A budding relationship between cannabis and real estate

Landlords have found a new best friend in cannabis.

Today, traditional brick-and-mortar retailers are navigating an unprecedented and potentially devastating one-two punch of COVID-19 and shifting consumer purchase behavior driven by the proliferation of e-commerce and new digital technology solutions. 

At the same time, cannabis, which was deemed an ‘essential’ business service in Colorado amidst statewide ‘safe-at-home’ and ‘safer-at-home’ orders, has showcased its strength and resilience.

Even as consumers practice social distancing and heed government restrictions, adult-use cannabis sales in Colorado have remained steady. The industry has retained existing and attracted new customers along the way, while other business sectors have struggled to adjust to a dramatic decrease in consumer foot traffic.

This isn’t to say there aren’t challenges ahead for hundreds of Colorado cannabis retail operators.  

Because cannabis is not legal at the federal level, companies that cultivate, manufacture and sell the substance were locked out of relief made possible through the government’s Paycheck Protection Program. Access to capital, even for loans tied to real estate, is another issue entirely.

Because traditional lenders and financial institutions are, by and large, restricted from doing business with cannabis companies, many operators are either forced to purchase real estate outright, including medical and recreational dispensary storefronts, or take on riskier loans with less favorable terms.

As a result, real estate tends to take up a larger portion of the balance sheet than a cannabis company might have planned for or even know how to effectively manage. 

For many operators, the prospect of taking on additional debt in the name of growth is the ultimate Catch-22.

One emerging practice, however, is rising to the fore in Colorado, offering cannabis companies the chance to swap their assets for operating capital while allowing savvy real estate investors the opportunity to invest in the high-growth cannabis industry without ever having to touch the plant. 

Sale-and-Leaseback Agreements: An Emerging Investment Opportunity

In today’s market, many investors see cannabis real estate as an opportunity to broaden their portfolios beyond traditional sectors. Others see cannabis real estate investing as a steady source of fixed income. Regardless of your camp, the cannabis industry is strong, with even more exciting growth prospects for the future.  

One such concept that’s gaining traction nationally is the sale-and-leaseback agreement. As the name indicates, a sale and leaseback occurs when an asset owner agrees to sell a property to an investor and, following the sale, leases the asset back from the new owner. Typically, these are competitive, long-term leases with favorable terms for both the operator and owner.  

For cannabis companies, sale-and-leaseback agreements represent a non-dilutive capital solution that can support growth and expansion goals. In Colorado, for example, our firm has worked with The Green Solution to acquire 16 assets since 2014. By helping to unlock the equity in their real estate, The Green Solution has been able to expand from 3 locations to 26.

This approach also adds a trusted landlord and real estate partner to a cannabis operator’s network. As a result of the relationship, operators can make more informed real estate decisions that support business growth by partnering with a firm knowledgeable about site selection, acquisition, development, leasing and asset management. 

For opportunistic investors, acquiring cannabis real estate–primarily stand-alone retail properties–through the sale-and-leaseback model is an increasingly effective strategy for generating above-market, risk-adjusted returns. 

To investors that have discounted the merits of cannabis real estate in the past, it’s worth noting that the same level of traditional real estate due diligence is applied to the cannabis industry. In fact, the basis of each acquisition is an attractive purchase price, often validated by third-party appraisals and located in a market that will result in long-term appreciation. Having cannabis tenants with strong credit adds to the return while the high-quality assets stand on their own.

Cannabis is a $9 billion-dollar industry expected to reach $26 billion by 2025. With nearly 25 million monthly cannabis customers in the United States and more than 500,000 new jobs projected by 2022, the economics of cannabis–and as a result, their impact on real estate–can’t be ignored.

As the cannabis industry matures and the dynamics of retail continue to shift, it’s likely that cannabis and real estate will thrive–and thrive together–thanks to a long-term, mutually beneficial partnership. 

Ryan Arnold and Randy Roberts are partners at Scythian Real Estate, a full-service cannabis real estate firm based in Denver.