Business

Advice on investing in cannabis real estate

Want proof that marijuana is going mainstream? Look no further than the wealth management conference that kicks off Thursday at the Hyatt in Huntington Beach.

Between discussions on tax strategies and building a real estate portfolio, experts will offer tips on investing in cannabis real estate to guests that have paid upwards of $2,000 a pop to soak it in.

The new rules on marijuana in California and other states are starting to rouse the curiosity — if not yet the money of — investors of all stripes.

“It’s really opened up in the real estate space for investment opportunities,” said Stacey Kelly with IMN, the New York-based firm organized that organized this week’s third annual Real Estate Family Office & Private Wealth Management Forum.

Medical marijuana has been legal in California for 20 years. But the state is just now working on plans to regulate and license medical cannabis, which has prompted many outside entrepreneurs and major investors to start eyeing the market for the first time.

The state also is prepping to legalize recreational pot sales on Jan. 1, something that became reality with the November passage of Proposition 64.

The coming rule changes are paving the way for an even larger market that’s got investors at least interested in learning how they might participate.

“Right now there’s a marijuana craze,” said Aaron Herzberg, who heads up the Santa Ana-based cannabis real estate firm CalCann Holdings and will be moderating Thursday’s panel at the IMN conference. “It’s just starting, and we’re not even at the beginning of the upward slope.”

There are serious opportunities for savvy investors, Herzberg said, with the price of a warehouse in Long Beach jumping from $140 or $150 per square foot to $200 or $300 per square foot once the city voted to allow an unlimited number of indoor cannabis farmers to set up shop.

But real estate ventures are always risky. And cannabis real estate includes unique challenges, he said, with some California cities already seeing their short-lived land rushes fizzle due to problems plaguing the industry.

One of those challenges is finding a city that welcomes cannabis ventures and has industry-friendly policies in place, since local governments get to decide whether to license such ventures or to add additional taxes and regulations on top of what’s handed down from the state.

“It all comes down to the local approval and the local level,” said Sacramento-based legislative consultant Max Mikalonis, who helped write the state’s new medical marijuana laws and is also speaking at the IMN conference.

The goal, of course, is to buy or lease land even before that city publicly states that it plans to allow marijuana businesses.

City councilman John “Bug” Woodard championed an ordinance that will bring medical marijuana cultivation to the town of Adelanto. (PHOTO BY BILL ALKOFER, ORANGE COUNTY REGISTER/SCNG)

As soon as a city starts accepting applications from business owners, Mikalonis said land values will have already skyrocketed. That’s what happened in Adelanto, where prices shot up to 10 times what they were before the High Desert city voted to allow commercial cultivation. And that’s the case in Humboldt County, where a 240-property that sold for $600,000 two years ago is now on the market for $8 million.

Instead of going to cities where marijuana businesses are already legal, Mikalonis recommends aspiring investors do some research to find cities that have been open to marijuana in the past, such as ones that voted in favor of Prop. 64.

Then he said to find property that meets state requirements by being at least 600 feet away from schools and that’s zoned appropriately, such as agricultural or light industrial.

Once they’ve got the property, Mikalonis suggests developers lobby the local city council to permit and regulate cannabis businesses in that area.

By contrast, Herzberg recommends investors seek out properties in cities that have already started the process of drafting regulations for cannabis businesses. Otherwise, he said you just don’t know how those regulations will shape up – if they come together at all.

“If you’re sitting there trying to turn new cities, you’re missing the opportunity,” he said. “There are just a ton of cities at play as we speak.”

While it’s great to get in before land values take off, Mikalonis said, “If you miss the first round, all is not lost.”

His company K Street Consulting worked with a client who bought suitable property right outside Coachella’s designated cannabis zone. Then they went back to the city and got them to expand the zone to include that parcel.

There are also a number of investors who are buying properties in cannabis-friendly zones, developing them and then selling or leasing properties to people who want to run the ready-made business there.

But another potential pitfall for aspiring cannabis real estate investors to keep in mind is the infrastructure that’s available, since some cities are only allowing marijuana businesses in remote areas with little access to power and water.

The city of Desert Hot Springs, for example, got a lot of attention when it became the first city in Southern California to permit commercial cultivation. Developers began eagerly snatching up land in the permitted zone before learning that many of the properties didn’t have nearly enough electricity to power a large cannabis grow – and likely wouldn’t have that capacity for a couple of years.

Draft state regulations also call for cannabis ventures to use at least 42 percent renewable energy, adding another layer of complexity to these projects.

Another challenge for developers is to get the investment dollars they need to see a project through. While cannabis has been deemed the fastest growing industry in America, it remains illegal at the federal level. And that’s kept many traditional, national investors away.

Potrepreneurs expected a surge of new interest when Prop. 64 passed. But Herzberg said that was dampened when Trump was elected the same day and quickly appointed marijuana opponent Jeff Sessions as Attorney General.

“We’ve seen very little capital flow into California,” he said.

That fear seems to be fading a bit now, Herzberg said, with interest from out-of-state investors starting to pick up after nearly four months with no signs of a federal crackdown on state marijuana programs.

“There are a lot of regulatory burdens,” Mikalonis said. “But I wouldn’t say that it isn’t still a good opportunity and something that a savvy investor may wish to consider. You’ve just got to be cautious.”

There’s bound to be a great deal of uncertainty in the industry over the next few years, with both men predicting a good number of existing cannabis businesses won’t make the transition to a regulated market.

“I think people will overpay, many businesses will fail and I think there will be an opportunity to pick up licenses from those failed businesses,” Herzberg said.

Still, Herzberg sees this so-called “green rush” less as a bubble and more as a regular business cycle that’s just now taking off.

“I think things haven’t even begun to get hot,” Herzberg said.


Learn more

  • What: Cannabis panel during the Real Estate Family Office & Private Wealth Management Forum
  • When: 10:50 a.m. Thursday
  • Where: Hyatt Regency Huntington Beach Resort & Spa
  • More information: IMN.org

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