How Cannabis Could Become The Next Real Estate Disrupter

GFarma News/November 28, 2018

For a while it looked like the best thing to bring to a neighborhood was a new Whole Foods grocery store. One study showed that homes in these neighborhoods would appreciate at a much faster rate than if they were near a Trader Joe’s (and both were better than a Starbucks). Another sign a neighborhood is on the cusp of revitalization is when the yoga studios start vying for space with the arthouses. Usually, it is not long after that the expensive coffee shops and cupcake stores start showing up at street level. But now that so many states have passed laws favorable to the marijuana movement, the next big thing to bring a neighborhood back from the brink just might be the increasing number of organizations that work in the industry.

Downtown Los Angeles could be the first case study to see this phenomenon in action. Next month, a seven-story building in the heart of Los Angeles’ Jewelry District will open up, filled with tenants who all have cannabis somewhere in their job description. The 67,000-square-foot Green Street Building (the name is in reference to its anchor tenant, the Green St. Agency, which works solely with clients in the marijuana industry) will house everything from co-working spaces to an art gallery, dispensary, restaurant, law firm, luxury spa and lounge. Real estate investment company Bow West Capital purchased the property last year for a reported $14 million. Once open it will be the largest real estate space dedicated to cannabis in the U.S.

“The buildings in [the Jewelry District] have not received the proper upkeep, allowing for low sale prices of the buildings but also requiring full renovations,” said Matthew Rosenberg, CEO and Founder of M-Rad, Inc, the design team behind the project. “With the prosperity and funding in the cannabis industry on the rise, this is a perfect combination for this exciting new industry to make this area their home, with Green St. being the catalyst.”

While there are not many residential properties for sale within the Jewelry District itself, data from Realtor.com shows the few that are on the market have a median asking price of $525,000. Surrounding neighborhoods vary quite a bit with the neighborhood of Florence-Graham about five miles away to the southwest seeing median list prices of $440,000 compared to Greater Wilshire a few miles to the northeast seeing median list prices of $1.7 million.

M-Rad took the 1913 building and completely renovated the interiors to create mixed-use spaces that cater both to the requirements of offices and restaurants as well as the unique needs of cannabis users. They needed to create the right proportion of an open-plan design matched with a set of cloistered, secluded rooms for those who want privacy. Here are some images of the interior provided exclusively to Forbes.

For example one concept for behind the hidden door of the library bookshelf could be the Bud Bar, with a custom-designed table. (Interested? A Forbes contributor put together a Gift Guide which includes some of the most unique marijuana rolling papers, with some that are made from gold and others that look like money.)

The lounge, MOTA—which if, like me, you didn’t know is a Spanish slang term for marijuana (at least one dispensary out there has ascribed the words Medicine Of The Angels to the letters, but the term doesn’t have its origins as an acronym)—will complement the restaurant which will prepare cannabis-infused menu items and have a U-shaped bar designed specifically for cannabis tastings. It will also have fully transparent windows into the kitchen so guests can see the food being prepared. Sound-proof rooms are also available for private meetings and the Flower Room is a designated smoking area.

“The companies who are part of the building are some of the biggest players in the industry,” says Rosenberg. “Which will bring in high-level clientele and investors who may feel encouraged to invest in the development of the area. The building itself will host a number of cannabis-related programs such as cultural activities and gastronomic experiences which will attract new clientele.” Some of the big names affiliated with the project are prolific investor Gary Vaynerchuck, who is a 50% stakeholder in Green Street Agency, and Vicente Sederberg LLC, dubbed The Marijuana Law Firm, is one of the tenants.

Typically neighborhood revitalization follows the pattern of stores opening up on a neglected city block one retail space at a time. But this model is different. By bringing a critical mass of companies to the neighborhood all at once, the sudden influx could accelerate the resurgence all the more quickly. Los Angeles’ Jewelry District could become a major player in a matter of months, not years.

Claiming Your Stake: Real Estate Considerations for Cannabis Companies

Cannabis Business Executive/March 29, 2017/Jason Klein

Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”

– Theodore Roosevelt

Purchasing Real Estate with your Cannabis Company

Most cannabusiness operators would disagree with Mr. Roosevelt.  For them, real estate is not the basis of wealth—company cash flow is.  Real estate is simply a capital asset that the company needs to create cash flow.  Anyone who has ever sought to purchase or value a cannabis business knows this fact implicitly: the value of the company is dictated not by the assets it owns but by the cash flow and year over year sales it generates.

