Real Estate

How pot is firing up this real estate

It could be the hottest outgrowth of the pot-conomy — highly lucrative for both investors and cannabis companies. The industrial real estate that houses pot production is in high demand, and it is about to become the first opportunity for investors large and small to get in on marijuana.

How? The biggest problem for cannabis growers and suppliers is an inability to get much-needed cash to grow both their products and their businesses. Since cannabis production and use is not legal under federal law, only state to state, most banks won't lend to cannabis producers. Enter, the real estate angle.

The first-ever cannabis REIT (real estate investment trust) filed to go public last week and is in talks to acquire its first property in New York state for $30 million, according to a prospectus.

Innovative Industrial Properties, a newly formed corporation, will focus on buying the properties of specialized industrial medical cannabis facilities. That will provide the cannabis growers and sellers with plenty of capital; the REIT, in turn, will offer the cannabis companies lease-back deals so no one has to move.

As the appetite for cannabis grows, so too, can the profits for the REIT, which will collect rent as well as benefit from increasing property values.

The canopy of a marijuana crop is seen at Alternative Solutions, a D.C.-area medical marijuana producer, April 20, 2016 in Washington, D.C. Security cameras and barbed wire suggested this was the right place, an old warehouse on a dead-end street not far from the White House housing one of the few legal marijuana farms in the U.S. capital.
Brendan Smialowski | AFP | Getty Images

"Our real estate investments will consist of primarily properties suitable for cultivation and production of medical-use cannabis," company executives wrote in the prospectus filed with the Securities and Exchange Commission on Oct. 17.

The company's executive chairman, Alan D. Gold, is a 30-year veteran of the real estate industry, and co-founded two NYSE-listed REITs: BioMed Realty Trust and Alexandria Real Estate Equities. His experience in both real estate and biomed were attractive to the principals at the first cannabis company planning to sell to the REIT.

"We know that they have a track record in a space very closely associated with ours," said Jeremy Unruh, general counsel and chief compliance officer for Illinois-based PharmaCann, a medical cannabis producer licensed in Illinois and New York.

PharmaCann operates in the two most heavily regulated states for cannabis in the country. It owns most of its properties outright and has had to finance everything through private equity.

"Banking in the cannabis world is not banking in the regular world. They have to set up these incredibly onerous compliance programs. Even opening a small line of credit at OfficeMax is far more complicated than it would be if I owned a T-shirt shop. A sale lease-back program is one of the handful of ways we can participate in financing activity."

PharmaCann is in a deal to sell the new REIT a 127,000-square-foot cannabis growing and manufacturing facility in Montgomery, New York. PharmaCann obtained the first of five licenses for cannabis production in New York. The cash from the deal will allow the company to expand its operations without having to tap into its own funds.

"We've developed some sophisticated manufacturing facilities, all of which we've essentially written a check for. We have a tremendous amount of capital tied up in this Hudson Valley center that we'd like to leverage for our operation," said Unruh.

PharmaCann will use the funds from the sale to expand its business, everything from buying vehicles to recruiting high-level personnel, and refining its products and dispensing practices.

"Given the difficulty of financing the cannabis space we're perfectly happy with the proposed relationship with a company like IIP," said Unruh. "There is a tremendous opportunity in the cannabis space. This is the ground floor of a brand-new industry."

Cannabis has already dramatically boosted the warehouse business in Colorado, where marijuana is legal for both medical and recreational use. Vacancies in the sector are way down and rents are up. With 25 states already allowing some form of cannabis use and nine other states with cannabis measures on the ballot this November, investing in cannabis-based real estate would seem like a no-brainer, but as with any investment, there is always the possibility of a downside.

"There is a lot of risk. The business could get shut down in five or 10 years. Let's say it gets deregulated and the cost of cannabis comes down," said Eric Frankel, an industrial REIT analyst at Green Street Advisors. In any case, he added, "There is a dearth of institutional capital investing in this business."

Innovative Industrial Properties has applied to list 8.75 million shares of Class A common stock at an initial price of $20 per share on the New York Stock Exchange under the symbol "IIPR."

It has also identified and is in various stages of reviewing in excess of $88 million of additional potential properties for acquisition, according to the prospectus. Its executives are not allowed to speak to media now, as they are in the required "quiet period."