By far, the most expensive part of the cannabis licensing process is obtaining compliant property for your new facility.
Cities that have opted-in for cannabis usually implement strict zoning restrictions on where these facilities can operate, severely restricting the possible locations that may be used. This scarcity, in turn, inflates green-zoned property prices to as high as 2-3x their fair market value.
Most established cannabis companies can afford to pay these prices as a cost of doing business. But for new cannabis operators seeking to open their first or second facility, this cost is often too great to bear.
For this reason, many hopeful cannabis entrepreneurs turn to leasing as a cost-friendly alternative.
Below, we'll break down the main differences between buying and leasing property for your cannabis business, as well as the pros and cons of each.
Buying Cannabis Property
It is always ideal to buy property for your cannabis business, if possible. This is true for a few reasons:
License Value: when you own the building in which your cannabis business operates in, your state license becomes tied to the property. Therefore, if you ever need to sell the business, you'll also be selling land that is state-licensed for cannabis; inherently increasing it's value. This provides a valuable exit strategy.
Equity: owning property is one of the oldest and surest ways to build wealth in America. This provides cannabis entrepreneurs more security as they can hold equity in something outside of the business, in the off-chance it fails or underperforms. As a land-owner, you'll also have full control over your own property, rather than having to go through a landlord.
Tax Benefits: because cannabis is still federally prohibited, the tax deductions that are available to cannabis businesses are limited. One significant deduction, however, is your building's depreciation, which of course you must own in order to claim.
However, there are also a couple of drawbacks to buying:
Cost: by far, the biggest con of buying commercial cannabis property is the cost. As mentioned, the values of green-zoned properties can be extremely inflated, pricing out those who are on a limited capital investment.
Financing Availability: because cannabis is federally prohibited, you are unable to pursue most conventional financing methods to purchase commercial cannabis property. You'll have to pay for the property cash, enter a land contract with the seller, or find a private lender that is willing to finance your deal. This is often easier said than done and will still, at minimum, require a hefty down-payment.
Leasing Cannabis Property
Leasing can be a viable alternative for the following reasons:
Cost: by leasing, you eliminate the single most expensive part of the cannabis licensing process, which is buying commercial property. The hundreds of thousands of dollars you save on down-payments can instead be used as valuable start-up capital to get your business operational, so you can start generating cashflow as fast as possible.
Time: buying commercial property is also arguably the most time-consuming and frustrating part of the cannabis licensing process. You'll need to find green-zoned property in the municipality you are pursuing, secure financing for the property, and strike a deal with the seller against other competitive buyers. For most, this process can take months. By removing these obstacles, leasing is undoubtedly a speedier alternative for operators who are eager to get their business up and running as fast as possible.
There are several drawbacks to leasing. These include decreased license value, lack of equity, and less tax benefits [as discussed above], as well as the following:
Landlord Restrictions: cannabis businesses are very high maintenance in terms of the operational demands they put on their property. In most cases, renovations must be made to ensure state and municipal compliance, and utility costs can be extremely high. This, combined with social stigma around cannabis, can make it tricky finding a landlord that is okay with the burdens that come with leasing to a cannabis business. You'll also have exercise a great deal of diligence in negotiating terms with a potential landlord to address these operational requirements.
Location: when a land-owner realizes their property has been green-zoned, and thus significantly increased in value, they are often more inclined to sell the property and immediately realize their gains. By limiting your property search to only those land-owners willing to lease, your options in many cities may be limited.
Interested In Buying or Leasing Cannabis Property?
To learn more about buying vs. leasing and the cannabis licensing process, please contact our team of expert consultants to schedule a free consultation.