Times have changed with respect to attitudes and public perception of cannabis in the United States as more states (and the District of Columbia) move towards full or partial legalization even as the Federal Government continues to prohibit cannabis for any use under the Controlled Substances Act of 1970.  The trend towards legalization creates new uses for existing property types and exciting opportunities for real estate developers and investors.  But even with this growing trend, many challenges remain as major lenders and investors are still analyzing and underwriting the risks related to this industry. Our panel of professionals will highlight the challenges they have faced and the opportunities they have found at the intersection of cannabis legalization and the commercial real estate industry.

Jonathan Havens, Partner with Saul Ewing Arnstein & Lehr, led an informative discussion about the emergence of the Cannabis industry and how it will affect commercial real estate.

Joining Jonathan were Michael Bronfein, Founder and Chief Executive Officer at Curio Wellness, a premium medicinal cannabis company, Alan Hyatt, Chairman and President of Severn Bank, and John Dettleff, Managing Director of Jones Lang LaSalle and leader of JLL’s industrial/flex space brokerage team.

Jonathan started with an overview of the status of legality of the Cannabis industry.  Jonathan pointed out that 33 states have medical cannabis programs and 10 states authorize the “adult” or “recreational” use of cannabis.  Jonathan gave a brief history of the terms “marijuana”, “marihuana”, “hemp” and “cannabis” and stated that the term “cannabis” is the preferred nomenclature.  Jonathan further explained the current state of Federal versus State law in regulating cannabis and highlighted that the evolving nature of legalization has been a series of “surgical strikes” by proponents of cannabis legalization versus an “all-or-nothing” approach.

Jonathan then asked each panelist to brief introduce themselves and explain how they are involved in the cannabis industry.

John Dettleff spoke about how the cannabis industry uses industrial real estate and explained that most institutional owners of industrial space are still not ready to lease space to cannabis tenants.  In his opinion, now is opportunity for non-institutional owners of industrial buildings to take advantage of higher rents that cannabis tenants are willing to pay.   The higher rents result from the perceived risk from cannabis being illegal under Federal law.

Alan Hyatt introduced himself and Severn Bank.  Alan spoke about the extensive research Severn Bank did in order to get comfortable lending to Cannabis businesses and on real estate used in the Cannabis industry.  As a community bank, Alan believes Severn Bank is really serving the community by financing the cannabis industry while most national lending institutions are still not willing to be part of the industry.

Michael Bronfein provided a brief history of his experience in the traditional pharmaceutical industry and how this experience led him to found Curio Wellness with his daughter.  Michael’s has a very scientific approach to the cultivation of his cannabis product and believes that it is a medicine that should be marketed and sold with the utmost care for quality and consistency to the end user.  Michael further explained that a vast majority of traditional medicines start from plants, and that cannabis should be viewed in the same light.

Most of the discussion was centered on the cannabis industry itself – educating the audience on how the industry is organized.  For example, Michael explained that there are three main areas of the cannabis industry: (1) cultivation, (2) processing, and (3) distribution.  Cultivation and processing are most likely to utilize industrial space and distribution will most be in retail locations, although local zoning ordinances sometimes push distribution to retail locations outside of the most desirable areas.

With respect to the use of industrial buildings, the panelists pointed out the following:

• Cannabis companies are likely to invest heavily into the build-out of their industrial space to install complex lighting, water and security systems. Michael pointed out that he spends about $265 per square foot to build out his space.  Given the investment by these tenant’s in their space, cannabis companies tend to be “sticky tenants” – meaning that they are more likely to stay in their spaces for the duration of their lease terms.

• Michael mentioned that one of his cultivation/processing facilities has 8,500 amps of power available to it.

• Cannabis companies do not need high ceilings seen in modern industrial buildings and, therefore, the reycycling of old industrial buildings with lower ceiling heights are perfect for cannabis companies.

• Given the illegality of cannabis on a federal level, cannabis companies typically pay higher rents.

After the initial introductions and a few additional questions posed to the panelists, Jonathan called for questions from the audience.  Several audience members asked questions and there was not enough time to answer all of them.

Several audience questions focused on payment systems used in the cannabis industries.  Alan Hyatt pointed out that Visa and Mastercard do not allow their systems to be used for cannabis purposes.  Michael pointed out that payment transactions are primarily done by debit cards, checks and cash.

Audience questions were also focused on the conflict between federal and state law related to cannabis.  Michael pointed out that 89% of Americans are in favor of medical cannabis and 63% of Americans are in favor of legalizing cannabis for “adult” or “recreation” use.  Jonathan mentioned that public opinion is way ahead of the government in its laws and regulations, but that governments are moving fast to catch up.  One reason states are interested in authorizing medical or adult use of cannabis, is because of the tax revenues generated and some believe medical cannabis can help alleviate the current opioid crisis.

In conclusion, the cannabis panel was extremely educational and informative.  Audience members were left with better understanding of the cannabis industry, what may happen in the future and how it is affecting, and will continue to impact, commercial real estate.

Moderator:

Jonathan Havens, Saul Ewing Arnstein & Lehr

Panelists:

Michael Bronfein, Founder and Chief Executive Officer at Curio Wellness

Alan Hyatt, Chairman and President of Severn Bank

John Dettleff, Managing Director of Jones Lang LaSalle