Nothing in cannabis is simple, and the same is true when it comes to securing real estate. Especially in recently legalized and rapidly expanding markets like New York and New Jersey, where the rules and regulations are still being developed and buying or leasing property to support a future cannabis operation could be a complicated endeavor.
To help you navigate the waters of cannabis real estate, we developed this guide to cover the challenges associated with securing real estate, as well as the tips you need to know as a cannabis business trying to make decisions about one of the most important aspects of doing business: location, location, location.
Cannabis real estate financing and federal prohibition
The ongoing federal prohibition against cannabis continues to lock some businesses out of the banking system, especially plant-touching companies like cultivators and dispensaries. The same is true when it comes to lending, a key component for any business looking to secure commercial real estate — especially in high-value locales like New York City.
Unfortunately, cannabis’s continued status as a Schedule I controlled substance under the U.S. Controlled Substances Act (CSA) means most lenders are hesitant to write a check for a cannabis business to rent or buy a space. This can make securing real estate a very difficult endeavor.
“In the event a landlord is foreclosed on because they missed payments or for some other reason, the rents would automatically go directly to the lender,” said Kristin Jordan, CEO of Park Jordan, LLC, a commercial real estate brokerage firm dedicated to serving the cannabis space. “That means the lender would be taking rent from a cannabis client, which they can’t do typically because they are FDIC insured and cannabis is considered federally to be illegal activity.”
One of the biggest considerations when it comes to acquiring real estate for cannabis businesses is the federal tax code 280E. 280E is a regulation which disallows cannabis businesses from taking tax deductions and credits available to other legal businesses. When it comes to real estate, 280E makes lenders extremely hesitant to offer mortgages for cannabis companies looking to secure commercial space.
As a result, Jordan said, cannabis businesses are left with a couple of decisions: buy the property outright with no mortgage, which could be prohibitively expensive, or find a local lender that isn’t FDIC insured and is willing to work with cannabis businesses. According to Jordan, working with local lenders may be challenging because some brokers are willing to misrepresent the nature of the business to secure the loan — but usually, she said, the truth comes out.
“You may spend nine months negotiating the deal, but then the full thing falls apart,” she said. “What I recommend my clients to do is get a letter from the lender directly before you even negotiate. Don’t take the word of the broker or even landlord for that matter — it’s the lender that matters.”
State regulations limit real estate options
It’s not just funding considerations that limit cannabis businesses’ options when it comes to choosing real estate. Most states also have setback regulations that prevent cannabis businesses from setting up shop just anywhere. For example, Jordan said it is typical for cannabis retail or on-site consumption locations to be no less than 500 feet from a school zone and 200 feet from places of worship.
While these regulations vary from state to state, finding a location in compliance with the rules is critical to securing and maintaining a license. An added element is that the way states measure setbacks can vary, making it unclear precisely what qualifies as far enough away from specified places.
“One consideration in New York that we don’t know is how setback measurements will be made,” Jordan said. “For liquor licenses, it’s the front door to the other front door. In cannabis, because we don’t know what that is yet and we’re waiting on regulations, we’re not inviting our clients to use those measurements yet. It’d be foolish for anyone to secure anything without knowing those regulations.”
Zoning rules also limit cannabis real estate selection
On the municipal level, every town has its own zoning rules set by the local land use boards. While some municipalities allow cannabis businesses to open in normal commercial zones, it’s also not uncommon for them to be relegated to a far-flung corner on the outskirts of the municipality.
“In Massachusetts, for example, we saw local municipalities fearful of having cannabis retail in main retail corridors, so they put them in industrial parks,” Jordan said. “These areas are not well lit and not well-trafficked — they’re not great areas for retail and not designed for retail. So it’s creating these unsafe and less attractive environments for customers to have to go to.”
In a densely populated area like New York City, Jordan said, this could be even more challenging.
“I separate New York City from the rest of New York state – in NYC, if you know the area, we could start negotiating,” Jordan said. “Retail corridors where there are no issues of setbacks like churches and schools – like in SoHo or large spots in Upper East Side – we can look more closely at those areas, and we would make those leases contingent on getting and obtaining a license.”
For the rest of New York, it will be important to engage local officials and begin a dialogue around what the industry needs to flourish and how it will contribute to the local community, Jordan said.
What should cannabis businesses do today?
Jordan offered the following tips for cannabis business owners looking for real estate to help them find a great spot without getting stuck covering a massive liability.
The best place to start is to understand what’s happening in your broader region. Jordan recommended looking to other states to understand the risks of snapping up property too soon. Since the regulations and processes are still in development in emerging markets, you could be left paying a mortgage or rent on a space you can’t use for some time.
1. Research other states
“The best example is to look at New Jersey,” Jordan said. “They expanded medical cannabis in 2019. We have clients who held real estate until present and the licenses are still not issued yet. Not many people can do that, and most shouldn’t. My fear is the New York opportunity seems so compelling you will have people borrowing money to do this, and I get really nervous about that. The state has promised low and no interest loans. Let’s hear from them first.”
2. Keep tabs on regulatory developments
Naturally, closely following regulatory developments as state agencies promulgate industry rules should be a key focus for cannabis operators. Partnering with a reliable broker who will act in your best interest can help you stay apprised of the most recent developments as they occur.
“Speculating does a disservice; there’s so much misinformation out there that can further cloud a complicated space,” Jordan said. “Unless you have very deep pockets, you should not be willing to pull the trigger on anything yet. That’s the right move, especially for small businesses and startups.”
3. Avoid taking possession of real estate until licensed and permitted
If you find the perfect spot and the landlord and lender agree to a deal contingent on licensing, Jordan advised that cannabis businesses should not take possession of the space until all their documentation is in order.
“Don’t take space unless you can do what you need,” Jordan said. “We also want a termination rate [in the agreement]; people need to be able to walk away if they don’t get a license.”
4. Engage with community leaders
Finally, cannabis businesses should engage with local community leaders and officials to demonstrate their desire to be good stewards of the community and explain what support they need to get their businesses up and running. This is especially true for social equity applicants, Jordan said, who will face additional scrutiny to ensure social equity licenses are going to qualified applicants.
“If you’re a social equity applicant waiting on funding from the state, you can’t secure a place — but we can do market surveys,” Jordan said. “You have to meet with [community stakeholders] now and ingratiate yourself today because you need that kind of support to open your doors. Get the intel about what the community looks like, its stance on cannabis, and neighboring communities that might opt-out.”
Getting real about cannabis real estate
If you’re looking for the right match for your cannabis business, we wish you happy hunting. And if you’re looking for professionals and partners who can help you make the right decisions about real estate and anything else cannabis, join us at the next CWCBExpo cannabis trade show, where the leaders of the legal cannabis industry gather.