Commercial Investment Real Estate Winter 2020 | Page 23

O
n January 1, Illinois became the
11th state, along with the District of
Columbia, to legalize marijuana for
adult recreational use.
There’s interest across the country
as well, with voters in as many as 10 states
finding the question of legalized recreational
marijuana on their ballots later this year. A
look at tax revenues in states where legal-
ization has occurred explains some of the
interest; Washington took in $319 million in
2018, followed by $300 million in California
and $266.6 million in Colorado. Overall in
2018, legal marijuana was a $1.4 billion in-
dustry in the U.S.
There is “tremendous opportunity” in
cannabis retail, says Wendy Berger, principal
of WBS Equities, LLC, in Chicago. “This in-
dustry is exploding. We describe this often
as Prohibition 2.0, and the question is: How
does the real estate industry play a role in
this tidal wave of demand?”
Cannabis, notes Berger, “is one of the
very few areas of brick-and-mortar that’s
growing at a rapid pace, so that alone has
attracted attention. If you’re a developer and
own a building with a vacant storefront or a
broker and you have focused on retail, you
have to ask: What’s the next growth industry?”
For cannabis consumers, she says, “my
feeling is that they want to do this legally.
They want a safe, consistent experience; they
want laboratory testing; they want a regulat-
ed product. They want to be able to go into
a retail store and get educated, so the retail
environment matters. These are not the head
shops of our youth. These are beautiful, well-
lit open spaces. They’re places where you can
get comfortable with a product that maybe
you’re unfamiliar with at some level.”
But it’s also a new industry, with every
segment learning the ropes as they go and
with complicated laws and guidelines that
vary and can change continuously. Addition-
ally, cannabis is still illegal on the federal
level, which can affect a variety of factors,
particularly financing. “I tell brokers this
is a totally different commercial real estate
industry — there is no historical data that
you can use,” says Kerry Mann, CCIM, prin-
cipal at Pacifica Commercial Realty in Santa
Barbara, Calif., who’s worked with cannabis
clients for about seven years.
Real estate professionals who have
worked in the cannabis field agree on one
strong point: It’s essential to be well-versed
in both state and municipal laws and ordi-
nances governing the business, because they
are the primary tools for regulating where
and how businesses can operate. Issues in
licensing, zoning, taxes, and even safety
can delay or derail deals. It’s also advisable
to seek out advice from professionals who
have experience with retail cannabis. Mann,
for example, works with attorneys who are
members of the International Cannabis Bar
Association, based in San Francisco.
One of the first challenges a cannabis
retail business faces is site selection. “From a
developer or broker perspective, when we’re
focusing on picking a location, the first thing
you need to do is understand local zoning
and local sentiment,” says Berger. States can
provide an overall framework and licensure
regulations for the businesses, only to then
leave it up to local governments — either
county or municipal — to decide if cannabis
can be sold in their jurisdictions and, if so,
how and where.
Some communities have been quick to
embrace the promise of additional tax rev-
enues from cannabis businesses, but others
have rejected cannabis sales in the face of op-
position from local residents and businesses.
In communities where legal dispensa-
ries have been approved, there can still be in-
tricate zoning issues. Chicago, one high-pro-
file example, has permitted sales; the city has
been divided into seven zones, and each zone
will allow seven dispensaries. Sales, however,
are prohibited in much of the central busi-
ness district. Cannabis businesses also must
be at least 1,500 feet apart, with regulations
around proximity to sensitive uses such as
churches, schools, and daycare facilities.
Brokers may also encounter resistance
from potential landlords. Some may simply
be dead set against renting to a cannabis
business; others may be concerned with is-
sues such as an increase in insurance costs.
Ryan Brandt, director of commercial acqui-
sitions for BW Strategies in Charleston, S.C.,
has worked with MedMen, a cannabis multi-
state operator, to locate dispensary space. “In
2018, there was a lot of resistance to us,” he
says. “I’d say seven out of 10 properties that
we’d call would say they weren’t interested.
They just didn’t know what cannabis was yet.
But today, I’d say that’s more like four to five.
There’s still some resistance, but there’s an
awareness coming to the market.”
Building requirements can be limiting
as well. “In most retail stores, 99 percent of
your inventory is going to be on the store’s
floor, so you don’t need much backroom
space,” says Berger. “But if you’re a marijua-
na dispensary, very little of your inventory
is allowed on the floor — and every state
requires, in different and slightly nuanced
language, that every bit of product be placed
in a secure vault every single night. You need
a vault for money, you need a vault for prod-
uct, you need employee welfare space, and
then you need your selling floor — so you end
up with a lot more back office space than a
traditional retailer that has tiny amounts of
back office space.” And, she adds, states have
different requirements for the thickness and
types of materials used in the vaults, as well.
The next complicating issue for those
Photo by Heath Korvola
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