Joint ventures As California’s recreational marijuana laws take effect, many are preparing for the sector to explode, but operators will grapple with the challenge of finding affordable real estate in which to operate
(Illustration by Dushan Milic)
When Derek Peterson’s company Terra Tech closed on two new Southern California properties recently, it likely paid up to 25 percent more than another business would have — but Peterson still thinks they scored a deal.
It’s a markup that’s largely expected in Peterson’s industry, legal marijuana, a market segment that got another dose of legitimacy after California’s recreational use laws went into effect this January. In the end, those high costs could pay dividends for a firm like Terra Tech, a cannabis company that already has storefront medical marijuana dispensaries and cultivation facilities in place.
Peterson, a former Wall Street executive who dove into the cannabis business more than five years ago, said that Terra Tech last year purchased the two buildings in Santa Ana — a 30,000-square-foot warehouse and a separate 40,000-square-foot structure — for about $17.5 million combined. It worked out to about $250 per square foot, a relative bargain once you factor in the scarcity of industrial spaces in the area, regulatory requirements that restrict where such operations can be located and the hodgepodge of other issues marijuana businesses face.
“I think we got a decent deal, but we paid a premium over what we would have if we were a widget manufacturer,” Peterson said in an interview in December.
Peterson isn’t alone in his willingness to pay more to get in on California’s growing Green Rush. But while most experts say the industry’s exponential growth is all but certain, cannabis-related businesses face a slew obstacles, including high costs on both the retail and industrial sides, unwelcoming cities and landlords and a new threat from the nation’s chief law enforcement official.
The Green Rush
California voters legalized medical marijuana in 1996 with the Compassionate Use Act. It marked the first ballot initiative of its kind passed by any state in the country, though 28 others and the District of Columbia have adopted medical marijuana laws since.
The medicinal marijuana system, which requires users to get an ID card and a doctor’s recommendation to purchase pot, has meant big business for the state. Dispensaries in California sold more than $2 billion in medical marijuana in 2016, according to a report prepared for the California Bureau of Marijuana Control by the University of California Agricultural Issues Center. Los Angeles alone lists more than 150 licensed medical marijuana businesses on a city-maintained online database.
But that medical marijuana figure was dwarfed by the estimated $5.7 billion in nontaxable sales that took place in the state illegally, the report said.
In November 2016, voters took a step that could bring some of the black-market activity out of the darkness and into the light by approving Proposition 64. The ballot initiative, which followed the lead of states such as Colorado and Washington, legalized adult recreational use and the facilities that cater to it, both of which are still illegal on the federal level — a distinction reiterated by U.S. Attorney General Jeff Sessions in January.
The new rules could be a huge economic boon for the state, which is positioned to become the largest legal weed marketplace in the world, according to a report by cannabis-industry monitoring firm New Frontier Data. The new rules could spark a compounded annual growth rate of over 23 percent with sales reaching an estimated $6.5 billion by 2020, which would rival California’s $7 billion wine industry, the firm found.
It’s clear that investors see the possibilities.
“Everybody is running to be involved in cannabis right now,” said David Feuerstein, a New York–based attorney with Feuerstein Kulick who works with marijuana-related businesses throughout the country. “What they’re seeing is that there are outsize potential returns for investment I always make the comparison to the internet in the mid-’90s.”
But don’t expect dispensaries to pop up on every corner of L.A. County. Prop 64 created a framework that allows cities and counties to control recreational dispensaries and cultivation and extraction facilities via permitting or an outright ban in their jurisdiction.
The city of Los Angeles, thanks to voter approval in March 2017, will permit recreational use, though the framework is still being developed. Businesses were allowed to apply for licenses starting on Jan. 3, but if approved, they still need a separate license from the Bureau of Cannabis Control. (The city’s existing medical marijuana dispensaries would be given precedence over new applicants.)
For the moment, though, most cities in the area have gone in the opposite direction from L.A., according to data provided by Harris Bricken, a law firm that has worked closely with cannabis-related businesses in California. The vast majority of the 88 municipalities in Los Angeles County have ordinances banning dispensaries and cultivation facilities — even for medical uses — at least for the time being.
Notable exceptions include West Hollywood, which allows retail, delivery and on-site consumption permits; Long Beach, which allows medical facilities but may consider recreational-use facilities this year; and the small community of Lynwood, which permits cultivation, manufacturing, distribution and delivery but not retail stores. Compton and Culver City are among the areas set to consider ordinances this year.
Hilary Bricken, who heads Harris Bricken’s L.A. office, said that the approach most cities in Southern California are taking is not surprising, given the industry’s newness and the sometimes conservative nature of the region.
“With the politics that are present, [cities] have not been afraid to ban in order to wait and watch, or they’ve been entrenched in saying, ‘We don’t ever want this as an economy,’” she said.
Retail’s pot markup
Those conservative attitudes toward legalizing marijuana laws have created an environment where suitable properties are scarce and commercial landlords and sellers know they can demand top dollar from cannabis clients.
Most cities that allow the industry to operate dole out licenses in a lottery-like system, and all restrict ho阿爱上海同城