What’s the State of the Capital Markets for Cannabis Real Estate?

The past few years boosted the U.S. cannabis industry in several ways, increasing production and sales and enticing more states to legalize or at least begin the process of legalizing cannabis for medicinal and/or recreational use to help shore up budget shortfalls.

Last year, four additional states—Arizona, New Jersey, Montana and South Dakota—fully legalized cannabis, bringing the total to 15 states, while Mississippi legalized pot for medical use. This year, the cannabis industry could reach a new high, with another 21 states expected to legalize it in some form.

Related: More Investors Eying Ways to Tap the Higher Returns of Cannabis Real Estate

As the cannabis industry continues to grow, so do opportunities for investors in cannabis real estate. But the cost of capital for this specialty area is at a premium due to its federal status as a Schedule I Controlled Substance. So real estate investors interested in entering this market may not have a clue about where to find financing, let alone how to get the best deal for their acquisition.

There are now companies that specialize in providing real estate capital to state-licensed cannabis operators, such as New Canaan, Conn.-based NewLake Capital Partners. The small-cap cannabis REIT, launched in 2019, funds both build-to-suit projects and property expansions and purchases cultivation facilities and dispensaries nationwide. In the first quarter of 2022, NewLake reported a 130 percent increase in year-over-year revenue, at $10.2 million. Its latest deal, in April of this year, involved the acquisition and the signing of a long-term triple-net lease with an affiliate of C3 Industries Inc. for a 40,000-sq.-ft. cultivation facility in Missouri. The acquisition totaled $7.2 million.

Related: What Does Expanding Cannabis Legalization Mean for CRE Investors?

WMRE asked Anthony Conigilio, president and chief investment officer of NewLake Capital Partners, to share his expertise on the financing market for cannabis real estate.

This Q&A has been edited for length, style and clarity.  

WMRE: Different states have different rules about the location of cannabis facilities, but can you provide a general rule-of-thumb on the best sites for this use and how to find them? 

Anthony Conigilio: Since the rules vary from state to state and often from municipality to municipality, it is difficult to find a rule-of-thumb. However, for states that score license applications, a site in areas that are economically depressed or have a higher concentration of incarceration from marijuana possession can be attractive since they typically score well because of the expected positive impact on community jobs and tax revenue. For dispensaries, the golden rule in real estate still applies: location, location, location—as long as it’s licensed.  

WMRE: What financing terms are feasible for this type of real estate use, given that traditional lenders won’t finance cannabis real estate?   

Anthony Conigilio: Lenders are in the 17 to 20 percent range all-in for financing costs. Sale lease-back transactions are in the 11 to 13 percent range. 

WMRE: How much variance in terms is there between lenders that do offer financing for cannabis real estate?  

Anthony Conigilio: The market is fairly tight right now, given the relatively few firms that have capital to serve this sector. There are always traditional real estate people who think they can secure a property and find the financing later for a transaction, but it just doesn’t work that way in cannabis real estate. Too many operators have been burned by groups that promise them a deal, but then can’t find the funding to close. Because of this, there are fewer companies vying for transactions, most of which are public, resulting in a tighter spread among pricing options. 

WMRE: How can cannabis real estate investors find the best deals? 

Anthony Conigilio: Investing successfully in any real estate transaction is about finding the right tenant and a property that has strong cash-flow dynamics. Properties in the cannabis sector make this more difficult, given the high growth and highly regulated nature of the industry. Expertise in understanding credit quality in the cannabis industry, as well as the specific use and licensing, is essential to good decision-making.  

WMRE: What are some of the challenges with those transactions? 

Anthony Conigilio: Some of the common issues are management inexperience in operating a high-growth business in a highly regulated market, overly optimistic projections, negative cash flow, inability to raise capital for CapEx plans, local restrictions on the property and regulatory delays.