How to Maximize Your Cannabis Yield: Commercial Real Estate — Part 1
When selecting a property for your cannabis business, you want to be certain your investment aligns with your goals. At the outset, it’s important to think about how to maximize your cannabis yield in terms of production and financial return regardless of the vertical in which you choose to operate.
Real estate is one of the biggest upfront costs in launching your business. What you pay and the ease with which you’re able to find a suitable property will vary widely by state, county, and municipality. Regardless of where you look, top considerations include supply and demand, applicable regulations, and location, location, location.
Are you thinking of buying, leasing, or doing a custom build? Whichever path you choose, we have some tips on what to look for in a piece of commercial real estate — and some pitfalls to avoid.
Do Your State & Local Research
States have the authority to legalize medical or recreational cannabis use and issue cannabis business licenses. However, the final decision about who can operate where rests downstream at the county or municipal level. In fact, many towns chose to opt out entirely when it comes to allowing cannabis businesses within their borders.
Before you begin scouting properties in a state with brand new legislation legalizing cannabis, learn what cities are on board and for what licenses. It may pay to keep your eye on municipalities that are taking a wait-and-see position like many cities in Michigan have chosen to do.
Fully acquaint yourself with cannabis business land use and zoning regulations in the locale where you plan to purchase or build. These regulations will define what you can do and where. Cultivation, extraction, and retail need to take place in locations zoned in advance for those purposes.
There’s usually a minimum distance — or buffer zone — that must exist between dispensaries and establishments like schools and daycare facilities. Though zoning laws for cannabis are strict, you can occasionally apply for and receive an exception for a particular location in the form of a zoning variance.
A minimum setback from the nearest road may be required for growers so your operation can’t be detected by passersby. Any solvents you use may dictate that your extraction facility be located in an industrial zone. A visit to the local planning and zoning office can be invaluable in clearing up any questions you may have.
Property Value & Appraisal
Property values tend to make gains in areas where cannabis businesses are prolific. When purchasing cannabis real estate you can reasonably expect to pay, on average, 20% over market value. Leasing can prove equally expensive, especially over the long term and in areas where demand is high and properties are scarce.
You should get a property appraisal before you agree to a purchase price. You want to be confident that the asking price is in line with recent sales of comparable properties. A cannabis operation will often be evaluated by an appraiser as the “highest and best use” of a property. As such, a property supports a higher price tag.
In simplest terms, a property can fetch a higher price because of the money that you can make on it. As you calculate how to maximize your cannabis yield, you need to know exactly how much of a real estate investment you can afford in order to be profitable.
Financing Your Cannabis Property
Since cannabis is illegal at the federal level, national banks can’t lend on it. Private investors, some of whom focus on the industry, may be willing to loan you money. Such financing typically comes at a higher interest rate than you would pay for other types of real estate. Carefully compare options to avoid predatory lending practices.
Some state banks and local credit unions aren’t obliged to follow the same regulations as national banks. However, you can still expect to pay a premium if one of these institutions finances your cannabis real estate. Again, prepare to shop around if you need financing to secure real estate.
When considering how to maximize your cannabis yield, any costs to finance the purchase of a property — or the rent you pay to lease — is a factor you need to calculate.
So what will it be? Will you buy, lease, or build a home for your cannabis business? In Part Two of How to Maximize Your Cannabis Yield: Commercial Real Estate, we cover property types including existing businesses, buildings, and land.
At Higher Yields Cannabis Consulting we can help you plan these next steps for your business. Reach out to us today for a free consultation.