Cannabis businesses are paying a premium for real estate. While several states have moved to legalize cannabis use, the absence of federal legalization has created heightened operational risks for these businesses. To offset those risks, real estate owners are securing above market rents and including contingencies in leasing agreements.
While challenges securing capital is the most common reason for landlords to increase the rent premium, licensing problems are another common challenge. “As cannabis real estate brokers, all of the deals that we work on have some sort of contingency needed to make sure that the business is properly licensed and is operational,” Matte Namer, founder and CEO of Cannabeta Realty, tells GlobeSt.com. “There could be some additional risk for that landlord to strike a deal with the cannabis business if the tenant is then not able to get a license for that location.”
While this is a common challenge, there is no standardized calculation to account for this risk. “It is always a little bit of a dance as to how much pre-licensed financial risk the cannabis company and the landlord are willing to take,” says Namer. “Often, the less risk a cannabis company is willing to take in the pre-licensed phase, the more incentive they are going to have to offer the landlord on the other side of that deal. That means that when they do get a license, they will be paying above market rents.”
Both cultivation businesses and retail dispensaries are exposed to higher rents due to licensing risk. The challenges also vary from state-to-state and municipality-to-municipality. Namer operates in the New York and New Jersey markets, which are exemplary of regulatory discrepancy. “New York and New Jersey have a very different approach in their laws around where cultivation can be located. New York has been very flexible and open, and while we haven’t seen the regulation on cultivation, it doesn’t ban cultivation on agricultural land and the state did not allow municipalities to opt out of allowing cultivation,” says Namer.
On the other hand, neighboring New Jersey is less amenable to cannabis cultivators. “New Jersey, by contrast, allowed municipalities to opt out of allowing for cultivation, and 85% of municipalities did opt out of allowing cultivation,” says Namer. “Within those remaining 15%, the townships had restrictive zoning. That is further limiting the number of places where it can be done.”
While increased rent premiums are the most common way for owners to mitigate risk, Namer notes that ground leases are also increasing in popularity. Investors can lease the land to a cannabis business, which can then build, operate and license the property.