Schneiderman: Savvy investors picked up on this opportunity early on. The desert town of Adelanto is a prime example. In 2014 it was a city with a significant budget deficit and depressed land prices. In 2015, the city embraced the cannabis industry with open arms. Its deficit has decreased significantly (in fact, it may be operating at a surplus at this point), and land prices have increased dramatically. As businesses gobbled up commercial real estate, the construction industry picked up and home prices have been increasing significantly as well. Picking up on this trend, we've seen commercial real estate brokerages that have established cannabis practice groups that monitor developments in local regulation to help investors find suitable investment opportunities. We are also seeing a surge in real estate investment funds being established to seize on the opportunity in the space.

GlobeSt.com: What do landlords need to know before signing cannabis tenants?

Schneiderman: First and foremost, they need to understand that along with the rewards (i.e. premium rents), comes higher risk. Cannabis is still illegal at the federal level, and there is a risk that real property used to facilitate cannabis related crimes could become subject to civil asset forfeiture. Assuming the landlord is comfortable with this risk, the landlord should include a clause requiring the tenant to indemnify the landlord if the property becomes subject to an enforcement action. From the landlord's perspective, the lease should also contain a covenant by the tenant that it will actively monitor and comply with state laws and local regulations, and an “out” if the tenant fails to comply with those laws. Landlords should also steer clear of percentage rent, as generating revenues based on cannabis sales may attract unwanted attention and scrutiny from regulators. Any landlord with a mortgage on its property also needs to evaluate whether leasing to a cannabis industry tenant might trigger a breach under its loan documents.

GlobeSt.com: How are cities regulating this business, and does it have an impact on the real estate?

Schneiderman: Each city has full discretion as to whether, and to what extent, they will permit cannabis businesses to operate within their borders. So, for instance, one city may completely prohibit any cannabis business from operating within its borders, while another city might allocate 10 permits for retailers, 2 for outdoor cultivation, 2 for indoor cultivation and 3 for manufacturing. Those cities that do allow cannabis businesses also usually adopt zoning regulations specifying where cannabis businesses are permitted to operate. When you layer those on top of state regulations that restrict how close a cannabis business can be located to a school, day care center or youth center, you can easily wind up with a situation where one building has tremendous revenue potential for leasing in the cannabis industry, while a nearly identical building only a block away is not a viable option and therefore loses out on the economic opportunity.

GlobeSt.com: This business was only recently legalized. Where do you see the industry in the next five years?

Schneiderman: At a bare minimum, I do expect that as local officials recognize the tremendous tax revenue potential to be had from embracing the industry, more and more cities will open their doors to cannabis businesses creating opportunities for real estate investors who stay on top of regulations at the local level. On a larger scale, it's really difficult to say—much will depend on the next presidential election and the balance of power in the House and Senate. As frustrating as federal illegality is for the time being, it's helping to ensure that cannabis remains a cottage industry dominated by risk tolerant entrepreneurs. The minute it becomes legal at the federal level, simply because of the tremendous economic opportunity, I expect we'll see big business make a tremendous push into the space and there will be dramatic consolidation in the industry. To some extent, we've already seen that in some of the more established regulated markets, such as Colorado. With more players in the market, product prices will likely start to drop, with a corresponding squeeze on profit margins. That may drive down the premiums that industry tenants are willing to pay for real estate.