California is likely to be the center of the legalized marijuana market here in the United States. In particular, Los Angles is expected to have a booming market and is also hosting the 2028 Olympics. So, it is not a big surprise that the California real estate market is attracting a lot of attention from investors throughout the country. Are you paying attention to what is going on in California?
The state of California will begin issuing temporary licenses for “cannabis commercial activity” on Jan. 1, 2018, with permanent licensing to follow within 120 days. This highly anticipated event is attracting private real estate investors from across the U.S. who want to take advantage of the opportunity opened with the legalization of cannabis use in the sixth largest market in the world.
The new law provides opportunities to invest in cannabis business operations, notes Jim Fitzpatrick, a former Costa Mesa planning commissioner who heads a consulting firm called Solutioneers. Both experienced industry operators and Wall Street investors hope to cash in on the Golden State’s cannabis-related investment opportunities, he notes.
His company prepares applications for cannabis businesses and offers investors access to cannabis real estate financing and assistance in identifying compliant properties. To be compliant, real estate used for dispensaries, for instance, must be located at least 1,000 feet from schools, churches, parks and other dispensaries.
The combined market for legal medical and adult cannabis use is projected to grow by compounded annual rate of 18.5 percent, from $2.76 billion in 2015 to $6.5 billion by 2020, according to a report co-produced by New Frontier Data and ARCVIEW Market Research. That’s not even figuring in revenue from real estate, technology development or the overall economic impact of the cannabis market.
In addition, cannabis commercial activities will add significant revenue to state and local government coffers from licensing fees and other taxes. The state charges a15 percent excise tax on cannabis sales and taxes cannabis cultivation at $148 per lb. for “flowers” (buds) and $44 per lb. for “leaves” (plant trimmings used to produce cannabinoid-based products, such as oil, edibles, bills and vapes.
Local governments will collect sales on cannabis purchases and may impose other taxes, as well, notes Max Mikalonis, legislative advocate for the cannabis industry at K Street Consulting, which provides licensing and real estate compliance advisory services. Local governments are already licensing to cannabis businesses, because the state requires proof the local jurisdiction has authorized the business before issuing a state license.
“Real estate provides a conservative way for investors to participate in the cannabis market without actually ‘touching a leaf,’” says Aaron Hertzberg, a partner and general counsel for Calcannholdings Inc. His company is a cannabis real estate investment firm focused on creating a chain of cannabis dispensaries throughout Southern California. The company is repositioning retail space in compliant locations as attractive storefronts, and is inviting private investors to participate in projects. It currently has two locally licensed dispensaries in Long Beach and is working on others in Los Angeles and Bellflower in Los Angeles County, Santa Ana in Orange County and Lemon Grove in San Diego County.
“We’re seeing a ‘land rush’ for light industrial warehouses,” says Mikalonis. “The biggest demand is for cultivation space. Prices for warehouse space have skyrocketed over the last 12 – 24 months, based on cities going legal.”
Growers in the Bay Area are paying $2 per sq. ft. or more for warehouse space, he adds.
Mikalonis warns growers against signing long-term leases for warehouse space at high rents. Noting that indoor cultivation is power-intensive, he points out that warehouse rents shot up when Colorado legalized cannabis for adult use, but indoor growers lost their shirts when the market was flooded with cannabis and the price dropped significantly
According to Bob Costello, a commercial real estate broker based in Denver, warehouse rents initially escalated four times from what they were previous to Colorado voters legalizing cannabis. He said that Denver— the state’s “pot utopia”— required indoor pot cultivation in areas zoned for plant husbandry. When other states legalized cannabis too, the price of pot dropped from $4,000 per pound to $1,000 per pound, he says. As a result, growers moved their operations into greenhouses, which rent for a fraction of the cost of warehouses, and provide similar growing conditions with less power than indoor cultivation.