With Vendor Applicants Raring To Go, NYC's Cannabis Leasing Market Hits Breakneck Pace

Dean Valentino, Current Real Estate Advisors’ managing director of retail leasing, is working on his first cannabis lease in New York City right now, negotiating for a two-level, 4K SF deal near Madison Square Garden.

It’s not the first time he’s been approached by brokers looking for potential locations for cannabis vendors, he told Bisnow, but it’s the first time that landlords have begun to see leasing to cannabis vendors as worth the risk.

“I would say that a year ago it was along the lines of: ‘If everything goes through with the state of New York, would your landlords be interested in leasing in a cannabis leasing use?’ but I didn’t see so much action,” Valentino said. “Now, there’s a flood of offers.”

After more than a year of build-up, vendor license applications awarded by New York State's Office of Cannabis Management are slated to open at some point in the next 30 to 90 days. As the dawn of NYC's formal cannabis retail market edges closer, aspiring vendors have accelerated their searches for available retail space and are signing lease agreements with a range of different conditions, experts in the space told Bisnow.

Crucially, more spaces are also appearing on the map as landlords become more willing to do deals in spite of potential risks. Valentino said his client, a national cannabis brand, is willing to pay market rents in the deal in a location and retail environment in which most tenants are looking for discounts.

The number of potential cannabis tenants has quadrupled over the past 12 months, said Greg Tannor, a cannabis leasing expert and Lee & Associates' executive managing director and principal. Those exploring options for space include everyone from experienced business owners to aspiring entrepreneurs looking at densely populated NYC. 

“Everyone out there thinks that they can go and win a retail license, hence more activity in the market,” Tannor said. “People think that it's like a license to print money, when there's a lot more detail into it. It's an extremely competitive licensing process.”

The OCM intends to award the first cannabis vendor licenses in the state to applicants with prior convictions related to marijuana, or who have family members with prior convictions. The OCM has also promised to match up to 150 of the first round of licensed vendors with a property obtained by the state government as part of its $200M social justice fund.

But there's no limit to the number of second-tier licenses that will be available, an OCM spokesperson told Bisnow by email — leaving applications open to anyone with a demonstrated business plan who is willing to submit all the paperwork required by the state.

“We have been busy from day one, but now I feel like the floodgates opened,” Lee & Associates Senior Leasing Associate Jessica Gerstein said.

Because applications for retail licenses aren't even open, let alone allocated, the deals for space being struck aren't for traditional leases, rather a mix of arrangements.

Tannor said some tenants are paying a fraction of the rent, others are putting down lump sums to hold onto spaces for limited periods, and some have agreements, but aren't paying rent, risking landlords signing the space over to other tenants. But all deals are also contingent — meaning that if a tenant isn’t awarded a license, they can break the deal and walk away from the space.

“A lot of the operators that we deal with, if they don't get the license, they're not going to use the space for anything else, they can just break the deal and walk away,” Tannor said. “They put up some risk capital, either monthly or a lump sum, and they're willing to risk that money if they don't win the license.” 

The impending opening of applications is one of the reasons for heightened activity in the cannabis leasing market right now, multiple brokers told Bisnow, but there are two other factors adding pressure. 

Retail leasing, although still below pre-pandemic activity levels, has shown signs of recovery in recent months, resulting in a tighter market with more competitors for space. But the other element is that more and more landlords have gradually become open to leasing to a cannabis space, adding more potential to the market.

Risk remains a factor at the center of many landlords’ decisions. Marijuana is still illegal at the federal level, meaning that federally chartered banks cannot accept payments from landlords leasing to cannabis businesses. For property owners with outstanding mortgage payments, being caught between federal and state regulations means they may need to refinance their debt with a private lender in order to accommodate a cannabis tenant.

But that’s no longer as off-putting as it was a year ago, 420 Property founder and CEO Ryan George told Bisnow. Landlords are beginning to see that they can get rents above market rates, he said, which is swaying some to take the plunge — especially if they can get full or partial rent from tenants in order to hold the space until they receive vendor licenses.

“Landlords are approaching it with high risk, high reward,” George said. “They're pricing rents in a way that if they get caught, it can still be worth it for them if they have to get a private mortgage.”

But despite the rush for vendors to apply and the shared optimism among potential tenants and landlords, it could still be anywhere from six months to a year before NYC’s first cannabis retail spaces are operational — making lease agreements a more expensive bet for potential vendors, experts told Bisnow. 

“We don't know the time frame, but I'm advising to try to hold the space for six to eight months,” Ripco Director of Cannabis Real Estate Colby Piper said. “The state says they want recreational open by the end of this year. I don't know how fast it could happen.”

Piper estimates that between the time needed to award licenses, the build-out process for stores — factoring in potential delays due to ongoing supply chain woes — the first spaces could be ready by summer 2023. George echoed that time frame prediction, adding that aspiring entrepreneurs who aren’t awarded licenses could appeal New York state’s lottery process in the hopes of getting one.

But some believe the process may be quicker. Tannor said this November’s elections could provide a catalyst, bringing the first stores into operation before the end of 2022.

“New York state is trying to expedite this program. Everything is working in concert together to get the retail up and going,” Tannor said. “Also, don't forget that New York state is a bordering state to New Jersey, where New Jersey is already up and running — and out of the 10 locations, they’re doing about $2M a day in total. New York state is watching this, and we don't want to lose additional tax revenue to these other bordering states.”

The time and money needed to put in an application is still a gamble, George said; some applicants could look to flip properties once they are awarded licenses.

“You're essentially going into the casino and dropping $10K on black. And if you don't get it, you're out all that money, all that time,” George said. “The first 20 licenses that came available in Florida, some of those licenses sold for $50M. There's always going to be someone that's willing to pay to play.”

That dynamic has appeared early on in other markets, according to Institutional Property Advisors broker Joe French, causing property values to skyrocket.

“We were looking at a property outside of Boston. If it wasn't cannabis, it would have probably sold for half a million dollars to a million dollars. But because it was approved for cannabis, they sold it on that potential business,” French said. “And so for the property, they wanted $12M for the location, even though it’s never opened for cannabis.”

A spokesperson for the OCM told Bisnow by email that it is not planning on capping the number of available licenses — meaning that applicants hoping to flip properties may lose out, Piper said. 

“It'll drive the price of the product down. That means that the tenants are going to have a rougher time paying the rent, because they're making less money, because there's so many stores,” Piper said. “Since the money's going to be spread out, it's very strategic on who you sign your lease with.”

Ultimately, amid a highly competitive atmosphere, entrepreneurs hoping to flip their cannabis spaces may have to first demonstrate the success of their business in its location before they can sell their license, Piper said.

“The value of a license changes drastically when it's just a piece of paper versus when you have an up and running business,” he said. “If they can't get the business off the ground, they lose tremendous value in selling their license.”