(Photo by Kevin Rebong for The Real Deal via Getty)
After its retail assets took a hit during the recession, Delshah Capital decided to explore new emerging industries. The New York real estate company has listed three of its stores in Downtown 420 Property, a cannabis site.
It has since received “a lot of questionable data,” mostly from smaller operators, said Chad Roberson, a Delshah partner. But he hesitates, seeing them as dangerous tenants and facing entrenched challenges.
One of them is competition from the illegal cannabis trade, which is now considered a gray market because enforcement has been suspended. Another is financing: Because the product is still illegal at the federal level, traditional loans are not an option.
Delshah’s Chad Roberson (LinkedIn)
“Here as a landlord, you’re asking me to consider a cannabis tenant that will have a structure that is superior to a gray market structure,” Roberson said. “So you’re telling us we can’t get bank financing?”
Despite these issues, some believe that cannabis will be the next industry to save retail.
“It’s almost as if you have a medical client or an urgent care client. Their business will never close,” said Colby Piper, RIPCO’s cannabis real estate specialist. “I almost see them as life-long tenants.”
Because ordering marijuana isn’t legal and distribution is considered an important business, brokers call it Amazon-and-health epidemics — protected from two forces that have decimated brick-and-mortar retailers.
Still, distribution owners need to bring together several important things: space, license and customers. In the cannabis industry, that’s no small feat.
Building owners warm up
Delshah is one of many business owners in New York who are hoping for an influx of licensed cannabis after the state in March 2021 passes the Marijuana Legalization and Taxation Act. Read also : Are Black Businesses Ready For Another Recession?. But the building’s owners weren’t always open to the idea.
Months before the bill was passed, Lee & Broker Associates Greg Tannor said they chased him out of his yard to bring a piece of it. But he persisted.
Lee & Associates’ Greg Tannor
“We brushed it off and said, ‘You know what? This is actually going to happen. You really shouldn’t be laughing at us,'” Tannor said. “And sure enough, the bill passed.”
Now, with the first patents expected to be issued before the end of the year, attention is shifting to what is projected to be a $1 billion industry by 2023.
“[Owners] are very interested,” Piper said. “They are, I like to say, amazing canna.”
To obtain a license, owners of distribution facilities must first secure a retail location. Retailers and homeowners are starting to look for each other. Delshah’s listed properties are located in the Meatpacking District and East Village, more footy neighborhoods.
“It goes back to the basics of real estate,” said Ryan George, the founder of 420 Property, noting that the marketplace has to be well-presented by stores because advertising is “very expensive.”
Homeowners should also consider the site’s vulnerability to burglary — buyers tend to use cash — and more unusual factors, such as whether it has 3,000 to 5,000 square feet of space, George said.
Space race
The new marijuana law states that distributors cannot be located within 500 feet of a school or 200 feet of a place of worship. On the same subject : New Cyber Risk Targets Small Businesses | Daily Business Review. In a city with more than 1,800 schools, 5,000 churches and 1,000 synagogues, the eligible retail space is rapidly shrinking.
“No other state says, ‘We’re going to raise $200 million and build facilities for you.’
In addition, the 59 community committees of the city can influence the way licenses are distributed by proposing the extension of schools and religious ones, which will reduce the number of possible sites even more.
If future retailers find a niche, they still have to contend with the possibility of someone beating them. That someone might be in New York state.
State lawmakers have budgeted $200 million to build 150 dispensaries by 2024. Hochul’s Administration Opportunity Initiative aims to reduce prohibitive start-up costs for businesses with prior marijuana convictions and their family members. – those directly affected by the drug war.
Jeffrey Hoffman, cannabis lawyer
“No other state has said, ‘We’re going to raise $200 million and build your distribution,'” said Jeffrey Hoffman, a cannabis attorney. “When I saw this, I knew that New York was going to be serious in the area of social and economic equality.”
CBRE is working with the state’s Housing Authority to expand its offering. Those locations will receive the state’s first dispensing licenses, essentially giving the state back space to retail cannabis.
Tenant owners who don’t participate in the program will have to wait — and hope — that they break their licenses, and cross their fingers that the state doesn’t settle below the threshold.
The first-come, first-served rule poses another risk that distribution owners need to wait and prepare a space without knowing whether a license will be issued. “You basically have to be prepared to lose that money, because it’s a very competitive application process,” Tannor said. “And not everyone is going to win.”
But property owners can write agreements that limit their liability if the tenant doesn’t pay. To figure out the best approach, Tannor said he created a “secret sauce” based on situations faced by renters and landlords.
“We have the worst in the whole world: lots of cash coming in, but no bank.”
“Some people are starting to pay rent now, or part of the rent,” Tannor said. “Others put down a good amount of deposit. Some other operators have free rides until the application opens. It depends on what’s on offer at night.”
Making bank without banks
One thing that keeps building new owners and businesses up overnight is interest rates. Cannabis loans tend to be expensive because the federal agencies won’t touch them. To see also : The gaming industry is being united by some of its most overlooked talents. Some politicians are calling for the Small Business Administration to give cannabis businesses equal access to financing, but for now, expensive private loans are the only option.
“That rate is 200 to 400 basis points higher than bank financing,” Roberson said. “It’s really expensive. It is a dangerous proposition.”
Homeowners with qualified property and no mortgage are best off leasing cannabis because it takes the mortgage out of the equation, said RIPCO’s Piper.
But real estate is heavily dependent on debt, which can be difficult if not prevented from dealing with cannabis.
“Right now, what we have is the worst in the entire world,” said Jim Landau, a cannabis attorney and director of the New York City Cannabis Industry Association. “There is a lot of cash, but no bank.”
Competing in the gray area
The start-up regulated industry will compete with the legacy market – weed dealers with little money selling to a loyal customer base for decades.
Legal players, on the other hand, face higher start-up costs. “The general rule of thumb, I tell people, don’t try to open a cannabis business without at least a million dollars in cash,” said 420 Property’s George. Given the risks for landlords, rent for cannabis retail is likely to be expensive as well.
For these reasons, not many entrepreneurs are likely to go legal.
“You have to be prepared to lose that money, because it’s a very competitive application process.”
“Grey market construction has a long track record of liquidation,” Delshah’s Roberson said. “People who want to pay two hundred grand for a distribution license, they’re just going to say, ‘It’s not worth it.’
Gray market sellers that operate visibly, like the 66 handed out under cease-and-desist orders this year by the state Office of Marijuana Administration, can expect to be shut down when the licenses actually go out and the tax dollars start flowing, Hoffman said. .
“Just as the State Liquor Authority will not allow an unlicensed bar to be open and popular, the cannabis regulatory agency will do the same,” he predicted.
But ambitious operators, some of whom want to go legal but see no clear path under state law, will remain competitive.
Given the widespread use of marijuana, the prospect of legalization in New York has created hope that the industry will bring an infusion of investment that will fill the pockets of operators and their owners.
But between the government’s social equity goals, the licensing framework and the challenge of gray-market enforcement, a cloud of uncertainty has formed. “We know very little about how they’re going to work,” Hoffman said.
The founder of the listing site agreed.
“The cannabis business is not for the faint of heart,” George said. “A lot of people thought it would be easy money, and it’s really hard. It’s an industry full of regulations and roadblocks.”
