Real estate is one of the more difficult aspects of the cannabis industry. Securing a license is tough but getting your location is even tougher. Each state has different regulations and restrictions, which combined with unique real estate markets makes finding and securing property essential. It’s an expensive endeavor and one in which traditional mortgages aren’t typically an option.
This presentation will focus on the New England and New York area cannabis real estate markets. It will cover the following states: Maine, Vermont, New Hampshire, Connecticut, Massachusetts, New York, New Jersey, and Pennsylvania.
Many of the states that have gone fully legal – meaning legalized both medical use and adult-use cannabis often have opt-out clauses for municipalities. This means that in some areas if a town or village decides against allowing cannabis stores or facilities in its location, that puts even more demand for locations in the municipalities that approve cannabis businesses.
Growth in the Northeast
The Northeast cannabis industry has been expanding at a blistering pace. In 2018, there were only 187 dispensaries across nine states. Fast forward to March 2021 and you see the number has jumped to 424. Of this 424, only Massachusetts and Maine have adult-use products for the sale, the rest are entirely medical marijuana. These numbers are expected to jump even higher as states like New Jersey and New York go fully legal. “It plays out in typically New England ways – Maine has been really friendly, Portland was very competitive,” said MMLG Managing Director Brian Lauvray.
|Dispensary/Retailers 2018-YTD 2021|
|Copyright © 2021 by CNB Media LLC dba Cannabiz Media|
|Source: Cannabiz Media License Database www.cannabiz.media|
One area in Massachusetts that saw a dispensary boom is Great Barrington. This lovely town in the heart of the Berkshire mountains is a center for tourism. Skiing in the winter, plus hiking, biking and camping in the summer. There’s a bustling summer performance calendar as well that brings lots of baby boomers up to watch dance and theatre groups. It’s the perfect place to locate a dispensary and the town initially opened its doors.
That sparked a flood of dispensaries and now the town, despite having no cap on stores is saying they have enough, thank you. The population has less than 7,000 people but 5 dispensaries. Springfield in the middle of the state has attracted several stores and then Boston and its surrounding suburbs has numerous dispensaries, but there are big pockets of the state where there are zero dispensaries. Mostly due to the lack of a major highway or tourist center.
Capitalizing on the Asset
Cannabis companies continue to struggle with getting big mortgages for buildings. They continue to use the capital raised in order to fund a store or facility purchase. The later, the company can sell the property to a REIT or real estate investment trust and then lease it back. Innovative Industrial Properties or IIP is a popular REIT that has done this so often, that it is the leader in the space.
Let’s look at Massachusetts again. Almost every big player in the space has sold a property to IIP. (The investment figure is in thousands and the data is from the IIP 2020 annual report.)
|Rentable Sq. Ft||Investment|
|PharmaCann MA||Massachusetts||May 31, 2018||58,000||30,500|
|Holistic MA||Massachusetts||July 12, 2018||55,000||14,750|
|Trulieve MA||Massachusetts||July 26, 2019||150,000||43,500|
|Ascend MA||Massachusetts||April 2, 2020||199,000||33,775|
|Cresco MA||Massachusetts||June 30, 2020||118,000||8,904|
|4Front MA||Massachusetts||December 17, 2020||67,000||15,500|
In 2020, IIP closed on the acquisition of a property in Massachusetts, which was approximately 118,000 square feet of industrial space in the aggregate. The purchase price for the property was approximately $7.8 million (excluding transaction costs). IIP also entered into a long-term, triple-net lease agreement for the property with a wholly owned subsidiary of Cresco Labs Inc. (Cresco), which intends to operate the property as a regulated cannabis cultivation, processing and dispensing facility upon completion of redevelopment. Cresco is expected to complete additional tenant improvements for the property, for which IIP has agreed to provide reimbursement of up to $21.0 million. Assuming full reimbursement for the tenant improvements, IIP’s total investment in the property will be approximately $28.8 million.(Data from IIP’s annual 2020 report)
Going back a couple of years in 2018, closed on the acquisition of a property located at 96 Palmer Road in Monson, Massachusetts, which comprises approximately 55,000 square feet of industrial space situated on approximately 5.4 acres. The purchase price for the property was $12.75 million. Concurrent with the closing of the purchase, the Company entered into a long-term, triple-net lease agreement with Holistic Industries, Inc. (“Holistic”), which intends to continue to operate the property as medical-use cannabis cultivation and processing facility in accordance with Massachusetts medical-use cannabis regulations.
