The future of California’s marijuana industry isn’t entirely clear due to fears of a federal crackdown. This hasn’t slowed the rate of investment in this rapidly growing market, and for good reason: many expect that the recent legalization of recreational marijuana use to result in massive sales growth, with New Frontier, a cannabis research firm, projecting an increase in annual sales from $2.76 billion to $6.46 billion by 2020.
It’s an incredibly attractive market for would-be investors. An important question to ask is, “How can I ensure the safety of my investment?” Direct investment in a cannabis company could result in devastating losses down the line, if the federal government moves on marijuana, or if local laws change and the business becomes a different game. This is why we recommend an alternative, more indirect approach that can yield very attractive profits while still protecting your investment:
Purchasing industrial warehouses and leasing the real estate to marijuana industry professionals.
Dispensing, cultivating, and distributing cannabis on a commercial scale requires a great deal of space, with some companies operating warehouses measuring a few thousand to a few hundred thousand square feet. The largest to date, a million square foot growing facility, is set to open in Massachusetts this fall.
Cannabis requires space, and because it’s typically grown indoors, warehouses in light industrial areas are very attractive grow sites. However, because growing and selling marijuana is still a federal crime, companies involved in the marijuana trade are unable to take out bank loans in order to purchase property. Thus, the vast majority of them have to lease their spaces instead.
Cannabis growers are extremely attractive tenants, as they pay rents well above market rate in order to secure space due to the risky nature of the industry. For instance, Bloomberg reported late last year that buildings that typically rented for $5 a square foot were rented by cannabis companies at a rate of $12 to $18 per square foot. We’ve seen this disparity hold true in Sacramento as well, with marijuana growers and operators here paying rent rates that are two to three times higher than market rate.
This presents a great opportunity for independent real estate investors.
This provides investors with a great opportunity to take advantage of the growing marijuana industry while keeping risk to a minimum. Because most marijuana growers have to rent their growing spaces at well above market rate, property owners can quickly recoup their initial investments and generate a profit. Most importantly, property is a secure investment: If the marijuana industry runs into difficulties, commercial properties can be leased to more traditional business tenants and still generate a return.
Purchasing property for cannabis use is difficult. Most investors don’t have the funds necessary to pay all cash for property, and obtaining a loan from a bank is not available for this use.
This is where Socotra comes in. We typically loan 55% of the total purchase price of a commercial property, and we help to make our client’s purchase offers look extremely attractive, thanks to our ability to close in only 10 to 20 days total, with a 10 day look and 10 day close. We have helped many investors purchase commercial warehouses in the Sacramento area and quickly begin to generate a return on their investment.
Investing in the marijuana industry requires serious due diligence.
Before you rush out and buy a property, take some time to do your due diligence. Your research should include:
- The marijuana industry and the governmental regulations that impact it.
- Local ordinances—every county and city has its own specific rules, separate from those set at the state level.
- Local zoning and what zones cannabis businesses are allowed to operate in. Much of this information is available online. For example, an overview of the Sacramento zoning regulations, the zoning code, and zoning maps can all be found on the City of Sacramento website.
Keep in mind that laws, regulations, and zoning regulations are always changing. In order to protect your investment and maximize your return, you should ensure that your knowledge is always up to date.
In addition, we strongly advise our clients to have an attorney who specializes in cannabis law advise them who has the knowledge base necessary to accurately appraise the operations of your tenant, and identify any potential legal issues that could jeopardize their business or your property. While some cannabis purveyors are incredibly savvy and detail-oriented businessmen, there are many who, in their eagerness to cash in on the craze, fail to adhere to the regulations and laws governing their industry.
Lastly, before you purchase a property, ask yourself the question: “If the marijuana industry died tomorrow, what would happen to my investment?” Buying a property that would only be attractive for marijuana use means that if the industry fails or falls victim to federal enforcement, your investment will become worthless. Only buy property that would be attractive to a variety of tenants, not just for green use.
As long as you show proper care and caution, the marijuana industry has massive potential for real estate investors. If you would like to learn more about how Socotra Capital can help you grow a profit in this dynamic industry with vast potential, give us a call today at (916) 277-9311, or send us a message with our convenient contact form.