Cannabis Retailers In A 'Feeding Frenzy' To Lock Up Space Before Applications Open

Although the regulations for New York’s now-legal recreational cannabis market are still months from being announced, the race for cannabis retail real estate has already begun.

Even though the rules around operating a recreational dispensary have yet to be set, would-be cannabis retailers are already securing deals for space, in some cases paying cash upfront, double market rents and agreeing to share profits with landlords in bids to get a leg up on what is expected to be frenzied competition.

“Now is the time that people are looking and trying to secure real property,” said Robert DiPisa, an attorney at Cole Schotz P.C. and co-chair of its cannabis practice. “Once the request for applications comes out, if you don't have real property secured, it is going to be very challenging for you to put together a comprehensive application.” 

The state is expected to roll out more thorough regulations before the end of the summer and applications could be issued later this year; New York State Assembly Leader Crystal Peoples-Stokes estimated legal sales could take 18 months to two years to begin from the passage of the law. When it comes time to approve licenses, experts expect the state to dole out 700 to 800 licenses in the first round.

With a legal cap on the number of businesses that can operate, cannabis real estate and legal experts told Bisnow that the need for speed to market — and the inherent riskiness of a still-unregulated industry — is driving prices and terms in landlords’ favor.

“[It is] important to come first on this … because there's going to be caps, there's going to be a limited amount of licenses,” Cannabis Real Estate Consultants co-founder and CEO Erich Rubio said. “On top of that, it comes down to location, location, location, and nothing has changed with this, especially with retail locations. They want to have the best. So you have to get in very, very early.” 

Multiple attorneys and brokers involved in real estate negotiations told Bisnow there are dozens, if not hundreds, of companies looking for space in the market right now, but it is unclear quite how big the pool is. None of the professionals would identify their clients, citing confidentiality agreements and sensitivity of negotiations, but they said a range of local entrepreneurs are active in the market, and nearly every major multistate operator is looking to get a foothold in what experts say could become the cannabis capital of America, surpassing even California and Colorado.

“Think of any retail industry in the world, having a flagship in New York City has always been a thing, and I don't think that that will ever go away,” DiPisa said. “If you're a [multistate operator] and you're one of the large ones, you certainly want to have your flagship store in New York City to plant your flag, and let everyone know what you're about.” 

Lee & Associates NYC Executive Managing Director and principal Gregory Tannor represents dozens of operators currently looking for New York City retail space, he said. Tannor has emerged as one of the city’s leading cannabis tenant brokers; last fall, he began a system of mapping out potential locations in the city that would be ideal for cannabis operators, he said. 

The dispensary operators he represents are looking primarily for spaces between 2,500 SF and 4K SF, with the largest spaces reaching 5K SF, Tannor said.

“You don't need that much space for a dispensary,” he said. “The goods are packaged and they're very small. You're not selling TVs or dishwashers.” 

While the footprints of these spaces may not be large, the cost to secure them is.

Some operators are putting up a lump sum of money called a “lock fee,” Tannor said. The cost of these payments vary by location and can range from around the equivalent of one month’s rent to six months or even more. To get these deals done, operators and landlords have concocted a myriad of payment arrangements. 

“Really each deal is like its own little cocktail,” DiPisa said. “All of these deals are very subjective. It depends on the property. It depends on the tenant.”

Ryan George, co-founder of cannabis property listing platform 420 Property, said he has heard in New York that some landlords are asking for upfront payments between $25K and $100K. 

Some landlords have signed onto profit-participation agreements, where they would receive a percentage of any profit that their tenants make, George said. This model is less common because it increases the risk for landlords, since they would be directly profiting from the sale of a substance that is still outlawed under federal law, DiPisa said. 

More frequently, landlords have demanded tenants start paying monthly rent, DiPisa said, despite having no assurance that they will ever be able to operate. While he declined to give an exact range of the cost of monthly payments he has negotiated, DiPisa said operators have agreed to start paying as much as double the market rate, depending on the location and quality of the property, he said.

Property owners demand a premium because of the high financial and legal risks they undertake when signing these agreements. The deals, which are term sheets or letters of intent, not leases, are contingent upon the operator securing a license, and they can preclude a landlord from signing a viable tenant.

“The landlord's perspective is like, ‘Well, wait a second. I don't want to tie up my property for this, and if I'm going to do it now, I better be compensated for it, because I'm keeping my property off the market for you,'” DiPisa said. “One of the first issues you run into on the landlord's side is trying to find that happy medium where the tenant is getting enough time and enough options, and the landlord is happy that they're being compensated.”  

But just as the coronavirus pandemic changed the minds of lawmakers who were reluctant to pass legalization legislation before the crisis, it also changed the minds of landlords who were hesitant. 

“A lot of those retail storefronts were vacated by different kinds of uses that have not survived the Covid-19 pandemic, and I represent a lot of landlords who are scrambling to try to find tenants to fill those spaces,” DiPisa said. “A lot of my landlord clients have approached me, who maybe weren't comfortable pre-pandemic and now are comfortable with the idea of their retail storefront being used for cannabis-related use because I think that there's a lot of questions of what the future of retail is going to look like. And this is just another use that could potentially be used to fill those vacant retail storefronts especially.” 

Cannabis is still illegal on the federal level, and federally chartered banks are prohibited from accepting payments from landlords renting to cannabis retailers — the bank could potentially seize the property if it has a cannabis tenant, said Eric Orenstein, an attorney in Rosenberg & Estis’ transactional department. Insurance could also get complicated, as insurers could deny a claim where there is a cannabis tenant, he said.

“Every mortgage has a provision that says you have to utilize your property and comply with legal requirements. Legal requirements include federal law,” Orenstein said. “If you're a big landlord, if you're a publicly traded company, those are things you may not really want to test.”

The location of New York’s dispensaries could come down to which buildings have backers that are at peace with a cannabis tenant, said Jeff Schultz, a partner at Feuerstein Kulick LLP. Regional banks are more likely to be OK with a cannabis operator as long as the tenant and landlord are abiding by state and local laws.

“Operators need to ensure a couple things — that your landlord is obviously comfortable with a cannabis tenant and that if they have a lender, which in most cases they do, that that lender is going to be cannabis-friendly,” he said. 

While operators are aiming to secure crucial real estate and some landlords are looking to cash in on the associated premiums, deals will be difficult until the regulations come out later this summer or in the fall, experts said.

“We're kind of looking at a crystal ball or a black box trying to figure out, ‘OK, when is this going to go live and how much lead time do I have, and when do I want to really lock up the property?’ Because you don't want to wait too long,” DiPisa said. “It's a feeding frenzy towards the end.”