Real Estate and Cannabis; A Convergence of New and Old
The legalization of cannabis in New York earlier this year has set off a boon of business opportunities all over the state. Speculated as a potential $4.2 billion industry, operators, investors and entrepreneurs of all shapes and sizes are jumping at the chance to get a piece of what is being seen as a modern-day gold rush. However, as the legislature continues to evolve with little insight as to where the regulations will land, there are many hurdles and challenges standing in the way of these opportunities. While many commentators are focusing on the challenges surrounding the uncertainty of license applications and federal banking laws, a major issue facing every form of operator from growers, to manufacturers, to distributors, to retailers, is access to space and real property required to run their corner of the market. Differentiated from other 21st century emerging industries that are less reliant on physical space, the cannabis industry is heavily dependent on real estate; cannabis needs expansive space to grow; processors and distributors need large industrial locations to process and circulate their products; and of course, retailers need brick and mortar locations to sell their goods.
Owning or leasing real property is a crucial step in any business owner’s journey and a common misconception of early-stage operators is that the only way to get started and grow is via friends and family fundraising. While institutional capital from federally regulated banking institutions may be out of reach until the federal government addresses the Controlled Substances Act of 1970, as the industry continues to evolve, more and more available lenders are starting to see the same opportunities that these cannabis entrepreneurs are seeking to capitalize on. Lenders with funds available for use in the cannabis industry include state-sponsored institutions, privately held lenders and even local credit unions that are not subject to the Financial Crimes Enforcement Network regulations. However, due to the relatively small pool of available capital created by restrictive federal regulations, such lenders hold a greatly superior bargaining power and often impose overly-burdensome terms and rates on their loans. While these circumstances are not always predatory in nature, a major reason for these oppressive terms that some insist on is due to a lack of understanding of the industry, combined with an inability to find creative solutions to the multi-purpose asset of real estate.
Whether you’re an operator or a lender, a crucial step in becoming a successful player in this evolving field is understanding not only the asset that you’re either holding or lending on, but how to create successive value in an uncertain area. In summarized terms, lenders need to have a deep understanding of the collateral they are secured by in conjunction with formulating a cohesive exit strategy that would allow them to protect their own portfolios in case of a failed investment; operators need to understand the value of their business or location, as well as what the overall lending market is offering to avoid being subjected to oppressive and unnecessary terms in both a financing relationship, as well as a landlord-tenant negotiation. The Anderson Firm is uniquely positioned to service both operators and lenders in this booming industry. With attorneys specializing in both real estate finance and business consulting, we are here to help navigate this tumultuous and emerging field.