The Real Estate Market for the Cannabis Industry

Colby Piper is Director of Cannabis Real Estate at RIPCO and has become a cannabis real estate specialist representing both tenants and landlords in this growing industry. Colby is a graduate of West Virginia University.

Darrin Chandler Jr. joined RIPCO as Director of Cannabis Real Estate, focusing on cannabis operator representation. Darrin also provides consultant services for top tier cannabis brands through his other business, Premium Genetics. Darrin is a graduate of the University of Maryland and received his MBA from Montclair State University. Welcome, gentlemen.

Colby Piper:
Thank you for having us. Very excited.

EA:
Colby, tell us a little bit more about RIPCO and how you got involved in the cannabis space.

CP:
So like you said, RIPCO started in 1991 where we focused on retail, specific real estate, and business grew to investment sales. So we are the leading independent retail leasing and investment sales firm in the tri-state and we represent about 110 national tenants. With that expertise, I decided to open up the cannabis division. I did my first deal with the Sen Wellness in Fort Lee, which was 14,000 square feet and the light bulb clicked in my head. I reached out to my long friend Darrin, who went to high school and I together and we began the cannabis division at RIPCO.

EA:
Darrin, how hard is it for a cannabis company to get property or lease?

Darrin Chandler Jr.:
Well, specifically here in New Jersey it's extremely difficult because when cannabis was legalized, the state allowed the municipalities the opportunity to opt in or opt out. And when I say opt in or opt out, it means they were able to, yes, allow cannabis businesses to operate within their township or to ban cannabis businesses from operating within their township. So last year, one of the biggest headlines was 70% of the towns in New Jersey banned cannabis businesses from operating. The other 30, they put a cap on the amount of cannabis businesses that can operate within their township, and they only zoned a small portion of each township. So when you put all of those obstacles together, it is extremely limited and difficult for cannabis businesses to find green zone properties to house their businesses.

EA:
That's a similar method to what New York used also, with the ability to opt in or opt out and those that opted in, they were finished and those that opted out had the ability to opt in later on down the road. I guess that's a similar system that New Jersey used, right?

DCJ:
Yeah. So when they legalized cannabis, the day that the state released the regulations was the same day the municipalities had to make a decision on whether they were opt in or opt out. That's the reason why that number of opted out was so high because they weren't able to do their due diligence. But as you've been seeing, if you follow New Jersey news, slowly towns are now opting in because they don't want to miss that tax revenue. The one caveat, New York only allowed townships to have the opportunity to ban the retail operations. But, yes, it's very similar to New Jersey where in the future, if they do decide to opt in, they can create their rules and regulations for their municipality and opt in at a future date.

EA:
Colby, do you deal with dispensaries or cultivators or both?

CP:
So we deal with all classes of cannabis. When it comes to real estate, typically you see cultivators in industrial space and you see retailers in retail space. So typically we are handling the assets for industrial and retail that covers all classes.

EA:
And what issues are the same and different with those groups? What issues do dispensaries and cultivators both experience and what issue are separate or distinct for each class?

CP:
Besides the issue of the municipalities opting in and opting out from their use and both parties, say, both buckets, they also face the lending aspect. If the lender on the property is a federally insured bank, they also can't house their business on that site. So that's an issue that both parties come to. But also when it comes to a retailer, you want location, location, location. And as a cultivator or manufacturer, you're more concerned about pricing, pricing, pricing.

EA:
That's a very interesting point you mentioned earlier, which, if I remember correctly, if the ultimate lender on the property is a federal bank, that creates issues because illegality of the industry. So many of those federal insured or those mortgages using federal institutions become a problem if they lease now to a federally illegal business, right?

CP:
Correct.

EA:
Now, Darrin, how do prospective dispensary owners find suitable properties?

