Six medical marijuana dispensaries are open for business in Massachusetts and with the emergence of the industry comes the need to secure large-scale growing facilities for thousands of pounds of product annually.
Along with 11 dispensaries that have received provisional state approval, they’ve secured 13 properties from Northampton to Plymouth for cultivation. Some are paying rents nearly five times the going rate to lease warehouse space.
Up to 35 dispensaries eventually could be permitted statewide under the 2012 law legalizing medical marijuana. And a statewide ballot question in November could legalize recreational marijuana use, authorizing 75 retail licenses and another 75 cultivation facilities in the first year.
It all adds up to opportunity for companies such as Denver-based AmeriCann, which is partnering with a Bristol County dispensary on a site in Fairhaven and a potential 52.6-acre acquisition in Freetown. With traditional lenders reluctant to back the industry, AmeriCann is providing capital to dispensaries in Massachusetts and three other states. It’s also weighing conversion to a REIT – subject to shareholder and IRS approval – to aid its ability to raise funds for land acquisitions nationwide.
“There are obviously benefits from pursuing this conversion,” AmeriCann CEO Tim Keogh said. “People understand what we’re doing. We buy land, we buy buildings and we lease them out to tenants. Nine times out of 10, people say, ‘You’re like a REIT.’”
Massachusetts now has nearly 30,000 certified medical marijuana patients. The ranks have been growing at a rate of over 1,900 patients per month since July 2015, according to the state Department of Public Health.
The impact on the industrial real estate market is just starting to be felt in Massachusetts. After Colorado legalized medical marijuana in 2007, the industry accounted for more than one-third of all industrial space absorption in the Denver area, according to CBRE Research.
Alternative Financing Drives Industry
AmeriCann is a publicly-traded company that is attempting to apply modern real estate business models to a newly-legal market: massive indoor facilities to grow medical and recreational marijuana strains. In contrast to grow farms that use artificial light, AmeriCann says its greenhouses use sunlight to cut utility costs by up to 75 percent.
It’s partnering with Fairhaven-based Coastal Compassion Inc. and medical marijuana dispensaries in three other states. AmeriCann received provisional approval from the Massachusetts Department of Health in 2014 for a 10,000-square-foot dispensary and growing facility in Fairhaven. Renovations to the former Massachusetts Lottery office building will begin this week, Keogh said, in the first phase of a $2.5 million project.
At the same time, AmeriCann is seeking financing needed to close on a $4.2 million Freetown property where a cultivation facility up to 1 million square feet is planned. The current owner, Boston Beer Co., dropped plans to build a brewery on the site in 2007.
The closing was originally scheduled to take place in June 2015 but has been repeatedly extended, most recently to June 15. AmeriCann has paid $675,000 so far that will be applied toward the $4.2 million purchase price, according to SEC filings. Boston Beer spokeswoman Michelle Diamandis said the property is still under contract.
Keogh said AmeriCann intends to close by the new deadline, and is in talks with licensed broker-dealers on a debt offering to cover the remaining acquisition costs.
Traditional lenders have been leery about providing financing for cannabis farms and dispensaries, said Timothy Watkins, an attorney with Goulston & Storrs in Washington, D.C.
“The Obama administration said it will not enforce the federal laws in this controversy, but we don’t know what the next administration will do,” Watkins said. “No lender wants cultivation and distribution in its buildings. They’re afraid the buildings could be confiscated.”
That, along with security concerns for a mostly-cash business, drove industrial landlords away from cannabis operations, Watkins said. Watkins represented a dispensary that was awarded two cultivation permits in the District of Columbia, using cash to buy a fire-damaged warehouse for approximately $2 million.
In Massachusetts, some dispensaries have opted for cash purchases of properties for cultivation, according to Department of Public Health documents. But others are paying rates significantly above the median for warehouse space.
CommCan Inc. of Millis agreed to lease 60,000 square feet at 2 Marc Road in Medway at $1.4 million per year, or $24 per foot. The average rent for warehouse space in the Route 495 south market was $5.64 during the first quarter, according to Transwestern RBJ’s inSTATus report.
Four Daughters Compassionate Care Inc. agreed to pay $1.5 million for a 22,000-square-foot commercial condo at 1200 General Edwards Highway in Sharon intended for cultivation and dispensary use.
In Colorado, A Rush For Real Estate
Legalization of medical marijuana in Colorado became a major driver of industrial real estate absorption in the past decade.
Between 2009 and 2014, cannabis cultivation facilities accounted for nearly 36 percent of net industrial absorption in Greater Denver, according to CBRE Research. As of September 2015, the industry occupied 3.7 million square feet, or 2.6 percent of the region’s warehouse space.
Marijuana operations paid a significant rent premium initially, reflecting landlords’ perceived risks of theft and vandalism, said Jessica Ostermick, a CBRE director of research. Those rates lifted overall industrial rents throughout the region, and spurred speculative development as vacancies declined.
Growers gravitated toward lower-cost class B and C industrial properties that were owned outright, Ostermick said. Higher-tier warehouses tended to have mortgages including use restrictions that would complicate cannabis operations, she said. Reflecting security concerns, many tenants showed interest in low-profile locations, and retained signs from previous non-cannabis-related tenants.
Since 2014, demand has trailed off, even as Colorado legalized recreational marijuana and dispensaries sold nearly $1 billion of recreational and medical cannabis in 2015, according to Colorado’s Department of Revenue.
“It’s about right-sizing,” Ostermick said. “With any industry that appears out of nowhere, there’s going to be a lesson learned from some of the business folks, and opportunities for takeovers and consolidation and business failures.”
