Cannabis-related Real Estate Transactions, buying/selling/leasing
Cannabis-related businesses can be extremely lucrative, but they also bring with them a lot of challenges that businesses in other industries don’t face. Even though both recreational and medical cannabis is legal in Michigan and many other states, for example, setting up shop is not as easy as it is for other industries.
One of the biggest challenges for cannabis-related businesses is landing the necessary real estate to conduct their business. Some building owners simply don’t want to lease or sell to people who run cannabis businesses. Others require the business owners to take out certain insurance policies or pay additional fees and/or higher rents to operate there.
In addition, business owners in the field might have trouble securing a loan to purchase a property. That’s because marijuana is still considered illegal according to federal law, so many large financial institutions won’t lend to those who deal in marijuana — even if it’s legal where they operate.
For a cannabis-related business to even receive a license to operate in Michigan, they have to get the proper approvals from both the state and the municipality where they want to operate, which can only be done once they have a property secured and there are different ways one may be able to secure a property.
With all this being said, here are some of the main real estate transaction options for cannabis-related businesses, as well as the pros and cons of each.
A property purchase is the most common form of real estate transaction in the cannabis industry. This includes the company purchasing the facility that they will use to operate their business from a seller.
There are many advantages to this type of real estate transaction. For one, the cannabis business will retain full rights to the property immediately. They won’t have to check with a landlord to see if it’s OK to operate their type of business, or meet any specific requirements the landlord has.
Second, the property can serve as a major asset for the business, especially after it’s paid off. In this same vein, the payments the business makes toward the purchase price of the property is a direct investment in a real asset, rather than just being dumped into rent.
Finally, purchasing the property provides the owner with potential tax benefits, such as being able to deduct any interest paid or depreciation.
On the flip side, purchasing a property to operate a marijuana business can be quite expensive. Depending on the type of cannabis business you run, you might need a large warehouse, state of the art equipment and many personnel, which might be more than some people can afford.
Purchasing a property also adds a significant line item to the business’ long-term debt service. As mentioned before, it might also be difficult for cannabis business owners to obtain decent financing for the property, causing them to either seek out alternative funding sources that could come with high interest rates or have enough cash on hand to purchase the property outright.
Lastly, this type of real estate transaction might be limiting in the long run. If the company grows at a rapid pace and needs more space, for example, the business can’t simply finish out the lease and move to a new facility. They would be stuck with a building that they own and might have to sell or expand if able.
Another option is a land contract agreement. A land contract is an agreement between a seller and a buyer in which the seller will essentially act as the mortgage company. The seller will hold onto the title of the property until the buyer completely pays it off.
One of the biggest advantages to this type of real estate contract for cannabis-related businesses is that it opens up new possibilities for funding. They don’t have to worry about being rejected by major banks for loans or seek out expensive lending alternatives.
A land contract agreement will provide the business owner with the benefits of owning a property, as the payments they make each month will go toward paying off the land contract balance while building equity in an asset.
The downside to a land agreement is that the seller will hold onto the title for the entire time until the buyer is able to pay off the total balance so the title can be transferred to the buyer.
Another big negative is that these contracts are usually much more stringent than typical mortgages. For example, the buyer may have no leeway at all in repayment terms. If they miss even a single payment, then the seller might have the ability to forfeit the land contract and recover the property from them. This doesn’t provide a lot of protection to the cannabis business owner, should they not have a solid relationship with the seller.
If property ownership is not in the cards — or is not something you desire — then you could of course opt for leasing your commercial space. This would work just like the lease of any other property. You would come to an agreement with a landlord on the terms of the lease — the length, the restrictions, who is responsible for what, etc. — and then pay an agreed-upon price to rent the space.
There are many advantages to a lease for cannabis-related businesses. First, it doesn’t tie up a lot of cash in an asset that is outside the core business. Instead of being land owners, the business can focus instead on just running the business.
Second, leases provide more flexibility. If the business needs to expand, move or add space elsewhere, the lease likely won’t stand in the way of it doing so.
Third, most leases will provide coverage for ongoing maintenance. Sometimes, this will cover not only the exterior of the property and building but the interior as well.
Lastly, leases allow cannabis business owners to not have to worry about securing financing. They can simply use cash-on-hand to pay their monthly rent, instead of trying to secure financing for a large purchase.
The biggest downside to a lease is the business owner doesn’t have any control over the property. They are at the mercy of the property owner in many respects. Rental increases could become prohibitive, and the potential for this to happen provides cost uncertainty.
The property owner may decide to sell at one point, and if the new owner doesn’t want a cannabis-related business to operate there, they may not renew the lease and eventually kick you out.
Finally, cannabis-related businesses might have a tough time finding available property owners who would be willing to lease them a building. As mentioned before, even though both medical and recreational marijuana are legal in Michigan, not everyone wants to be directly, or even indirectly, involved in the industry.