DCJ:
Well, the first thing is they have to hire individuals like Colby and myself. But putting that aside, it takes a lot of due diligence. And right now, so currently in New Jersey, the strategy we tell our clients is to really focus on opted-out towns because pretty much all the towns that are opted in, the first wave of opted-in towns, they have picked their winners, they've had their whole process ironed out. They've reached their cap of the amount of dispensaries they'll allow in those townships. So yeah, the only opportunity is opted-out towns. So we always say, you want to be a good community citizen, corporate citizen, so you want to be able to be that cannabis expert and help inform the municipality officials on how we can actually do cannabis business here. And what are the benefits of allowing a cannabis business to operate within your walls?

EA:
Colby, landlords historically have not been so keen on leasing to a dispensary. And I know we just kind of had COVID, we came out of COVID and we're coming out of COVID and there's a lot of empty space. It's now harder to rent. Have landlords' views changed on renting to a dispensary?

CP:
Yeah, so historically they always were like, "No, no, no." Due to the stigmatism of the plant that us cannabis industry folks face all the time. But as the industry rolls out, landlords are becoming more acceptable due to the cannabis tenants willing to pay a higher rent. So ultimately landlords are more acceptable to the use because it's more financially beneficial to them.

EA:
Darrin, we did talk a little bit earlier about municipalities in New York and New Jersey having the option to opt in or opt out. What is your view of this method used by New York and New Jersey? Does it work? Does it not work? Is it similar to other states or is it completely different?

DCJ:
I'd have to double check, but, no, it's like Massachusetts. It was the same. They allowed the townships to have an opportunity to make their own decision. But it's just that, so New Jersey, that's just the way the state is structured. It's this thing called home rule, which the easiest analogy I use is that New Jersey is a miniature United States, and the townships are miniature states. So look at this thing. Cannabis is federally illegal, but we allow states to have their own opinion on whether to legalize the plant or not. And then that's just the same thing, the same way it's ran here in New Jersey. So do I think it's successful? No, but unfortunately we can't change that.

EA:
Colby, how does the illicit market impact rents?

CP:
The illicit market, let's say, when we talk about New Jersey, we still don't have the standup brick and mortar illicit guys. We do. They're very small. So New Jersey, the illicit market doesn't really affect the rents when it comes to cannabis. In Manhattan specifically, or New York, where there's over 1500 illegal brick and mortar stores, ultimately, now that there's been subpoenas and things getting sent to landlords to help shut down the business, the illegal stores were paying technically market rent because they turned on their typical bodega to a dispensary overnight. So they didn't have to face the woes of what we call the cannabis delta. So ultimately the illegal markets are just taking up space that the cannabis legal market can rent for a higher price per square foot.

EA:
It's so interesting in New York, New York, I know better than New Jersey and I know New York, I think there's maybe a dozen legal dispensaries now within the state, but if you walk down 7th Avenue south of Penn Station, on every corner, it seems like on every block there's at least one or two dispensaries, all illegal dispensaries.

CP:
Correct. It's very crowded. But if you go and you speak to some of these, when it comes to speaking over the whole industry, regardless of the illegal guys that are there, as a licensed operator and as the education rolls up to New York where there's more educated buyers, ultimately that will help diminish the illegal market. And then the other thing is these illegal stores are doing numbers as well as the legal stores. So there's kind of still a market for both almost. If you can do... Some stores are doing $100,000 today, and that's in the legal market. In the illegal market, if they're doing $50 to $100,000 a day, both parties are still winning. So there's still a big market ultimately for us to grasp.

EA:
Now the cost of building a dispensary, I know the answer, Darrin, when I ask you this question, you're going to tell me it depends. But how does the cost of building a dispensary differ than from building, say, a more conventional or a non-illegal business, say, a 7-Eleven? How different is the cost of building these two different stores?

DCJ:
I don't think there's really a big cost difference. At the end of the day, you're going to have to get fabrication, custom shelving, no matter if you're opening a 7-Eleven, a Starbucks or the next great dispensary. So the cost is very similar, I would say, when it comes to building out your retail store.

