It’s been over two years since Proposition 64, legalizing recreational marijuana, passed in California. And just over a year since this new legislation took effect. A significant shift that initiated a new, and, if predictions are correct, highly lucrative industry.
But two years later, the rules and regulations surrounding the burgeoning cannabis trade remain uncertain. And these murky circumstances have left many in the retail real estate industry scratching their heads, wondering exactly what the future holds for legal cannabis businesses?
To cut through the haze and answer these burning questions, no pun intended, leading commercial real estate news outlet, Bisnow, recently hosted a Future of Cannabis panel discussion in Downtown LA. The assembled panelist offered expert knowledge drawing expertise from many different corners of the cannabis industry.
The panel’s far-reaching discussion covered a lot of ground. But for our purposes, the real questions is: What is the prognosis for retail landlords?
And speaking from that perspective, here are the event’s key takeaways:
Where Does The Law Stand On Cannabis Currently?
“It remains illegal at the Federal level,” notes Troy Dayton of Acrview Group, a Cannabis industry consultancy. But the Obama and Tromp Presidential administrations have both chosen not to pursue marijuana enforcement in legalized states. A trend incoming Attorney General, William Barr, intends to continue.
Dayton also predicts an end to marijuana prohibition in the long term, though he’s not clear on how far down the road this might be. But in the short term, he anticipates legislation, like the recently proposed “States Act,” which, if passed, would prohibit the federal government for enforcing marijuana laws in legalized states.
What are the Biggest Barriers to the Developing Cannabis Trade?
“Regulations are still evolving,” notes Amada Ostrowitz of CannRegs, a cannabis industry consultancy. The most recent “permanent regulations” recently issued by the state are just one more in series of “permanent regulations,” and likely “subject to further revisions before regulations are truly finalized,” Ostrowitz adds.
The real governance, however, is enacted (or not enacted) by local municipalities. “There are over 80 local governments in California,” Ostrowitz says, and each must create their own licensing program.” To further complicate matters: “80% of California’s local municipalities have established some sort of ban against cannabis sales,” Cat Parker, Director of LA’s Cannabis Regulations Department, notes.
What’s the State of Cannabis Sales in the City of Los Angeles?
Unlike many local California municipalities that already had licensing programs in place (to accommodate the medical cannabis trade), Los Angeles only offered limited permits. This forced the city to quickly develop and implement a licensing process, a key factor in the slow of growth of LA’s legal cannabis trade.
That said, Los Angeles has issued 170 cannabis cultivation, distribution, and sales licenses. And the city is currently processing another 760 cannabis business applications.
4 Issues Directly Impacting Cannabis Businesses in the City of Los Angeles
If you own a retail property in the city of Los Angeles and are considering leasing to cannabis tenant, here are four important issues the panelist caution you to keep in mind:
Zoning Concerns – Regulations are still tentative, and thus subject to change. Current “Green Zone” designations may still be revised. This means properties leased to tenants with plans to open a Cannabis business could be foiled if these districts are redrawn.
Fines + Penalties – Leasing to an unlicensed cannabis business is a risky proposition. Property owners can be fined up to $20,000 PER DAY. Additionally, DWP could be called upon to power and water to an offending property. And units may even wind up padlocked, along with a slate of other possible punitive actions. Enforcement has been lax up to this point, but Parker suggests this is going to change very soon.
Community, Law Enforcement + Governmental Opposition – Many powerful local forces still oppose the cannabis industry. And while the cannabis industry is here to say, these disapproving factions are keeping the debate over regulation, particularly proximity to “sensitive neighbors” alive. And may result from further regulatory changes that could negatively impact licensed businesses.
The NIMBYism Factor – Many who support the cannabis industry, in theory, are opposed to a dispensary opening up on their block. And these people are expected to continue to push for further restrictions and expanded regulations, in addition to mounting active protests against cannabis businesses opening in their neighborhood.
Cannabis Business Issues to Consider Now and in the Future
Regulation Is Key to the Success of the Cannabis Industry – “Oregon made a HUGE mistake! The state issued 64,000 cannabis business licenses. Now, however, only a third of those businesses are still active,” notes Paul Smithers, President of Innovation Industrial Properties.
As with any market, cannabis is subject to the law of supply and demand. Too many operators equal oversupply. And oversupply drives prices down.
Oversupply then paired with leasing rate premiums and high taxation is guaranteed to shutter many fledgling cannabis businesses.
As such, regulation, in both limiting licenses and policing unlicensed operators is key to the long-term success of the cannabis industry.
Current Taxation is Likely to Change – And continued hikes could be VERY bad for business.
“Many municipalities are looking to the cannabis industry as CASH COW,” PLUS Products’ Jennifer Tung says. But countless operating are already crying afoul of heavy taxation. “Licensed cannabis business, subject to high taxes, often can’t compete with black market sellers that pay zero taxes,” Tung adds.
There is an additional concern that as more businesses enter the market, and competition increases, prices will fall. And current tax rates, or future tax hikes, are bound to drive many cannabis operations out of business.
Lease Rate Premiums Are Likely to Fall – “Current cannabis lease rates are trending at 4x to 5x above market rates,” says Arcview Group’s Troy Dayton. But again, as competition rises, premiums are destined to fall. And as more operators enter the market, and supply expands “Lease rates will fall to around 2x above market rates, at best,” Dayton adds.
“Long term leases at current premiums may force operators to renegotiation or drive them out of business,” notes Ostrowitz. Highlighting that rising competition is poised to impact current operators.
Aquent Insurance is Crucial – “Due to the federal prohibition on marijuana sales, cannabis businesses can’t have regular bank accounts. And their business is largely cash-based,” Notes David Paletz of Novus Underwriters, an insurance firm specializing in cannabis businesses. Paletz adds: “this requires additional security precautions and special accommodations to store both the ‘product’ and cash onsite. Underwriters are well of aware of this, and require additional property, liability, and workman’s comp insurance for properties hosting cannabis businesses and the businesses themselves.”
How Can CBM Help?
Over the past several decades since medical marijuana was legalized in California, we’ve completed hundreds of cannabis business leases. In addition, we currently manage countless properties home to hundreds of cannabis business tenants.
We understand the unique requirements of this tenant type and have effectively navigated the cannabis industry with minimal discord.
Do you need assistance leasing to cannabis tenants? Or property management services for a shopping center leased to a cannabis tenant? CBM can help!
Visit our services page for additional information: cbm1.com/servcies