Although the value of real estate is not the primary driver of business valuation, owning real estate as a business asset offers some positive financial, legal and regulatory advantages. Some of these advantages can be particularly impactful for cannabis businesses.  For instance, owning your own property means you do not have a landlord to keep happy.  It also gives the business greater flexibility in financing since real estate is viewed as an investment with a virtually unlimited lifespan – so it can be financed with equity, mortgage loans, or sale-leaseback financing.

Some drawbacks are attendant to the ownership proposition as well – buying real estate carries a significant opportunity cost insofar as it could act to make further investment in the business more difficult.  These considerations – the value, the costs, and the opportunity costs – can all be incorporated into a model to help business owners decide what is best for them.

The Cannabis Commercial Lease

A commercial lease to operate a cannabis business is anything but standard – even a standard commercial lease agreement applied to a cannabis business has the potential to be interpreted very differently from what it otherwise would be in the case of another industry.  Both landlords and cannabis businesses must take into account the fact that cannabis remains a schedule I controlled substance under the Controlled Substances Act (CSA) and work to mitigate the potential negative outcomes stemming from this fact for both parties in the relationship.

Just one example involves state regulatory compliance. While it varies between states, every state has some level of regulatory requirement relating to the ownership of cannabis businesses.  A very popular provision often incorporated into cannabis lease agreements provides for a share of profits to go to the landlord.  In some states this profit-sharing arrangement could be seen by regulators as a form of de facto ownership in the business, hence implicating disclosures, background checks, and compliance vetting.  Suddenly, landlords who saw themselves as “silent” partners to the business could be subjected to unwanted and invasive regulatory reviews, and leaving the businesses and the valuable licenses they hold exposed.

Potential landmines exist even within the boilerplate language typically found at the end of every commercial lease.  Most commercial leases contain a boilerplate clause stating that any illegal use of the property in violation of federal or state law constitutes a default under the lease, and subjecting it to immediate termination.  Clearly that clause is not going to work for a cannabis business.  I recommend instead that leases use a clause forbidding only activities outside of the scope of those allowed under state – not federal – law, thereby allowing for the intended use consistent with the state license.

Another example involves dispute resolution.  Often overlooked in lease agreements and many other types of contracts, a dispute resolution clause stipulates how disagreements between the parties are resolved.  Parties need to be sensitive to the fact that some state courts have held that contracts for an activity illegal under federal law are unenforceable and void ab initio, meaning that it is as if the contract never existed.  An arbitration clause mandating the parties resolve their differences before an arbitrator rather than a judge could be a feasible workaround.

Location, Location, Location….and Compliance

Regardless of whether you end up buying or leasing, the property that you select has a big impact in determining your eventual success.  The right property for you will be determined by two primary considerations – suitability and compliance.  Naturally, dispensaries require vastly different properties from cultivation and processing facilities.  The former look for accessible retail locations conveniently located nearby target markets, while the later typically seek industrial or agricultural properties that meet their utility demands while still allowing for conducive supply chains.

Both businesses have to grapple with state regulations and local zoning.  Often states and cities require cannabis business be set back at least 1,000 feet from schools, parks and other places that children typically congregate, and it is good practice to stick to this approach even where local laws may allow a shorter buffer.  You should have a zoning review showing all local schools, parks, daycare centers, and playgrounds in the vicinity of the target property before beginning any negotiations for lease or sale.

Keep in mind too that a cannabis company moving into the area will attract the attention of neighbors.  Be a good neighbor and be sensitive to the concerns and questions coming from the local community.  On the whole, cannabis companies that engage their local zoning and neighbors will succeed at a greater rate than those who do not, and this is because local zoning boards and neighborhood associations, hold a great deal of power to make your business life frustrating, impractical, or even impossible.

Conclusion

Cannabis businesses by nature require real estate – either agricultural, industrial, or retail.  Your choice of property that fits your business criteria while still complying with the regulatory requirements is essential, and the decision about how to acquire use of the property, will go a long way toward determining the long-term success of your venture.