Newcomers – New Jersey & New York
Massachusetts looks like an old-timer compared to the soon-to-be fully legal states of New Jersey & New York. Both markets are expected to be sizable and both are only legal for medical marijuana at this time. Both have recently decided to legalize adult-use cannabis and New Jersey could begin sales in 2021, while New York will begin sales on April 1 2022. Both states are also famous for expensive real estate.
Any new entrant to the market is best served by hiring a consultant that knows the ins and outs of navigating the red tape that comes with cannabis. The competition for licenses will be fierce. Brian Lauray from MMLG consultants said, “New York & New Jersey will be a battle royale from an application standpoint. Borough commissioners and aldermen and who you know.” Plus, both states allow municipalities to opt out of the cannabis industry. “In New Jersey, a few desirable municipalities have indicated they are open for business – like Jersey City,” said Lauvray. “It’s a really interesting market – everyone wants in. But there is a lot of demand and not a lot of supply. It will come down to the operators that have the money and can tweak many levers”
IIP has also been busy in the New York market buying properties despite the relatively small size of the number of stores and facilities. New York is a limited license state that only gave 10 operators the opportunity to be in the industry. That will change with full legalization, but those 10 operators have all struggled with the medical-only nature of the state. It had a very restricted list of conditions in order to get the license and sales have been dismal versus the amount of money invested. So it was no surprise to see some companies selling off real estate to IIP in order to get some cash in the kitty.
IIP said in a securities filing that in December 2019, one of its properties in New York accounted for 6% of our net real estate held for investment. In December 2020, the company said it amended its lease and entered into a development agreement with PharmaCann at one of our New York properties, making available $31.0 million in construction funding at the property. “Assuming full payment of the construction funding, our total investment in the property will be $61.0 million. As of December 31, 2020, we incurred approximately $70,000 of the construction costs, of which none was funded.”
|Rentable Sq. Ft||Investment|
|Curaleaf NJ||New Jersey||July 13, 2020||111,000||18,940|
|Columbia Care NJ Portfolio||New Jersey||July 16, 2020||54,000||13,033|
|PharmaCann NY||New York||December 19, 2016||127,000||30,000|
|Vireo NY||New York||October 23, 2017||40,000||6,717|
In New Jersey, the Columbia Care parcel is actually two properties and IIP said that Columbia Care was expected to redevelop one of the properties and IIP would reimburse them $1.6 million. Curaleaf was redeveloping its building with a reimbursement of up to $29.5. IIP said $20 million was spent on redevelopment costs and IIP funded $13.4 million of that. Both New Jersey and New York give cannabis companies the best of both worlds. Each state has urban dense population locations and then long-term agricultural areas. In upstate New York, much of this agricultural land is economically depressed as well and welcomes large-scale grow facilities despite the smell and light pollution.
Pennsylvania is a medical-only state at this time, although there seems to be incredible pressure on the state to go fully legal as its neighbors New York and New Jersey. In the last 12 months, Pennsylvania medical cannabis sales totaled $910 million. Medical cannabis sales have grown steadily in the past 13 months, starting at $40M in January 2020 and ending at close to $98M in January 2021. The state’s stores have grown from 47 in 2018 to 110 in 2021 for just a medical market. The size of the spaces is growing as well. While Canadian companies may have overbuilt facilities, Pennsylvania operators are clamoring for more. In December Ayr Strategies closed on the purchase of CannTech PA for $57 million. This acquisition included a 143,000 sq. ft. cultivation and processing facility on 13 acres.
