and the ability to be patient as the industry matures.

“If you are new to this space, your grit and determination is going to determine your success,” Hidder said. “Whether it's in real estate, whether it's in construction, whether it's in equipment, sales, whether it's layout, there is just so much inexperience. Even for those with the most money, things just don't move at the pace that you're used to.”

For the moment, cannabis real estate is “a hurry up and wait industry,” he added. “We are being asked to jump through hoops and we can get so frustrated by this. But it's something where you know the strongest will survive if you can deal with the frustration. That's when you're going to come out the other side on top.”