Since the first of January 2014, when the first ounce of recreational Cannabis was sold in Colorado, the wave of growth has huffed and puffed and has blown the Cannabis industry through the roof. Twenty (20) more states have hopped on the train and legalized the sale and use of recreational Marijuana, encouraging more investors and Cannabis operators to spread their wings.

Since then, the U.S. Cannabis industry has grown from $2 billion in 2014 to over $33 billion in 2023 and is expected to reach $56 billion by the end of 2028. [MJ Biz Daily.]

So, why should you invest in Cannabis real estate now? The simple answer to that question is scarce SUPPLY and high DEMAND. How’s that? Well, let’s find out.

What is Cannabis Real Estate?

Cannabis real estate refers to properties, such as land, buildings, and facilities, that are used by businesses operating within the legal cannabis industry. These properties are specifically tailored to accommodate various aspects of the cannabis supply chain, including cultivation, processing, distribution, and retail sales (dispensaries).

Cannabis real estate emerged in the United States in the early to mid-2010s, coinciding with the broader trend of cannabis legalization in various states. The catalyst for this development was the legalization of Cannabis for recreational use as well as for medical use in different states.

During this period, Cannabis real estate companies began to make their way into the stock exchange market in the form of REITs, enhancing the opportunities for investors looking for a way to generate returns. The trend continues to this day as more states begin to relax their laws on the use of Cannabis for recreational purposes. 

Why Should You Invest In Cannabis Real Estate?

Amid a shifting landscape where Cannabis products (recreational and medical Cannabis) have gained prominence, the convergence of Cannabis and real estate presents a unique opportunity. But why should you consider venturing into the dynamic world of Cannabis Real Estate? The answer lies in a blend of innovation, financial promise, and the evergreen potential for growth.

1. The Ever-Growing Cannabis Industry

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Since January 1, 2014, when Sean Azzarati (Iraq war veteran) bought the first-ever joint back when there were only thirty-seven Cannabis dispensaries in Colorado (and nationwide), the Cannabis market has consistently grown to become a multi-billion dollar industry.

According to a report by Statista, Cannabis is currently the fifth most valuable crop in the U.S., with around 13,297 cultivation farms serving over 7,400 dispensaries nationwide. One thing, however, is common among these Cannabis companies – real estate (land, space, farm, structure).

Additionally, the year 2020 to date saw the highest rate of Cannabis legitimization across the country, with more states eying the tax revenue potential of the industry as we came out of the pandemic [Wikipedia]. In fact, Cannabis dispensaries were deemed essential during the lockdown and were made to continue running.

This has created a more competitive industry and more ground for Cannabis real estate investors.

As the Cannabis industry gains more traction and recognition as a mainstream business, Cannabis investors and operators are constantly searching for new markets that are beginning to issue licenses to operate. This short window of opportunity for these folks creates an enormous amount of demand for Cannabis properties. Typically, a state will require you to submit your proposed location at the time of application.

This proves why Cannabis real estate investment is in high demand. But why is it in low supply? Let’s find out…

2. The Unique Real Estate Needs of Cannabis Businesses

Cannabiss real estate is a niche branch of the regular commercial real estate (CRE) industry. Yes, it deals with buying, leasing, renting, and selling land and buildings, but there are many moving parts that make it challenging for the regular real estate investor and operators alike. These challenges are part of why Cannabis real estate is scarce and profitable.

Reason #1: Zoning and Regulatory Compliance

Cannabis is a highly controlled and regulated product, and this is reflected in how Cannabis-related businesses operate. Cannabis businesses must adhere to strict zoning laws and regulations, including minimum distances from schools, parks, and other sensitive areas. This can limit the available real estate options and require businesses to select from scarce suitable locations carefully.

