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What Brokers Need to Know to Get Cannabis Deals Done

A maturing legal cannabis industry in several states has the industry growing its real estate footprint, looking for more agricultural, light industrial, and retail space to expand cultivation, distribution, and sales. Whether repping tenants or landlords, brokers who know how to work in the complicated world of cannabis are seeing plenty of green.

Real estate strategies are shifting as the cannabis industry becomes more commoditized. When things first got off the ground, cannabis companies had huge valuations while raising tens of millions in capital. Flush with cash, most operations were buying their property outright. Proliferating licenses and business opportunities are lowering valuations leading to more sale-leasebacks and leases in general, representing an opportunity for leasing brokers. Like any other business, a good real estate broker needs to understand the needs of their client and what pitfalls to watch out for. 

In the world of cannabis real estate, there are plenty of pitfalls. Coldwell Banker Commercial broker Rick Locchead has established a niche in Florida’s budding cannabis industry. At a recent virtual conference, Locchead detailed his experience negotiating over 150 cannabis leases. Only 27 turned into actual deals, highlighting how difficult it is to do business in the space even when you know what you’re doing. “There are four major issues,” Locchead explained. “One, the site has to work for retail. Two, local codes must permit the use. Is it even allowed? Three, is the landlord willing, do they have moral issues with the product? Four, you have to make sure the property is debt-free, or the lender who has debt is willing to allow cannabis use.” 

Renting to cannabis retailers can be highly profitable. Not only do dispensaries and other cannabis retailers typically pay above-market rental rates to compensate for additional risk, but their high sales volume can also help drive traffic for co-tenants. If a landlord or broker is thinking about leasing to a cannabis company, the first thing to do is line up legal counsel. Not because of the potential for criminality, though cannabis is still federally illegal, but because understanding each state’s legal landscape is difficult. The legal cannabis industry is still in its natal stages, laws regulating the industry are still being written, varying from state to state. Lawyers that specialize in the developing cannabis industry will help give business owners and brokers a better understanding of the changing statutes and regulations. 

Once you have a firm understanding of the legal issues surrounding the business sector, make contact with your local zoning or planning department to help you understand restrictions. Because any cannabis site has to meet codes preventing locations from being near schools and other places, many locations are not suitable so leasing to cannabis operators is a non-starter. If a location meets the criteria, a deal can be done. 

Figuring out suitability is the easy part. Understanding licensing is the next step. With slight variations by state, cannabis purveyors must hold state-issued licenses. Some states issue licenses for certain parts of the supply chain, while others issue licenses to establish full vertical integration. What’s important is that these licenses are public records with contact information, and can help brokers or landlords looking for cannabis tenants to find and verify license holders to do business with. 

“If you’re repping a landlord, you need to ask directly if they have their license or if they’re working on it,” Locchead said. “Repping a tenant that was a license, that was our biggest issue. We were competing with people who wanted to lock up the property for 6-9 months, which upset landlords and property owners. You have to make sure you’re clear up front.” 

Once you’ve established the location is suitable and the tenant is licensed, negotiations can begin. This is often where landlord brokers will overplay their hands. Sure, the number of locations is limited and the deal has plenty of hair on it, but a growing number of licensed operators means cannabis operators are increasingly able to walk away from deals. Cannabis tenants are usually willing to pay a premium on rent, but not multiples. It’s important the property doesn’t have debt. Because of its federal prohibition, most banks cannot work with or accept payments related to the sale of cannabis, meaning any debt to an FDIC-insured financial institution will have major issues. To avoid liability, properties should be debt-free or working with an appropriate private lender.

“Number one tip, don’t ask for the world,” Locchead said.  “Treat them like any other hot retailer. If you try to get greedy you’ll scare people off. I’ve lost a lot of good deals that could’ve worked if they hadn’t tried to extract too much.” 

Like most retailers, cannabis sellers want lease terms between five and seven years. Landlords want seven to ten. Five years with options is a common structure, according to Locchead. With the rough outline of a deal at a suitable location that doesn’t have any additional debt liabilities attached, finalizing the contract can begin. Protecting the landlord from liability is the biggest concern. That’s where lawyers come in. 

“There are some general provisions you want to change or have in your contract,” Florida-based attorney Dustin Robinson said. Robinson has carved out a niche in the industry as a founding partner of Mr. Cannabis Law. “One of them is the Compliance With Law provision. Generally, you’re going to have it in the contract that a tenant needs to comply with local, state, and federal law. Obviously, if they’re a marijuana tenant, they’re not complying with federal law, so you’re going to want to make sure that provision is changed to specifically state that marijuana is allowed even though it’s illegal pursuant to the Controlled Substances Act.” 

