For the past few years, it has been boom times for the U.S. cannabis industry. But that doesn’t mean some businesses aren’t going bust. And as the legal market begins to find its equilibrium against increasingly stringent regulations and product gluts, investors are looking to pounce upon distressed and failing weed businesses that succumb to the more competitive environment. And real estate investors, in particular, are becoming increasingly eager to capitalize on the situation. For California’s legal cannabis industry, location is everything. And real estate investors are looking to buy up weed-zoned locations from failed businesses on the cheap.
Weed Growers’ Losses Are Real Estate Investors Gains In California
California’s cannabis industry is undeniably expanding. The state doesn’t limit the number of available grow licenses, and production and retail operations continue to grow apace.
Nevertheless, several sectors of the industry have run aground against some new obstacles. California’s cannabis regulators continue to revise rules and introduce amendments to improve product control and safety, but these have met resistance from the industry as costly and excessively burdensome.
Other factors are working against legal weed companies, too. There’s the fact that some municipalities have banned cannabis operations within their jurisdictions while others impose heavy revenue taxes on the businesses they do permit. Los Angeles, for example, levies a 43 percent revenue tax. And that’s on top of the state tax rate of 15 percent for cannabis businesses.
The uneven playing field in terms of taxes also makes it harder for some businesses to compete against neighboring areas with lower rates. And with more businesses getting into the game, the supply of cannabis products is on its way to outpacing demand, as in Oregon.
Lower prices on products, rising taxes and regulatory hurdles all make margins slim enough for companies already. But it’s production operations that are most feeling the heat. And with a new round of regulatory changes in the pipeline for 2019, there will be production facilities that won’t be able to afford to stay compliant. Some might be able to obtain one of the limited, high-interest loans available from select financial institutions. But in general, affordable loans are tough to come by due to federal prohibition.
Real Estate Investors Are Snatching Up Cannabis Properties For Pennies
All of those challenges add up to one fateful result, according to AllGreen Funding‘s Jim Fitzpatrick. “Most operators aren’t capitalized to withstand a six-month shutdown to achieve compliance,” he said. And that means that to cut their losses, those businesses will sell their assets, including their highly valuable cannabis-zoned property, for cheap.
But that’s not the only way real estate investors are capitalizing on the California cannabis industry. Another strategy reportedly involves purchasing real estate assets in areas forecasted to become cannabis-approved zones that have yet to go legal. Cutting costs on the acquisition side, investors spend capital on ballot measures and other campaigns to pass bills opening the area to cannabis operations.
The same goes for states that have passed or expanded medical cannabis legislation. Anticipating retail markets will eventually open in those states, investors are purchasing commercial real estate in advance. The surge in interest in cannabis real estate has also spawned a whole new industry of consultancies. These firms aim to help weed businesses become profitable and connect investors with opportunities to acquire cannabis-related assets.