The holiday decorations that adorn the lobby of West L.A. marijuana dispensary BSE Pre-ICO Collective belie the high price the shop pays to deliver its good cheer to customers.
BSE owner Zahur Lalji said he had a tough time finding retail space for the business and when he located a site, next to the 405 freeway on Cotner Avenue, he wound up paying four times the going rental rate.
That real estate premium is not uncommon, according to Lalji and others in the cannabis industry. While the Nov. 8 passage of Proposition 64 sparked increased interest among investors eager to purchase properties and lease them to cannabis businesses, there is still not enough available space to meet demand.
“I tell people I made a very bad deal that pays me very well,” Lalji said of his location and subsequent shop revenue. In fact, he said he has received a number of inquiries from real estate
investors interested in buying a stake in his business and moving it into one of their properties.
“Since Prop 64 passed, I’ve received more phone calls from real estate investors that want to buy a portfolio of dispensaries,” said Lalji.
Avis Bulbulyan, founder and chief executive of Glendale cannabis consulting and management firm Siva Enterprises Inc., said companies can expect landlords to charge them at least twice the going rate for retail space in a given area once zoning information is updated based on new laws and regulations.
“As soon as the zoning map becomes available, they end up driving up the price of real estate,” he said. “Let’s say the market is $120 per square foot (annually), when the zoning map comes out, that price can jump to $300.”
Bulbulyan said the hefty price comes down to more than just short supply. It’s also a way for property owners to mitigate risk should a cannabis business fail.
“What they’ll do is buy the building, handle the construction, treat it as a tenant improvement project, and then lease it back to the operator for an increased rate,” he said. “They’re able to get a return on their investment without necessarily having to touch the plant.”
Others in the cannabis industry noted that investors are making a mad dash to purchase properties and rent them out to dispensaries and commercial growers in an effort to turn a profit without investing directly in marijuana businesses.
David Welch, founder of D|R Welch, a downtown law firm that caters exclusively to the marijuana industry, said real estate represents a safer bet for investors than dispensaries themselves – even though there are still drawbacks.
“It depends on your risk profile,” Welch said. “It’s clearly safer and you have an alternative if you fail. You can always sell your property. But let’s be real, the profit is in the operation, not in the land.”
Part of that risk is that the transactions are routinely handled in cash. Bulbulyan said the state often requires an authorization letter from a cannabis business on behalf of the property owner allowing for its use as a dispensary or grow facility. But if the landlord is still making bank payments on the property, then the cannabis company must ask the landlord’s lender to write an authorization letter.
“No bank is going to give you that authorization,” he said. “What that does is it forces most of these operators and applicants to buy in cash without any financing.”
Growth opportunity
Lalji said he drove around Los Angeles County hunting for-lease signs on buildings, taking care to note each city’s zoning laws, which include restrictions on operating near schools, parks, and residences.
The company, which opened in February and has 15 employees, is looking to open a second location and has sought the help of its landlord, a commercial real estate agent.
Aaron Herzberg, a partner at Santa Ana medical marijuana real estate firm CalCann Holdings Inc., said the process of looking for cannabis retail space is like looking for a needle in a haystack.
CalCann implements a number of methods to help pot businesses and real estate investors find properties, from cold-calling landlords about off-the-market listings to hiring consultants to create custom interactive maps. Because city zoning laws are so restrictive, business owners have a lot of difficulty meeting their real estate needs in many areas.
“When you start imposing these sensitive uses it becomes extremely challenging to find a suitable location, (and) a lot of landlords won’t lease to this use,” Herzberg said.
Several years ago, cannabis entrepreneurs would have to serve as their own real estate brokers. But since then, consulting and cannabis-focused real estate firms have cropped up as the industry has expanded, said Jerry Tutunjian, consultant at Siva Management in Glendale, a division of Siva Enterprises. The industry still has a long way to go as most traditional brokerage firms shy away from working with cannabis firms.
Several large brokerage firms, including CBRE Group Inc., Newmark Grubb Knight Frank, and Savills Studley, demurred when asked for comment.
Attorney Welch said he’s doubtful that traditional brokerage firms will enter the marijuana market, based on meetings he’s had with many of the larger firms on behalf of his institutional clients.
“When you look at institutional organizations or organizations that own institutional property, they all have some kind of public money,” he said. “There’s no way to get the guy that signed a lease on behalf of an investment that’s backed by CalPERS to say, Yeah, I grow pot in my building. It looks bad.”
Lalji said he thinks the stigma among property owners and brokers will change once the state issues licenses to produce or sell recreational marijuana under Proposition 64, a process that’s scheduled to begin in 2018.
“It’s like any other business,” said Lalji, who used to work as a commercial banker for Wilshire Bank and Wells Fargo & Co. “The only difference is the perception.”
