After five and a half years of building and operating a real estate firm focused on the regulated cannabis market, I have picked up a few essential best practices when it comes to assessing and vetting potential real estate investments in this industry. It is important to understand that while regulated cannabis is an exciting and emerging new industry, one should not presume that standard business and investment practices will be present in every real estate project and with every project team. Let’s explore a macro-level overview of what to watch out for when it comes to investing in regulated cannabis real estate projects.
1. Master plan and development design: Have the short-, mid- and long-term development plans been drawn out to include all aspects of the real estate project beyond the initial phase to account for growth (i.e., utility upgrades, setbacks, permitting, engineering)? And has the development team sought out feedback from the local community regarding the facility, where it will be located and how it will be operated?
2. Real estate ownership: Does the owner or project team actually hold equitable title to the property? This may seem like an obvious one, but you’d be surprised how often ownership to a piece of real estate proposed for regulated cannabis has a complex and sometimes fraudulent history.
3. Hidden debt: What kind of debt is tied to the property, and is it considered toxic? Most cannabis projects are still not able to secure traditional capital due to financial restrictions in the marketplace. This is not necessarily a bad thing (the greater the challenge, the greater the reward), but make sure you know who holds the debt and where default risk can occur.
4. Real estate entitlements: Has the real estate and the project team received the necessary zoning authorizations, use permits and/or development deals from the local municipality, county and state departments? These regulatory requirements can be complex and could cripple a project if not done correctly.
5. Enforceable agreements: Does the project team actually have enforceable contracts in place that are required for a successful project (i.e., lease agreements, license agreements, vendor contracts)? It is vital to ensure the proposed project has not been created upon a self-fulfilling prophecy whereby the project team has put the cart before the horse. In other words, is the project merely conceptual, or does the project team actually have the contractual agreements in place to proceed with the development and succeed with the operation?
At the end of the day, the regulated cannabis industry is still very early in its evolution. Smart development teams and diligent investors should approach the market with a “buyer beware” mentality. Even the best and most honest operational teams are bound to make mistakes in an emerging industry, but where there’s high risk, there’s also high reward. Become as informed as possible regarding any potential real estate investments, and mitigate as much risk as possible in order to create the best chance of reaping the rewards.