Seth Weissman

The legalization of cannabis in California has been followed—and in some ways even preceded by—a rush of real estate investment to supply the new demand. However, while there is excitement and strong appetite for cannabis-related assets—which includes retail storefronts as well as industrial facilities for manufacturing—investors are also preceding with caution as the new asset class also poses significant challenges.

“Appetite is strong but cautious,” Seth Weissman, a partner at law firm Jeffer Mangels Butler & Mitchell, tells GlobeSt.com. “There are substantial challenges that can counterbalance some of the opportunities. First, cannabis uses are heavily regulated. These start at the land use level.  In many places, cannabis uses require a conditional use permit or other similar entitlements. Such CUPs can be saddled with numerous conditions of approval. Grow operations need a lot of power, so operators may need to upgrade their amperage. There can be substantial costs to build out appropriate space, including canopy systems.”

In addition to challenges prepping the physical building, there are also challenges concerning permits that can impact lease terms. “Operators also need to obtain local operating permits and a state license,” says Weissman. “These take time to obtain and are subject to substantial background investigation. Potential tenants do not want to commit to long-term leases without assurances that they will be able to operate. So the tenants seek options to lease, or leases with termination rights, and/or substantially reduced rent for the first 6 to 12 months.”