My earliest memory is of my first job. I worked in my family’s junkyard. My first task was to drag around a magnet by a string to pick up any nails and screws that could pop a tire. I took pride in it. I collected the nuts, screws and metal shavings from my trusty magnet and kept them as tiny trophies. My elementary school friends would talk about their chores with disgust. When they asked me what my allowance was, I would tell them “I don’t get an allowance. I have a job. I save tires.”
That yard, and the building attached to it, were the backdrop to some of my most formative childhood memories. I barely recognized it when I came home from college the Thanksgiving weekend of my sophomore year. My father had liquidated the inventory of smashed car frames and piles of salvaged parts that always gave the property a post-apocalyptic feel. He was ready to retire. Like most building owner-operators the rent that the building would generate was a going to be a major part of his retirement income.
There was high tenant turnover at first. An electric bike dealer, a thrift store, a charity auction, none of them could seem to make the space work for them. When my father was diagnosed with melanoma the property had been vacant for months.
The year between my father’s diagnosis and his death was the hardest year of my life. I had to watch as the chemo and radiation therapies degenerate his body and loomed as a cloud over his last year on earth. After losing his appetite, something unthinkable for someone that loved food as much as my father did, he decided to try medical marijuana. I will never forget the smile on his face for the first time in months after he tried his first dose and tenderly eat a whole plate of pasta.
He passed away during my last semester of grad school. I had to hold back tears as I was handed my diploma, knowing how hard my father had fought to see me graduate, only to pass away a short month before.
One day I received a call from an interested tenant, they wanted to set up a meeting with the family and give a proposal. When we were gathered for the meeting, the prospective tenant quickly identified their intentions to turn the location into a medical marijuana dispensary. They were well known and connected politically, one of the board members was the mayor of a nearby town. Even so, I was worried about reports I had heard about building owners renting to dispensaries receiving cautionary letters from the DEA. But, after seeing my father benefit from the medicinal value of the cannabis sativa plant, we decided to give the idea a chance. The premium our new friends were willing to pay for the building definitely didn’t hurt either.
My experience leasing my father’s building sparked a lasting interest in real estate. A lifetime of growing up in a working industrial space gave me an appreciation for the utility a property can provide a business. A love for the symphony created when a business finds its stride and everyone’s actions harmonize.
Now, I am a property manager full time. Not surprisingly, I get a lot of interest about my property and the dispensary that rents it. Both investors and cannabis industry professionals have asked me to find property that is zoned for cannabis.
I quickly realized that this business plan was not so easy to execute. While states have set guidelines, ultimately, it is up to the county governments to designate where cannabis businesses can operate, if at all. This makes finding properties in zones that conform to zoning rules incredibly difficult. Every county’s guidelines must be examined and city council meetings must be monitored for any upcoming changes to the zoning plans. The dynamic landscape of local legislation makes finding acceptable properties seem like trying to hit a moving target with a $2,000,000 bullet.
Add to this the strict guidelines adopted by most states prohibiting sale or manufacturing of cannabis within 1,000 feet from a school, park or daycare. I have heard reports of small daycares getting offered hundreds of thousands of dollars to relocate so large dispensaries would be allowed to operate down the street.
Finding a property eligible for a marijuana retail or cultivation permit is often prohibitively time consuming for most real estate professionals. Many hire lawyers for this task. While lawyers have good insight on the letter of the law in the counties they practice, they do not have real estate expertise. They also have large retainers and little patience to answer questions off the clock.
I have spent hours creating sloppy maps by overlaying pixelated zoning master plans on top of a Google earth screenshots. I knew that there had to be a better way. Last week, I found my answer.
Like many new technologies I was introduced to Herbfront by an incredulous friend. “You haven’t heard of Herbfront?!” I hadn’t, but a quick internet search brought me to their website and their simple but powerful motto, “Post. Search. Predict.”
I reached out to the CEO Matt Chapdelaine and he was kind enough to grant me an interview to talk about his unique technology. Herbfront is the first high-tech solution for real estate and cannabis professionals trying to find or list legal medical and recreational marijuana locations. They have a team of city planners and GIS specialist (that is shot for Geographic Information Systems, don’t feel bad, I had to look it up too) that tirelessly update local parcel maps with new zoning that is compliant with cannabis regulation. Users can access these maps to conduct research or can search through the number of listings (both sales and leasing) for verified legal locations.
He spoke at length about the opportunities in the space, “In real estate we all know that there is intrinsic value in properties that we can not easily see.” In his eyes, ability to have a marijuana tenant, be it grower, retailer or manufacturer, is just another one of those intrinsic values. That value has been proven by the market time and time again as properties generally get anywhere between “125-400% over fair market value.”