CP:
I would compare it to a restaurant buildout because we do may have to add extra ventilation specifically in the vault room where we're storing the product, which may be costly, same with security. But ultimately I would consider it just like a restaurant buildout.

EA:
And you mentioned security. How important is the security to a dispensary, Colby?

CP:
It's one of the most important things. Speaking to multiple dispensary operators, you have to go into the business with the mentality or notion that you are going to get robbed and the object is to prevent how frequently it happens. On average, I believe every 12 to 14 months, a dispensary will get broken into. Now when they get product there will be an attempt, but ultimately security is what the state and the cities want to see. So if you could show a very strong security plan, it gives you a leg up when it comes to getting applications approved.

EA:
Darrin, we talked about how hard it is to find prime real estate space. So is it very competitive for those companies now that are getting their licenses?

DCJ:
Yeah, absolutely. So kind of touching base on earlier about the opt in pound, right? Say, a township only allowed two operators within their town and they had an application process. I've seen it happen where there was 10 applicants for two spaces, and the township ended up taking seven months to determine who the winner was. And then when they picked the winners, they got sued by the losers. So all in all, I kind of say it's the Hunger Games. It's very, very difficult, it's very, very competitive, and you have to put your best foot forward in order to compete and win these local and state licenses.

EA:
Colby, what does somebody like you, a cannabis real estate agent, need to know that someone servicing other industries doesn't need to know?

CP:
We need to know what the lenders take on the property is that other realtors servicing other industries don't need to know. And we actually, all realtors need to know zoning, but we have to really fully understand zoning because they're giving zoning out specifically for cannabis operators in certain zones. So if we understand the zones and understand where they're placed in towns, it gives us the leg up when we begin searching for towns.

EA:
So you pretty much have to walk around with a tape measure always, kind of measuring how far you're away from other dispensaries, how far you're away from schools, how far you're away from other areas, huh?

CP:
So a good thing at RIPCO and our division, we have already done that for the five states that we work in. So we have proprietary maps that show all of the green zones written off of the worded regulations for the given towns. So we're able to click and see properties pretty quickly and speak to the landlords directly.

EA:
Right. So my last question for both of you gentlemen, I guess is, the current commercial retail environment, how has that changed for cannabis companies of late?

CP:
So, let's say, the change in the commercial retail are for cannabis companies. Cannabis companies that are established, they are learning that they are able to be a little bit more picky when it comes to their real estate. They're able to have the time to find the best-in-class real estate in a municipality that has opted in or opted out versus the mom and pop operators, they kind of have to go where they can fit.

EA:
Darrin, how about COVID? I mean, do we still see any impact of COVID affecting the current marketplace or do you see the impact that we've kind of experienced being long-lasting?

DCJ:
I mean, well, cannabis, it was essential product during COVID. What you see is that a lot of retail failed during COVID. So there are opportunities there. But again, if the municipality didn't opt in, then there's a difficulty there. I don't really see COVID having a lasting effect on the industry. I actually think that when more towns opt in, those that lost during COVID, there'll be opportunities to house cannabis businesses there.

EA:
It's interesting you talked about essential businesses. If I remember Massachusetts as an example, when COVID first hit, I think they declared medicinal dispensaries essential and recreational not essential. So I think there was all kind of confusion within the state of Massachusetts early on.

CP:
Right. Here in New Jersey, they deemed cannabis essential, period, across the board. So you were able to go recreational or medicinally there. It's kind of funny, it's like the seven sins of the world. Alcohol was almost deemed essential as well. So it's pretty interesting how devices are there still for us to grab.

EA:
Yep. Well, thank you for listening to CannaCast as part of the EisnerAmper podcast series. Please visit www.eisneramper.com/cannabis for more information on podcasts. Also, please visit www.ripcony.com for more information about RIPCO Real Estate and Colby and Darrin. Please join us for our next CannaCast podcast where we'll discuss other budding issues.

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