We have seen and perhaps felt the impact of the cannabis craze and its effects on real estate. We know cannabis has a connection to increased home prices, where cities with retail dispensaries saw their homes increase more so than those in areas that chose not to opt in. The median home value in Michigan has increased 26% which aligns with the trends set by states that have legalized cannabis.
But what about commercial real estate? The cannabis industry experienced disproportionately high asking prices of “green zoned” commercial real estate, by those investors that seized the opportunity to capitalize early in this new Michigan industry. This, unfortunately, set up new businesses that were stymied in the licensing process, on a colliding path trying to break even, or survive, as the retail price per ounce of cannabis dropped to a low of $80.16 as of January 2023.
It is not to say that there isn’t value in property, but just being in the green zone doesn’t automatically mean that Cannapreneurs will be able to justify their worth. Would it make sense for a buyer to pay $2M for real estate that might be worth only $900,000 or even less?
The days of urgency to dive in just to be first to market and partner up with people who “know how to grow weed” are gone. Cannabis Owners and Investors are savvier and are taking the time to better research targeted areas that have a good return on investment. We are now seeing Cannabis Owners investing in and collaborating with professionals, like Cannabis Legal Group to revisit and update business plans and partnership agreements to better align company goals, conduct thorough business valuations, scrutinize financial documents, assess market feasibility, and Broker Price Options, for cannabis commercial real estate.
With cannabis prices slowly rising, is now the opportunity to purchase turn-key properties that fell victim to closure? If so, then any commercial property you are looking to invest in, the list price better make sense, and if it doesn’t, sellers should expect offers to fall short of their expectations.
Killer Growth or Lack Thereof
Whether a company is undergoing partnership disputes or financial hardship – sometimes selling the business and property is the solution. Buyers will always want a deal, and sellers will want to profit. At this point, some owners and partners would be happy breaking even or choose to wash their hands of the whole thing. Whatever circumstances have led cannabis companies or cannapreneurs to the point where they must sell, it is best to stay focused on solutions. The lawyers at Cannabis Legal Group have identified solutions to help companies move forward.
The cannabis industry has felt the “growing pains” as the market continues to mature, and Michigan is no exception to this. The blessing in disguise for those companies that survived should be an examination of their operating agreement, strategically aligning goals and growth, and perhaps restructuring and operating more efficiently. For cultivators and processors, we are seeing heavy efforts for product and market segmentation. Applying lessons learned, seeking strategies to survive the next go around, and protecting your investment, are crucial, and it all starts with your business plan
For Example
Without a concise business plan, you run the risk of obstacles that will potentially delay your growth. Scaling is strategic and should be timed appropriately for your success. But let’s say, you have a plan in place and part of that plan includes purchasing another location or investing now, in the cannabis industry. We are often asked as Cannabis Business Lawyers, what tips can we give when looking to purchase commercial cannabis property? Here are a few, which may seem obvious, but are not.
RETAIL PROPERTY – A lot of time is being spent on site selection research and feasibility analysis. Companies want to ensure success and that their investments are sound. For retail, location remains the timeless variable that affects all real estate regardless, but especially in the case of being eligible for a cannabis business to operate. The caveat for cannabis is whether the municipality has opted in. Just because you like an area does not mean that you will be able to operate there. Common location requests we hear from prospective buyers are:
- An hour’s radius from Metro Detroit, but not in Detroit
- Border towns (Indiana / Ohio)
- Tourist attraction areas, or College Campuses
If none of these apply to you as a seller, then you may have to work a little harder in showcasing the value of your property and/or business with some of the other variables. Highlighting aspects of municipality master plans that show promising economic growth and development are also important factors that are often overlooked that can also serve as value add.
DEMAND – Know the property. What is unique about it? Is it green-zoned? That’s great, what else? Things to consider are if there are caps for the different licenses and whether your property is zoned properly to meet the ordinance requirements. This also includes being compliant with any buffer requirements that may be required for schools, churches, parks, religious institutions, control substance facilities, residential distances, and other cannabis businesses, along with others.
