Navigating the challenges of cannabis real estate

(This is a contributed guest column. To be considered as an MJBizDaily guest columnist, please submit your request here.)

As the cannabis industry continues to expand, operators face a unique set of challenges – particularly when it comes to real estate.

Unlike traditional industries, marijuana businesses must contend with a complex, fragmented regulatory landscape and a financial sector that remains wary because of the plant’s federal illegality.

These factors make securing and managing real estate a critical – yet often daunting – task for operators.

Despite these challenges, the cannabis industry presents tremendous opportunities for growth.

The total U.S. economic impact generated by regulated cannabis sales could top $112.4 billion in 2024, about 12% more than last year, according to analysis available in the 2024 MJBiz Factbook.

This growth is driven by increasing legalization at the state level, rising consumer acceptance of cannabis and its expanding applications for medical use.

For cannabis businesses, the ability to navigate the unique real estate challenges of this burgeoning industry can be a significant differentiator and a key to long-term success.

Understanding regulatory and licensing landscape

One of the primary challenges in cannabis real estate is the intricate regulatory environment.

Since marijuana remains federally illegal in the United States, the patchwork of state and municipal regulations varies widely.

For operators, it’s crucial to have a deep understanding of local and state laws, zoning regulations and licensing requirements.

Engaging with local government officials and staying informed about legislative changes can help operators anticipate and adapt to regulatory shifts.

In many instances, state regulators require a cannabis business’ location to be approved before it even applies for a license, so ensuring this work is done upfront is critical.

Staying proactive about regulatory changes and maintaining open lines of communication with regulatory bodies also can provide operators with a competitive edge in this fast-evolving market.

Building community relationships

Building positive relationships within the community is essential for the long-term success of any cannabis operation.

Community outreach and engagement can help mitigate opposition and foster local support as companies work through the licensing process.

Operators should be proactive in addressing community concerns, participating in local events and demonstrating their commitment to being responsible and contributing members of the community as well as highlighting the positives of bringing jobs and revenue to the municipality.

‘Location, location, location’

The adage “location, location, location” holds particularly true in cannabis real estate.

Whether locating a retail outlet or cultivation facility, operators must carefully select locations that comply with local zoning laws and are strategically positioned to attract customers and streamline logistics.

Proximity to target markets, ease of access, ability to hire quality labor and visibility are key factors to consider.

Conducting thorough market research and feasibility studies can help operators make informed decisions about site selection.

Property acquisition and leasing

Once a suitable location is identified, the next hurdle to tackle is acquiring or leasing the property.

Many property owners are unable to lease to marijuana operators given the plant’s federal illegality.

If a landlord has a loan from a bank, that lender must approve the site’s use as a marijuana business, which most large national banks are unwilling to do.

Of the landlords who are able to lease to cannabis tenants, many are still hesitant because of the perceived risks associated with the industry.

To overcome this, operators should be prepared to educate potential landlords about the cannabis industry’s stability and growth potential.

Operators also should discuss potential lender concerns early in negotiations so the landlord receives approval quickly, before too much time is invested.

Once that obstacle is overcome, operators might have to provide larger security deposits, long-term leases and parent-company guarantees to make a landlord comfortable leasing to a business in the nascent industry.

Securing financing

Access to traditional financing often is limited for cannabis operators because of the federal status of marijuana.

Banks are limited in providing mortgages to the industry – as are large institutional real estate investors that might receive capital from pension funds or sovereign wealth vehicles.

However, several alternative financing options are available, including private debt, cannabis-related equity funds and specialized real estate investment firms.

These entities understand the unique risks and opportunities within the cannabis sector and can provide the capital necessary to acquire and develop properties.

Building strong relationships with these financiers can be instrumental in overcoming capital constraints.

Compliance and security

Ensuring compliance with stringent security requirements is another critical aspect of managing cannabis real estate.

State regulations often mandate comprehensive security measures, including surveillance systems, access controls and secure storage solutions.

Operators should work with experienced security consultants to design and implement robust security plans that meet regulatory standards and protect their assets.

Adapting to market dynamics

The cannabis industry is characterized by rapid change and innovation, and operators must be agile and adaptable when it comes to financing.

Traditional banks and even private lenders enter and leave the industry with regularity, so continuously monitoring these shifts is crucial to securing reliable funding sources and maintaining financial stability.

Navigating the challenges of cannabis real estate requires a combination of regulatory acumen, strategic planning, financial ingenuity and community engagement.

By understanding the unique hurdles and market dynamics and proactively addressing them, cannabis operators can position themselves for success and contribute to the continued growth and legitimacy of the industry.

Jarrett Annenberg is the co-founder, senior vice president and head of investments at NewLake Capital Partners, a provider of real estate capital to state-licensed cannabis operators, where he oversees acquisitions and assists in the company’s operations, portfolio management and capital-raising efforts. He can be reached at jannenberg@newlake.com.