What to Expect in Cannabis Real Estate Deals

Hashish actual property transactions will be notoriously difficult – way more so than your common actual property deal. On January 9, 2024, I’ll be talking on a panel known as “Navigating Actual Property Points Impacting the Hashish Trade” for the Los Angeles County Bar Affiliation, the place my co-panelists and I plan on bearing on most of the most precarious points in these kinds of transactions. As we speak, I wish to preview a number of the key points we see in these sorts of offers.

Location, location, location

A very powerful consider any hashish actual property transaction is location. Licensing authorities impose all kinds of necessities or restrictions on actual property areas, together with:

Zoning legal guidelines are often hyper restrictive for hashish corporations. Hashish companies could also be relegated to very small areas inside a metropolis. Permissible zones usually change relying on the kind of use. For instance, some cities might permit storefront retail amenities nearer to residential areas, whereas you may just about warranty that risky manufacturing can be caught in industrial zones.
States and cities additionally impose all types of location-specific restrictions. Hashish companies, for instance, could also be prohibited inside X ft of colleges, parks, church buildings, libraries, and so on. In locations like California, cities usually add restrictions on high of state-specific necessities.
States or cities might also impose limitations on the variety of hashish companies that may be situated in a particular space. Generally we see caps on licenses inside a metropolis (extra on that later), whereas some cities will as a substitute prohibit two completely different hashish companies from present inside a sure distance from one another.
Along with location-specific points, there could also be a bunch of property-specific points that would disqualify a possible property. A bit of actual property could also be correctly zoned and out of doors buffer zones, however might not adjust to native parking necessities, setback necessities, electrical energy wants, and so forth.

Every of the problems above will be automated disqualifiers for a parcel of actual property. Issues like buffer zone areas will be troublesome to determine and alter over time. For instance, a college would possibly open up in an space earlier than a hashish enterprise submits a license software, and it could lose out on its probability to take action. All of that is to say that performing diligence on a property and its location is completely essential previous to coming into right into a lease or committing to buy a chunk of actual property.

Shopping for v. leasing?

When a hashish firm finds a very good piece of property in a very good location, the subsequent most vital determination it must make is whether or not to purchase it or lease it. There are some key exceptions right here, like giant farms or processing amenities in industrial or agricultural areas. However generally, most hashish corporations are likely to lease. There are plenty of the explanation why hashish corporations choose to lease actual property as a substitute of shopping for. I mentioned that intimately right here. However typically talking:

Hashish corporations are startups with restricted funds that choose to lease, quite than purchase.
Shopping for actual property is often way more difficult than leasing it.
Companies don’t wish to decide to a multi-million greenback buy earlier than realizing they’ll safe a license and/or have any prospect of success.
Financing is a giant problem! That brings me to the subsequent level.

Financing, escrow, and title

Securing financing has lengthy been a problem for hashish corporations. In actual fact, my final put up analyzed key points that hashish corporations can count on when making an attempt to safe financing. Few startup hashish corporations are sufficiently capitalized to buy actual property with out financing, and since conventional financing is nearly by no means accessible, patrons often find yourself with a lot greater rates of interest and extra lender-friendly phrases.

However patrons aren’t the one ones that should take care of financing-related points. If a hashish firm needs to lease a chunk of property that’s topic to a mortgage, it’s going to in all probability not occur. Huge banks don’t often financial institution hashish cash, and often may have the flexibility to default their borrower (the owner) for leasing to a hashish firm. I’ve seen plenty of potential actual property leases fail because of this alone.

One other issue right here is getting escrow corporations or title insurance coverage corporations to work on hashish actual property transactions. Like greater banks, lots of them merely gained’t do contact hashish transaction. That is particularly so in jurisdictions after they begin licensing.

Addressing licensing uncertainty in hashish actual property offers

There is no such thing as a method a hashish firm can assure that it’ll safe a license. Even in non-competitive jurisdictions, there are a bunch of potential property- or location-specific points that would bar a license software. The possibility of dropping out is far, a lot greater in a metropolis with 3 licenses up for grabs and 30 completely different candidates. I just lately wrote about some key points for aggressive licensing jurisdictions and actual property leases right here.

After all, there are methods to hedge in opposition to these sorts of uncertainty. Listed here are just a few I’ve seen:

Non-binding letters of intent or time period sheets could also be acceptable to some cities, however they clearly include the chance that the lessor may stroll away or change key phrases if the settlement will not be binding.
Choices to lease or buy upon securing a license, versus full-scale leases or buy agreements, is usually a good technique to tie up a chunk of property whereas ready for a license to subject.
Leases with termination rights if a license will not be secured are one more technique to hedge in opposition to denial of an software.

It’s key to level out that licensing authorities might have strict necessities on what a tenant wants to point out with the intention to apply. Some cities won’t permit a doc until it’s binding (i.e., an choice or a full-fledged lease). That is but another excuse why early diligence is so key.

Different points for hashish actual property transactions

Another key points that I’ve seen come up greater than as soon as embody the next:

I’ve by no means seen a hashish applicant that didn’t assemble a minimum of some tenant enhancements to their facility with the intention to get licensed. Tenant enhancements can result in will increase in actual property taxes. It’s finest apply to deal with who’s answerable for these enhancements in a lease.
Going off the final level, I’ve seen fairly just a few hashish tenants flip a dilapidated constructing in an industrial space right into a extremely productive, state-of-the-art facility. As you may think about, this prices some huge cash. Savvy tenants might attempt to negotiate some form of tenant enchancment allowance from the owner. Or they could use their enhancements to justify decrease lease or an extended lease time period.
Kind business actual property leases universally require tenants to adjust to all legal guidelines. It’s good apply to carve out federal hashish legal guidelines. Not solely will this keep away from a default entice, however it’s going to additionally stop a landlord from making an attempt to later terminate a lease with the declare that they have been unaware that hashish was federally unlawful (sure, I’ve seen issues like that occur).
Renewal choices are key! Hashish leases are likely to hover round 5 12 months preliminary phrases. In states like California the place licenses are successfully tied to a single piece of actual property endlessly, landlords have immense energy to stroll away from the lease on the finish of the lease time period until a tenant has renewal choices (and well timed workout routines them). This clearly could be devastating for an applicant who couldn’t transfer its license elsewhere.
Buy choices are additionally vital. Hashish lease lease tends to be a lot greater than market lease for related non-cannabis makes use of. And it nearly at all times will increase 12 months over 12 months. Companies with multi-year lease phrases might want a purchase order choice in order that they’ll decide whether or not it makes extra sense to purchase the property outright (if doing very properly) versus paying X instances market price every month.

I may preserve going right here for a very long time. The purpose is that actual property offers within the hashish house are troublesome and are riddled with potential pitfalls. Utilizing a kind lease from a traditional business transaction is nearly at all times a nasty concept, and failing to correctly diligence actual property can result in repercussions.