Cannabis Real Estate Investing: Considerations for an Emerging Asset Class
EquityMultiple provides investors access to high-quality commercial real estate investment opportunities at low minimums and diversified offerings with a range of risk/return profiles. We have experienced strong demand for non-traditional property types that have the potential to generate outsized returns.
EquityMultiple has targeted a variety of CRE asset classes across approximately 100 investment offerings on our platform including traditional property types—multifamily, office, retail, industrial, and hotel—as well as more niche property types targeted by institutional capital, including student housing, assisted living facilities, self-storage, and car washes. In an effort to further provide diversified offerings, EquityMultiple is excited to introduce an emerging investment opportunity to our investor network: specialized industrial and retail properties leased to state-licensed cannabis operators (“Cannabis Facilities”). This article further expands on the compelling aspects of this emerging CRE asset class.
Worldwide cannabis sales are projected to quadruple from $10.9B to $40.6B between the years 2018 and 2024 – a compound annual growth rate of 28.2% 1. This robust pace of growth has been recognized by institutional real estate investors. Much of the focus remains on cannabis stocks and private equity investments in pre-IPO cannabis companies. However, real estate investment in Cannabis Facilities presents another means of participating in the industry’s growth, while benefiting from the additional security of real estate.
What are Cannabis Facilities and why invest in them?
Like any industry that cultivates, processes, and distributes a perishable good, cannabis companies require facilities tailored to the specifics of their operations. Given the demands of harvesting cannabis, industrial facilities may require improvements with regard to sufficient security, climate control, energy throughput, and lighting to process and quality control (QA) at scale. Many cannabis tenants will also utilize office or retail components for administrative and dispensary purposes, respectively.
In addition, Cannabis Facility developers and investors must address material legal, regulatory, and zoning considerations. Cannabis real estate is complex and significant barriers to entry remain, resulting in a demand/supply imbalance. As such, investing in Cannabis Facilities can be attractive from a risk-reward perspective. Investors must be able to identify and acquire properties that are leased to licensed operators and understand the nuances of working with cannabis operator tenants.
It is important to note that real estate investing with cannabis operator tenants is not the same as investing in cannabis operators directly. First, there is nothing illegal in owning real estate. Second, if a cannabis operation becomes legally unfeasible per local or federal law, the asset can still function as a productive property for traditional warehouse, manufacturing, or retail uses.
Key Considerations for Cannabis Real Estate Investing
Like any real estate property type, Cannabis Facilities present their own opportunities, risks, and underwriting considerations. Here are a few key considerations:
Specialized Knowledge and Experience Matter
We always seek investments where a sponsor, operator, partner or lender possesses specific market, asset class, and investment strategy experience. This is further emphasized with regard to Cannabis Facilities, given the industry’s regulatory and operational complexities.
A Regulatory Arbitrage Opportunity
The cannabis industry continues to expand rapidly, but cannabis remains federally illegal. This results in a “risk premium” for Cannabis Facilities in the form of premium rental rates and above-market financing costs. This creates a window for regulatory arbitrage wherein investors can potentially benefit from improved returns and protections due to regulatory complexities.
NNN Structures are Particularly Favorable
Triple net (NNN) leases hold the property’s tenant responsible for insurance, tax, and maintenance costs (in addition to base rent). As noted above, Cannabis Facilities require certain specifications: climate control, security, and significant electricity to power specialized equipment. A NNN lease eliminates much of this “noise” and added expense to investors, allowing for a simpler execution and more appealing investment.
The Bottom Line: Investing in Cannabis Facilities
The market for Cannabis Facilities remains inefficient due to the specialized nature of cannabis production/sales and the existing legal and regulatory complexities specific to the industry. This creates material barriers to entry and results in higher financing costs creating an opportunity for investors to benefit from potentially higher income and total returns.
Want to learn more about how EquityMultiple can facilitate your participation in cannabis real estate investment? Please don’t hesitate to contact our Investor Relations team via email at firstname.lastname@example.org or by scheduling a call today.
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