The legal sector of the marijuana industry is growing faster than any other (see chart). The lesson really hit home for him when he visited Denver on April 20th, a non-official holiday for cannabis user. He was invited as a speaker at a MJIC event. “When I got off the stage I had 40 people waiting in line to talk to me about my product. That is when I knew we had something really unique.”
The interest is understandable. The growth in this part of the real estate sector is really second to none. “The value of cannabis compliant real estate is worth around $10 billion and is expected to double in the next 3 years.” Add to that the fact that “30% of these locations are institutional quality, top tier quality buildings. Some of these locations have been previously rented by companies like FedEx and Bank of America, so we don’t see much risk in these types of properties losing value.” Experts estimate that in Denver, by all measures a mature market for cannabis real estate, one out of every 11 warehouses is being rented to a marijuana business.
Sceptics say that as more locations become usable, the prices will eventually drop. Matt doesn’t see the growth curve tapering off anytime soon. His internal metrics estimate that there are currently around 6,000 legal marijuana locations, with another 6,000 coming on line in the next 3.5 years. We are apparently on pace to see around 9,000 transactions of legal marijuana real estate if legislation continues throughout the country. Sceptics seem to consistently underestimate the size of the market. The clandestine nature of consumption and production of this schedule 1 drug has led to undervaluation of every recreational market to date.
For such a big industry, I am always surprised at how few technology players there are in cannabis real estate.
Herbfront’s growth is another good indicator of the upside potential of these properties. They have paying customers in 140 cities that use the info that their team of geographic information specialists and city planners research. At $3,500 per county per year, the price tag is not cheap. Even so, almost 30% of their customers have signed up for access to multiple counties.
Matt pointed out something that I have thought for years. “For such a big industry, I am always surprised at how few technology players there are in cannabis real estate. It is really just us.” As the high-tech option, Matt says that he finds his average user to be early tech adopters with advanced degrees and/or extensive experience. “We have seen our clients be able to see regulation coming and stay ahead of the curve. They have been able to pounce on deals much earlier than less sophisticated investors.”
So convinced is the Herbfront team of their technologies ability to find valuable cannabis properties that they have decided to try their hand at investing in them as well. They recently launched HF Capital, a private placement fund that utilizes their data to find the “intrinsic value” for parcels with the correct zoning. Currently, they are exploring lease-back deals for cultivators already operating. “We look for good companies with healthy balance sheets and a well established board of directors.” Then they buy the property already being used and sign them into mutually favorable leases. The cultivators, unable to get a commercial loan do the federally illegal nature of the business are happy to pay a higher than average interest in order to have the stability to upgrade infrastructure. Investors are provided a healthy return for an investment backed by high quality commercial real estate. Matt assures me that they will get “more speculative” with their deals in the future.
From the time that I have spent on Herbfront’s interface, I have no doubt that HF Capital will be able to speculate intelligently using their own well organized data sets. Upon first glance, Herbfront’s gray parcel map is punctuated with green areas of eligible buildings. All this is done using a subtractive approach. Zoning maps eliminate most of the areas not designated for cannabis (interesting side note: most counties call growing “plant husbandry” a term that always seemed vaguely sexual to me). Then, a proprietary software automatically imports data from the department of child services to eliminate any properties too close to any school, park or daycare. Finally, a researcher is assigned an area to double check all the data and the results are posted live to the map.
Obviously, many investors do not want to take the risk, perceived or real, in renting to the marijuana industry. Another segment of investors morally disagrees with cannabis use and thus is not willing to participate. Add to this lucrative companies with no way to secure normal business financing and a growing industry that is being funneled into a finite number of usable properties. This creates a supply constraint that has pushed rent prices to what they are now. Highly profitable companies trying to expand faster than the competition in anticipation of the upcoming relaxation of regulations are happy to pay these high rents for the security of long term leases. Many deals I have seen have even included equity in the company to the landowner as a way of winning a bidding war.
No one knows what the future holds for the budding (sorry I had to!) marijuana industry. Almost every industry insider is extremely bullish on further decriminalization. In contrast, most of my colleagues in real estate and finance still think the bumpy road towards legalization isn’t quite complete. This knowledge gap is where Herbfront’s clients operate. I have seen many savvy real estate investors secure what would be impossible terms in any other circumstance. Now, thanks to technologies like Herbfront, the business of marijuana real estate just became a lot more scalable. No matter what your personal opinion about the direction of decriminalization, the cannabis industry, much like the plants that make up its product offering, is firmly rooted in the ground that it sits on.