Michigan recently legalized recreational marijuana in the State, and prior to that, passed the Medical Marihuana Facility Licensing Act, or MMFLA, which allowed for licensed, state-approved medical marijuana facilities. While the law is administered by the State’s Department of Licensing and Regulatory Affairs, or LARA, local municipalities are given the authority to determine where licensed cannabis facilities are allowed to locate.
Properties that are located in approved “marijuana real-estate” or “green zoned” areas have seen their value shoot up seemingly overnight. The vacant buildings left empty from the decrease in American manufacturing are now some of the highest valued properties in the area due to the growing popularity of the marijuana business and the ability to repurpose these building for such enterprises, often times doubling or tripling the market value of the property. For dispensary properties in particular, we have seen prices increase as much as ten-fold from the pre-marijuana market value to the marijuana market value.
Part of the reason for this is that in order to apply for a marijuana facility license in many municipalities, you must already have a building purchased, leased or under contract and being that not every building will be licensed, many have seen it favorable to make offers on several building hoping one will be licensed and taking the hit of loosing deposits on the others. These high, up-front cost have created a high cost of entry, but why so much?
One of the reasons the cost of commercial real-estate for the use of marijuana is so high is due to the strict zoning laws set forth by each municipality. Beyond the setbacks and necessary distances from schools, churches, and other marijuana facilities, many of these city’s only allow marijuana facilities in small, predetermined locations in very limited numbers. This creates only a small handful of properties that are eligible for an operation, compared to numerous buyers desperate to get their hands on dispensaries in order to vertically integrate their operations and have the “best locations”. This is further exacerbated by large local operators and deep pocketed multi-state operators who are willing to pay a steep premium for high-quality provisioning center locations. These market forces drive up the prices for everyone, including smaller local operators who are only looking for one or two facilities for the cannabis operations.
On top of the high cost to purchase these cannabis properties, “loans for such ventures” are few and far between. With a scarcity of lenders due to marijuana still being federally illegal, people are forced to pay cash upfront or pay high interest rate in order to get funding from private lenders and investors. This creates a significant barrier for entry to smaller local groups looking to establish marijuana facilities in the state.
What to Do as a Potential Purchaser
There are still options for those wanting to enter this industry without having millions of dollars in liquid cash to spend on a dispensary or cultivation property. One such option that we are seeing are businesses collaborating, with multiple business groups coming together to buy a building and dividing it into individual units for each separate entity. Other operators that are politically well connected are driving the opt-in process themselves, thereby ensuring that the property they already own is “green zoned” or by having an inside track on where the “green zoned” property is going to be, allowing them to purchase at the pre-marijuana market value. This does have risk, however, due to the possibility that their selected properties do not end up making into “green zone”, or the municipality ultimately decides not to opt in after holding several hearings.
Still others are continually watching municipalities decision making in regards to the marijuana faculties ordinances and hoping to find hidden gems and diamonds in the rough. By doing this and acting on building and lands before it is officially allowed by the municipality, aspiring cannabis facility owners will be able to acquire the properties before the premium is priced into the property value.
How Much is the Mark Up?
If you own a property that happens to be in a green zone, this article probably has you salivating. With the right buyer, your half a million dollar property could be worth as much as five million depending on the municipality you are located in and the license types your location is approved for. However, not all license types and municipalities produce such a big windfall. Usually, dispensary properties see the largest mark up, followed by grow properties, and then by processing facilities. We have not seen much of a mark-up for properties zoned by secure transport or safety testing facilities only, though generally properties zoned for these two license types are also zoned for other license types.
Another main factor when determining the marijuana value of a property is its location, which is in turn based on two main factors. The first factor is how many people are in the area. This factor primarily effects dispensary / provisioning center properties but can also affect other license types as there needs to be a large enough labor pool to staff your facility. For dispensaries, like any other retail business, the more people in the area, the more potential customers and potential business. This is why dispensary licenses in a city like Warren with over 100,000 people are more competitive compared to cities like Pinconning, with only about 1,200 people. Also relevant is how much green zoned property exists in a municipality, with the greater supply causing a greater price, and whether the area sees an influx of seasonal tourists.
The final main factor is the number of licenses that a municipality allows, if the municipality limits them at all. Turning to Warren and Pinconning as examples, Warren has more than 100,000 people but only allowed 10 provisioning center licenses, meaning one licensee presumably would serve a base of more than 10,000 people. Pinconning, on the other hand, allowed unlimited provisioning centers to be located in its boundaries, which would lead to several locations competing for a very limited customer base. The practical effect of this is that provisioning center property in Pinconning warrants almost no “marijuana mark up”, where as an approved and licensed location in Warren would probably warrant a 10x multiple or more.
The high price of cannabis approved property may be a blessing or a curse, depending on your perspective. If you own property that becomes green zoned, the value of your property will likely increase, though such an increase could be short lived. If you are looking to buy property, then this premium is likely the bane of your existence. However, you can employ strategies to locate property for less than the full marijuana value, though each strategy has its own set of drawbacks.