|Rentable Sq. Ft||Investment|
|Jushi PA||Pennsylvania||April 6, 2018||89,000||13,381|
|Maitri PA||Pennsylvania||April 24, 2019||51,000||21,402|
|Green Leaf PA||Pennsylvania||May 20, 2019||266,000||13,592|
|PharmaCann PA||Pennsylvania||August 9, 2019||54,000||25,730|
|GTI PA||Pennsylvania||November 12, 2019||148,000||39,600|
|Curaleaf PA||Pennsylvania||December 20, 2019||72,000||25,749|
|Holistic PA||Pennsylvania||June 10, 2020||108,000||15,007|
Parallel is working to set up a 120,000-square-foot grow facility in a space owned by The Buncher Co. in the Chateau neighborhood of the North Side, working in partnership with the University of Pittsburgh through its venture called Goodblends PA. The company said that the venture needed a big building for a range of uses that will include growing and processing medical cannabis products, conducting research, training employees as well as meeting basic distribution and warehousing demands. A fully legal state could see an additional boost in real estate. At this time, Pennsylvania is IIP’s second-largest market for a property with rents accounting for 15.7% of rental revenue. Seven properties with 788,000 rentable square feet bring in $18.3 million a year (as of December 2020).
An example of the effect on a fully legal state can be seen in the recent increase in stores in Maine, which jumped from 8 in 2019 to 23 in 2021. Propco., a subsidiary of New York-based real estate investment trust Power REIT acquired a three-acre property in York County, Maine. The sales price was $400,000. That property currently houses an under-construction, 32,800-square-foot cannabis cultivation facility. It also has a 2,800 square foot processing/distribution building with construction recently completed. PropCo. Said it will fund the construction of an additional 9,900 square feet of processing space and the renovation of an existing 2,738 square foot building at the recently acquired property. The completion of construction on the new property is targeted for Summer 2021.
The combined properties are expected to be one of the largest cannabis greenhouse cultivation and processing/distribution properties in the state of Maine upon completion. David Lesser, Power REIT’s Chairman and CEO said that it’s not easy to raise capital for large-size facilities despite all the talk. He also noted this his REIT is focused on greenhouse cultivation facilities.
CT, NH, RI
The remaining states are relatively smaller parts of the real estate story in the Northeast. Connecticut has four producers that account for 18 dispensaries and facilities. Vermont has seven, New Hampshire has five and Rhode Island has three. This week a bill to legalize marijuana in Connecticut was approved by a key committee on Tuesday—but it “remains a work in progress,” the chairman said. The legislation is said to be backed by the governor and includes a series of new social equity provisions. A week ago, Marijuana Moment reported a pair of Rhode Island Senate committees held a joint hearing on two marijuana legalization proposals—including one proposed by the governor—as well as several bills to reform the state’s existing medical cannabis program. In late 2020, Vermont’s governor allowed a legalization law to take effect without his signature. However, it may be some time before actual legal sales can begin as decisions around licensing have yet to be decided.
Ultimately, the real estate side of cannabis seems to be a solid choice. Lesser said that so far in cannabis if tenants have trouble making the rent, it often gets worked out. Either new investors come in or the company is acquired, but the situation is typically resolved. IIP has noted that its rents are on time as well. In October 2019, a court-appointed a receiver of the tenant at its Los Angeles, California property. That tenant subsequently defaulted on its lease payments to us for all of 2020. It had been leased to Vertical in southern California, in which Vertical made partial payments of contractual rent due.
The purchase price for the southern California portfolio was approximately $17.3 million. Then Holistic the cannabis operations from the tenant, which had been in receivership. Holistic closed on this transaction and then quickly executed a long-term, triple-net lease with IIP for the entire property. Assuming full reimbursement for the redevelopment of the property, IIP’s total investment in the property will be $24.0 million. The company did say that for some or all of 2021, it expected that many of its tenants would continue to incur losses as their expenses increase in connection with the expansion of their operations and that they have made and will continue to make rent payments to us from proceeds from the sale of the applicable property or cash on hand, and not funds from operations.IIP says it has not provided deferrals of any rent obligations to any tenant since July 1, 2020.
The New England market holds a great deal of promise for the cannabis industry. The pandemic has caused a huge disruption in traditional retail for many of these economies. Lockdowns caused a spike in online shopping causing many brick & mortar retailers to close up, presenting opportunities for dispensaries. While rural land values have risen as remote working created an opportunity for urban dwellers to relocate to more rural settings. Once depressed towns have seen new life, so the days of cheap big acreage in remote locations have declined. It’s still relatively early in this cycle for cannabis industries and the picture is sure to change as rules regulations get decided and then perhaps tweaked again.