The regulated cannabis market requires a multitude of licenses. In California, for instance, there are close to 20 different licenses across 7 categories. Categories include cultivation, manufacturing, testing, distribution, retail, microbusiness, and events. All licenses are attached to, you guessed it, real estate. Real estate is an underpinning of the cannabis industry and therefore a highly valued asset category.
U.S. legal cannabis spending is expected to reach $11B by 2018 and grow to $23B by 2022 — that’s a staggering compound annual growth rate of 25%. While investors are eager to tap into this generational wealth opportunity, many want to mitigate risk by investing in a hard asset class that is less exposed to supply, demand, and pricing dynamics: Cannabis real estate is the perfect category for many investors.
Underwriting cannabis real estate through a rigorous selection process can protect investors from unexpected costly surprises. At BaseCanna, we underwrite each property based on the following categories:
Taxes:
Cannabis tax treatments vary widely across municipalities. Some are very onerous, and have a substantial impact on the bottom line. We are careful to select properties in municipalities that have favorable (comparatively lower) tax treatments.
Zoning:
Zoning can be complicated. The light industrial category, for instance, can be permitted for manufacturing in one neighborhood but not in another. Rigorous zoning due diligence is essential for acquiring the right property. Also, look into the future: when might the municipality reconsider its zoning map, and how might that impact acquisition decisions?
Regulation:
Choosing a municipality with a reasonable and accommodative regulatory structure limits operational risk.
Licenses:
Choose buildings in municipalities where the probability of securing licenses is high.
Adaptable:
Repurposing a warehouse, for instance, for cannabis cultivation or manufacturing requires specific ceiling heights, utilities, and security measures, to name a few.
Location:
Cannabis real estate, like many other commercial industries, needs strategic access to the supply chain and accessibility to highways and transportation lines.
Efficient:
As the market becomes more competitive, having the ability to implement efficiencies and lower operating cost provides a competitive edge.
Staff:
Depending on its size, cannabis operations can employ up to hundreds of people. Purchasing and adapting cannabis real estate that is accessible to key personnel and line staff must be an acquisition consideration.
Cannabis real estate is a new asset class with premium returns and considerable longevity. As the market matures, premium returns will subside. At BaseCanna, we are underwriting our real estate investments with IRRs in the mid 20s. This premium investment window won’t last, so if you are interested in investing in cannabis or cannabis real estate, contact us today.
Let us know what you think about the potential for cannabis real estate in the comments below! And sign up for our newsletter at www.basecanna.com!
