By Will Yakowicz, Staff writer, Inc., Published on: Apr 20, 2016, Selling weed seems like a cash cow, but the real money these days is in the real estate that represents the most crucial part of the cannabis business.
In the unstable and risky marijuana industry anything can happen–your neighbor could wage a Racketeer Influenced and Corrupt Organizations Act suit against you, your bank can tell you to move your money to another institution, or you could lose your license for a small screwup. But in all of this uncertainty and risk, pot entrepreneurs are making one safe bet: buying real estate.
“With so many obstacles and regulations in our way, owning your real estate is the only thing we can control in this industry,” says Sally Vander Veer, co-founder and CFO of Denver-based marijuana cultivator and retailer Medicine Man. “It’s essential to long-term success.”
Aside from being a simple and time-tested investment, Vander Veer says owning your own real estate is also a smart way to safely store your money, as long as property values hold or increase. And surprisingly, property ownership is actually a flack jacket that protects your business from a frequent nightmare scenario in the pot business.
Since 2013, many cannabis entrepreneurs have seen their warehouse rents skyrocket after they’d spend tens of thousands of dollars to convert the space into a marijuana growing operation. Owning your real estate lets you avoid that financially crippling scenario entirely, says Patti Zanin, an independent real estate agent in Denver who serves weed clients.
Zanin says buildings zoned as “light industrial” that have been vacant for years are now the most valuable properties in the area thanks to the marijuana industry. Properties go so quickly, Zanin says, that a secondary market has blossomed–well-heeled companies will buy a property, get a license, and sell the whole package to smaller businesses.
After spending over $1 million to build out the 40,000-square-foot warehouse Medicine Man rented on Nome Street near the Denver airport, Vander Veer and her brothers Andy and Pete Williams decided to buy it. The brothers and sister got it for $2.5 million in 2014 and it’s now worth $6 million (they recently sold it).
“It’s the green boom here in Colorado and real estate is at a premium,” Vander Veer says. “If you own a building that is zoned properly, not including any improvements, it’s worth millions.”
Medicine Man just bought a property in Commerce City to build a new dispensary and rent out retail space to a few non-marijuana tenants. “Part of our overall strategy is to own all of the real estate we are in. We’re looking toward a hard asset mentality,” she says.
The property is also a form of banking in an industry that still has trouble maintaining bank accounts. Bankers need to do more compliance work for marijuana company customers, which makes the accounts expensive–some cannabis entrepreneurs pay $3,000 a month in account fees. Since it’s expensive to bank cannabis profits and banks won’t loan to cannabis entrepreneurs because marijuana is still federally illegal, buying real estate with cash profits is an increasingly popular alternative.
“You have to find a safe place to store your money,” Vander Veer says. “Where else but real estate?”
It’s not the weed business. – Josh Ginsberg, co-founder and CEO of Native Roots, says his company has gotten so large that he has a team tasked solely with looking for property to buy or lease. Native Roots has 450 total employees. Ginsberg says the real estate team has been key to the company’s explosive growth in the past two years, from four to 15 stores. The largest building Native Roots owns is a 180,000-square-foot grow facility with more than a hundred employees and tens of thousands of plants. Shortly, the company will open its 16th location, a third gas station-pot dispensary in Colorado.
The company owns half of its buildings and is working on buying more. Ginsberg says as a marijuana company that is growing as fast it can, he does not want to be at the mercy of anyone, especially a landlord.
“We put a lot of money into our stores to make them how we want, and it doesn’t make sense to put this much money into someone else’s building,” Ginsberg says.
Meet the landlords – The Kalyx, a real estate investment trust, is trying to be the marijuana industry’s “honest landlord.” The company, which is based in New York, was founded by Potter Polk, a tourism and internet entrepreneur, and George Stone, a founding partner at real estate investment firm The Witkoff Group (which bought the Woolworth Building in New York City, among other properties).
The company raised $25 million to buy properties in states where marijuana is legal, including three in Denver, one in Auburn, Washington, one in Eugene, Oregon, and a sixth in Phoenix, Arizona. Polk and Stone then rent the properties to marijuana businesses with the agreement that rent will increase only 3 percent a year. In an industry where rent can increase by 50 percent from year to year, Kalyx’s business model is enticing to marijuana entrepreneurs.
“Because the industry is so small, you want to be the guy who is fair. We’re building our business along side with these guys, not at their expense,” Stone says.
Kalyx owns buildings in Denver that are leased to three big weed brands–Strainwise, Medicine Man, and Dixie Elixirs.
The seller’s market – Rona Hanson, a real estate agent who finds homes that accommodate home grows, says the cannabis real estate boom is having a knock-on effect on the residential market. Home values have gone up 13 percent since last year, she says, and a house under $300,000 will typically have 30 to 40 offers after an open house and on average sell for 103 percent of asking price.
Some cannabis entrepreneurs are even pivoting away from the retail pot business to pursue real estate riches while the getting is good. Aaron Herzberg, partner and general counsel at marijuana holding company CalCann Holdings, owns three dispensaries in California (including actress Roseanne Barr’s pot shop). He says CalCann will start to focus on real estate instead of running dispensaries because marijuana properties are a hot commodity–a $2 million piece of land could go for as much as $10 million if zoned properly, he says.
They are looking to raise $10 million in the next three to four months to staff up and start buying more weed-friendly properties. Eventually, they want to become a marijuana investment trust and buy up properties in newly legalized markets.
Herzberg says his company worked with the city government of Adelanto, California to pass a city ordinance to allow for cultivation and in the process bought seven parcels of land for $350,000 before the public knew about the pot law. Two months later, they sold the land for $1.9 million to hopeful marijuana entrepreneurs.
“After going through that deal, we came to the realization that running dispensaries is a great business, but it’s a lot of work, it’s not all that profitable and it’s challenging to work with the regulations,” Herzberg says. “Doing the real estate, while it is not easy, is just a better business.”