Reason #2: Illegality of Cannabis at the Federal Level

Cannabis real estate investing also becomes challenging due to the stiff federal laws against the medical or recreational use of Cannabis, as Cannabis is still classified as a Schedule I drug [Wikipedia]

This makes it difficult for cannabis businesses to access traditional real estate financing options like bank loans or mortgage loans. Banks and financial institutions are often reluctant to provide services to companies involved in federally illegal activities, including Cannabis.

Also, due to federal illegality, several states and municipalities have not made positive moves toward legalizing medical and recreational Cannabis. This limits Cannabis-related businesses to only a few cities and states that have decriminalized and approved Cannabis, leaving the early bird with the worm.

3. Diversification and Risk Mitigation

Adding Cannabis real estate to a real estate portfolio introduces diversification by sector. Most real estate portfolios consist of a mix of residential, commercial, and industrial properties. Cannabis real estate represents a unique and growing sector that is not directly tied to the broader real estate market.

Diversifying into this specialized sector can help mitigate risks associated with economic fluctuations in other areas of real estate.

Cannabis real estate often generates income through long-term leases with cannabis operators. These leases can provide a steady and reliable rental income stream, which may be less susceptible to market volatility than other real estate ventures.

There are several other strategic Cannabis investing options that can secure and diversify your investment in Cannabis real estate, like the Cannabis REITs (real estate investment trusts). Unlike the usual REIT, a Cannabis REIT focuses on buying and owning properties used by cannabis companies.

With this investment option, you don’t have to become a landlord or be directly involved with Cannabis. Instead, you can earn money from investing in a Cannabis REIT that rents these Cannabis properties to businesses. Furthermore, returns of Cannabis stocks on REITs are high and can range from 4% to 8% [RCCBLaw].

4. Stable Rental Income

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Most businesses enter into a long-term agreement that can span several years to lease Cannabis real estate used for their operations. This inherent industry practice enhances rental income stability, making it a promising investment opportunity for investors looking for a steady, consistent income flow. 

Businesses renting cannabis real estate assets also typically have low competition and Cannabis businesses have demonstrated an ability to generate massive sales per square foot. The Cannabis retail real estate industry will remain in high demand and produce steady cash flow as long as federal and state regulations remain strict.

Unlike traditional retailers that may have to worry about high levels of competition due to the ease of opening a shop, the Cannabis space is more challenging to enter, as businesses face limited license distribution, strict regulations, difficulty accessing financial services, and many more.

5. Tax Benefits and Incentives

Cannabis real estate leases often have unique terms, such as triple net leases, where the tenant is responsible for property taxes, insurance, and maintenance. These lease structures can give investors more stable and predictable income than other real estate assets with different lease terms.

Some tax benefits associated with Cannabis real estate ventures:

  1. Depreciation: Investors can benefit from depreciation, which allows them to deduct the cost of their investment over time, reducing taxable income.
  2. Interest deductions: Mortgage interest payments on the real estate investment can be tax-deductible, reducing the overall tax liability.

III. 1031 exchange: Investors may use a 1031 exchange to defer capital gains tax by reinvesting the proceeds from a real estate sale into another qualifying property

These unique tax incentives help to reduce tax liabilities on retail assets, lower operating costs, and create a competitive edge, leading to higher rental rates, lower vacancies, and improved financial performance.

Final Words

The Cannabis industry continues to face evolving regulations and growth opportunities as the tide of legal Cannabis sales surges in multiple states throughout the U.S. Investing in Cannabis real estate emerges as a unique opportunity for savvy investors. As the demand for specialized properties grows, the potential for lucrative returns remains undeniable.

Cannabis real estate offers a dynamic and ever-growing opportunity for investors who are prepared to navigate the regulatory landscape and leverage the industry’s potential. Whether you’re an experienced real estate investor or exploring this sector for the first time, aligning your strategy with a team of experts who understand the nuances of zoning laws, compliance, and market trends can be the key to success.

Speak with our industry experts at Zoned Properties today, and let’s lead you on your path to success in your real estate journey.