Cannabis has been legalized in several states over the past few years, giving real estate investors a new alternative asset class to put their money in. It looks like this trend is going to intensify in the coming months.
As we move into 2022, all US states without current medical cannabis legalization are now considering legislation or ballot initiatives to legalize it. In addition, some states where medical cannabis is already legal may take the next step this year to allow adult recreational use.
“As we come out of the pandemic, states are looking at the cannabis industry longer and harder to increase tax revenue,” says Eric Altstadter, a partner at the New York-based accounting firm EisnerAmpere.
Twenty-one additional states could legalize some form of cannabis use this year, according to Michael Schwam, a partner in the New York office of law firm Duane Morris. For example, in Oklahoma, which has the largest medical marijuana industry in the country, State Representative Scott Fetgater has introduced legislation to legalize recreational sales. Two potential 2022 referendums have already been filed that, if passed, would establish a taxed, regulated adult-use market, Schwam says.
According to Matthew Carnes, founder, legislation to legalize cannabis for adult recreational use is underway in Hawaii and Rhode Island, and several states, including Arkansas, Ohio, Nebraska, Idaho, Missouri, and North and South Dakota, approve of recreational use. Ballot measures are pending for giving. GreenWave Advisors, a New York-based cannabis research and advisory firm. Delaware and Maryland also have pending legislation that would legalize cannabis for recreational use.
What does this mean for investors
With this “green wave” growing nationwide, Altstadter says real investors are becoming more comfortable with cannabis-related assets, despite the federal government’s failure to downgrade marijuana from Schedule I drug status.
And according to Carnes, the growth in cannabis sales during the pandemic may have attracted some new investors to the industry. Cannabis dispensaries were considered an “essential business” in most states, allowing them to remain open after other businesses had to close due to restrictions, notes Schwam. Meanwhile, the pandemic’s impact on retail real estate occupancy is making landlords who previously protected cannabis tenants more flexible, according to Altstadter.
“Real estate investing (with ancillary services) is often the entry point for many investors,” Schwam says. “As the industry continues to gain acceptance, I see more and more traditional real estate investors taking a look at this market as being able to generate higher returns in the cannabis sector versus the cannabis sector. Others [real estate] Market.”
Schwam says the return on investment in cannabis real estate is currently between 12 and 15 percent and is higher on loans with loan terms of two to four years. On the equity side, the range is much more variable and is more dependent on the type of company involved – whether it is a start-up, in the development stage, publicly traded or privately held. It tracks multiples of what other industries are getting with an added “premium cannabis,” Schwam notes.
what’s the risk?
The biggest risk for cannabis real estate investors is primarily the prospect of the underlying business surviving in an area that has always been very cash-constrained and subject to a very high tax rate due to Section 280E of the Internal Revenue Tax Code. , Schwam continues. Section 280E prohibits any business, or part of a business, that engages in the trafficking of a Schedule I or II controlled substance, such as cannabis, from using certain deductions or credits for federal tax purposes.
Additionally, on the loan side, most collateral is not available to the lender, and with real estate there is always a question of what the value is for the “next best use” if you need to replace the tenant, Schwam notes.
Meanwhile, Carnes cites civil forfeiture as a threat and concern to potential cannabis real estate investors, although he says the risk is not as significant given the number of states that have Cannabis is legalized, which is finally coupled with the inevitable end. for federal prohibition.
“The issue that dominates everyone’s investment thesis is that when we see some kind of federal law, it’s not going to happen anytime soon,” says Schwam. Nevertheless, he expects a significant increase in the region’s M&A activity, with larger players making strategic acquisitions to gain mass and/or move to new states.
while all the experts WMRE In interviews that believed federal legalization would eventually occur, he noted that the issue presents challenges for the cannabis industry as traditional bank loans remain unavailable and credit card companies sell credit cards (debit card sales) to dispensaries for an illegal substance. OK) will not allow to accept. ,
As a result, investors must rely on alternative capital, which has given rise to new capital sources and strategies. There appears to be a growing appetite for cannabis investments across all asset classes, but with many large public cannabis REITs now established, Schwam says there could be additional activity in the lower end of the market, including multi-state operators (MSOs). ) and single sign-on (SSO) retail locations. For example, over the past year, a number of private financial services firms have popped up to serve cannabis businesses, providing them with electronic banking and lending services, according to a recent report. The Financial Times,
Meanwhile, Dime Community Bank, while still staying away from loans, takes deposits and provides cash management services to cannabis companies, primarily in the New York metropolitan area. San Francisco-based Dama Financial performs compliance functions for small banks serving cannabis companies, which allows them to take loans as well as make deposits, process electronic payments, and arrange armored car cash pick-up .
Some state governments have also initiated loan programs to ensure social equity in the cannabis industry. For example, Illinois has raised a $34 million social equity loan fund that provides loans of more than $150,000 on average, with interest rates not exceeding 8 percent.
Altstadter also notes a large increase in back-sale-lease activity by cannabis businesses to raise capital for expansion. according to a report by benzingaSome examples of cannabis sales-lease return transactions in the past year include:
- A $50 million deal involving Chicago-based Cresco Labs and GreenAcreage Real Estate, a New York-based REIT, provides back-sale-lease and construction financing to cannabis operators.
- A $35 million sell-lease return transaction for six properties owned by New York-based multi-state operator (MSO) Columbia Care.
- A $39.5 million sell-lease deal with San Diego-based REIT Innovative Industrial Properties for the cultivation facility of Chicago-based MSO Green Thumb Industries in Pennsylvania.