Robinson recommends signing a formal acknowledgment that the landlord knows the purpose of the property use. Tenants will want a Cooperation By Landlord Provision to make sure that both parties are aligned. States have different procedures for build-outs, landlord sign-offs, and property modification. As a landlord or broker rep, you have to make sure the landlord is on board to cooperate in a diligent manner. Getting a new location up and running is a hands-on experience for most property owners, being prompt and meticulous will help overcome obstacles in a timely manner. Some states like Illinois have been hamstrung in court delaying the issuing of licenses, other issues license via lottery. Contingency provisions are appropriate in cases where licensing is forthcoming, simply stating a lease will be terminated if the company does not win or attain a license. 

The next step is insurance. Tenants will often come to the table with specific insurance needs. “Work with an insurance broker familiar with the space,” Robinson urged. “You need property liability insurance, product liability insurance. Directors and Officers (D&O) Insurance [that protects officers if they are sued personally for running a company] is becoming more important, that’s not easy to get. Work with a broker that is terribly familiar with the risk around the space to tailor a plan for obtaining the correct insurance.” 

If the dispensary plans to sell edibles, you’re going to need an attorney familiar with food laws in your state as well. Most edible productions are centralized, so providing kitchen space typically isn’t an issue, but selling consumables does come with its own stipulations. Luckily, most state food departments aren’t that stringent and are willing to accommodate in whatever way they can. As edibles become more popular and some sellers experiment with beverages, food laws will become more important. 

Once a deal is signed, build-out starts. Like all things cannabis-related, it is highly regulated. State laws require retailers to have extremely high levels of security, many even have laws governing aesthetic and material uses. That means you can expect most cannabis retailers to put a huge amount of their own money into the property. Signage is very limited, displays of drug use and other paraphernalia are mostly forbidden. In states where cannabis retailers must operate as nonprofits, they will put even more money back into the property. The final product can be surprising. A cannabis retailer is almost nothing like a head shop or tobacco retailer. Highly secure with top-notch finishes and minimal signage, most fit right in, hardly noticed. The smell isn’t a factor either. Because of licensing laws, in most states, retailers can only sell vacuum-sealed products or edibles packaged off-site. Even then, states require smell mitigation to be outlined by license seekers so many will install high-quality air filters and other mitigation techniques. 

Over time, the general attitude around cannabis locations is changing. “As time has gone by and more dispensaries have opened, landlords are seeing there’s not a bad contingent of people hanging around, they’re not head shops,” Locchead explained. “They’re nice properties. Cannabis companies put a ton of money into these properties, they’re more like jewelry stores. Landlords are starting to see it’s worth having them.” 

But, for all of the benefits of renting to a cannabis company, it can still be a headache. There’s simply no blueprint for this rapidly growing industry, giving early adopters the chance to make higher profits and gain a first-mover advantage. Ten thousand words wouldn’t be enough to cover the ins and outs of doing business in this space. Alcohol is the closest comparison, a highly regulated industry with a wide array of local and state variations in enforcement and regulation. As progress is made and the work and regulatory frameworks are built out, things should get easier. At a federal level, changes are ongoing. The SAFE Banking Act and the States Act, both working their way through Congress, would make banking and legal issues around the industry far more accommodating. Federal changes to banking and tax code would remove significant obstacles to growth, each looks promising. Rescheduling or descheduling marijuana’s status as a schedule 1 narcotic would also be a major boon. The Biden Administration can make that unilateral decision overnight.

Eventually one of the numerous ongoing court cases in the cannabis industry could make it to the Supreme Court. SCOTUS recently declined to hear Eric D. Speidell, et al., Petitioners v. United States, a case about the legality of the IRS’s authority to investigate whether a taxpayer is dealing in controlled substances. In the dismissal, Justice Clarence Thoams wrote federal laws against marijuana “may no longer be necessary or proper to support the federal government’s piecemeal approach.” 

For now, high barriers to entry are driving profits for cannabis retailers and their landlords. With risk comes opportunity. Like any good business, the risk is most dangerous when it’s unaccounted for. The best advice for anyone considering doing business in the industry: be flexible, be diligent, and work with the right experts. Understanding the risk and undertaking efforts to mitigate liabilities will open opportunities in one of the fastest-growing industries in the United States.

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