Perhaps, due to the zoning ordinance, the property is only one of few or maybe one of many that can house a cannabis establishment or facility. If it is one of the few, it is definitely a selling point. If you are one of many, perhaps the specific location is in the mix of mainstream businesses and offers better visibility, a higher traffic count, more parking, or convenient access to the expressway.
Additionally, if the real estate has been approved and has a special use permit attached, it can elevate the asking price of a property. It is convenient for buyers to be able to acquire a location with a license that “comes along with it” since it can save time and your business can open sooner rather than later. Most “Special Land Use” permits are non-transferrable in certain municipalities but sometimes they are.
You will need to verify this with each municipality or contact the Cannabis Legal Group for assistance. With this being said, there are several buyers that are already prequalified by the State or would rather apply to the local municipality (if they are able) than be assigned or acquire an existing entity’s interest – in which case, the approval that comes with the real estate will have no value to the prospective purchaser.
Another thing to keep in mind is that different counties and municipalities are different markets within themselves. Real estate in Bay City will differ in value from real estate located in Royal Oak. Licenses differ. Caps differ. Even without the cannabis part, just real estate alone will have a different market value.
When Cannabis Companies or Investors are looking for locations, they are seeking to find an area that will position their business, or location for success. It is different for cultivation, safety compliance, and processing versus the licenses that have a retail component to them such as retailers, microbusinesses, co-located facilities, and consumption lounges.
For cultivation and processing, the visibility and high traffic count will not be as important as being centrally located where transport is readily available. For retail-involved establishments, a convenient and accessible location with good visibility and traffic is highly desirable and better positions the business.
Patrons would rather shop in areas that are surrounded by other commercial businesses instead of going out of their way to an industrial-zoned area with nothing else around it. However, if that is what the municipality has permitted, then it is what it is and retailers will be successful if they have chosen an area where there is strong demand. This is why Cannabis Legal Group and CLG Realty can research and create a prospectus to enable any buyer the best choice for the business goals they wish to accomplish.
TAX PERKS – Are you in a Qualified Opportunity Zone (QOZ)? Being in a QOZ is also another thing that is of interest to buyers and investors, because of tax deferral and tax elimination benefits which allow investors to take the capital gain from the sale of any property into a Qualified Opportunity Fund within 180 days of recognizing the gain, taxes on such gains may be deferred until the earlier of December 31, 2026, or the disposition of the QOF interest. For those who are looking for long-term benefits, investors that hold their investment for ten years or more can defer tax payments on the appreciation of the QOF investment upon disposition regardless of the size of the potential profit [and] eliminates any depreciation recapture tax that otherwise would be owed upon sale.
View the Michigan Opportunity Zones Map and learn more about Michigan Opportunity Zones HERE. Or contact the Cannabis Legal Group
FINANCIAL PERFORMANCE – Having an operating cannabis business that occupies your real estate is attractive and saves time and costs for prospective buyers. Again, if your business is strong on performance and shows more growth than loss, you are in an advantageous position and can rightfully demand a premium list price as opposed to those with less stellar numbers. If the numbers are not strong and the asking price for the real estate and business is grossly inflated, it will immediately raise flags and owners will need to be able to justify the ask and will need to have something to present other than simply being an operating cannabis business.
Cannabis commercial real estate continues to stabilize as it too, makes its way into the “mainstream” market. At the end of the day, cannabis properties are regular commercial properties that allow special uses. Nothing more. If none of the above things apply and the real estate exists without the cannabis part, it is real estate that will fall in line with the market trends and values just like everything else.
Being green-zoned is a benefit that will bring special interest, increase marketability, and can add value. However, it is important to be competitive and realistic when purchasing or pricing the property and weigh out the profit from the sale against getting the property sold.
For Cannapreneurs or Investors, it is pertinent to align yourself with professionals that know the cannabis laws, and the cannabis zoning. We create strategic plans that protect your investment. At Cannabis Legal Group, we are the pulse of cannabis business in Michigan. Feel free to contact us, so we can help you succeed www.cannabislegalgroup.com.
If you have a property you are interested in listing or are looking for a location for your cannabis business, contact Anne Schultz at CLG Realty Advisors at anne@bartonmorris.com or 248-581-9081.
