Avoid Real (Estate) Regrets

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Selecting the right location for your dispensary is a difficult task. Here, experts provide 15 tips to prevent mistakes and setbacks.

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August 10, 2018
Jolene Hansen
©SMNelson | iStockphoto

If you are worried about making the wrong choice when it comes to selecting a location for a dispensary, you’re not alone. Too many lessons on selecting and acquiring property for retail cannabis locations are learned the hard way. To shorten your learning curve and help you avoid some common real estate mistakes, Cannabis Dispensary turned to real estate experts focused on the cannabis space. Their insights can help you make real estate decisions that position your dispensary for success.

Tim McGraw, CEO and Founder

Canna-Hub, California

1. Avoid selecting a location where you’re not wanted.

“Everybody knows securing a location is top priority. But … you want support from the local community when possible. Not having that boots-on-the-ground support can become a terrible headache and a real source of stress if you locate in a city that doesn’t want you there, barely passed cannabis legislation and has ordinances that are onerous and tough to deal with. When possible, you want to be where you’re wanted.”

“The public approval process is not something to be taken lightly. Applicants need to canvass and provide neighborhood meetings to educate the immediate neighborhood about the pros and cons of their business operation.” – Jeff Halbert, President and CEO, Canna Site Advisors
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2. Don’t forget your due diligence on local ordinances.

“In cities like Los Angeles or Sacramento, you’re beholden to the same rules as everyone else obtaining a license to operate in that area. But when you get outside of some of the larger cities, the rules and regulations can become more nuanced. Each individual city is going to have its own ordinances.

“Make sure to read the fine print and pay attention to what fees they impose—those are going to have a major impact on the profitability of your business. If you’re paying a local tax of 15 percent, but the neighboring town is only charging 5 percent, that’s something you need to consider on your pro forma.

“In addition, some cities require that half of your employees live within city limits. This might not be a big deal if you’re in LA, but if you’re in a small town, a mandate like that can become problematic depending on the type of labor you need and what skill sets are available. Always make sure you’ve done your due diligence on the local ordinances.”

3. Don’t underestimate time lines for obtaining permits.

“Ideally, you’ve already started this process at least a year and a half ago. If not, get on it. It’s a process, especially in California. Once you’ve picked your site, if the ordinance isn’t already passed and the CUP (conditional use permit) isn’t already issued, you may have a long road ahead of you. Those time lines add up and can further delay you from being operational in this rapidly expanding market.

“A lot of operators underestimate the time line for getting their conditional use permit from the city and having the ordinance finalized. It’s an arduous process. It’s also important to budget for the cost of legal fees, man hours and overall time it takes to get through that process.”

Dean Guske, President

Guske & Company, Washington

4. Don’t underestimate location.

“The adage of real estate is location, location, location. That’s probably the most important thing that you need to consider. I have some fairly sophisticated retail clients, and they spend a lot of time on locations of their stores. They do traffic studies. They check to see where there would be other competition. … Be patient in finding a good location.”

5. Don’t operate under a sole entity.

“Don’t own the real estate in the same [legal] entity that the store is operating in. That doesn’t make sense, just from a liability and risk perspective.

“It should be held in a separate entity [e.g., an LLC], and then leased to the operating entity. There’s not necessarily a big tax advantage to that, it’s more of a risk and liability issue.

“If you buy the property in a separate entity and you lease it to the operating entity—the dispensary entity—you’re not necessarily going to get a better tax advantage inside the operating entity. But depending on what the level of rent is, you have a totally different entity that is either producing income or loss from the real estate, and you may get some tax benefits out of that.”

Jason Thomas, CEO

Avalon Realty Advisors, Colorado

6. Don’t forget to budget for the unexpected.

“We found that most groups are undercapitalized for their plan, primarily around the cost to build out and [if renting or leasing,] the amount of money they’ll have to put down with the landlord for prepaid rent and deposits.

“The timing to open a store takes a lot longer than people would anticipate. I have clients that took well over a year to build out a store and get it open because of licensing and other dynamics centered around opening a store.

“When you look at that kind of timing, you’re looking not only at a lot of lost revenue, but some expense—whether it’s through ongoing rent payments or other static, or fixed, costs that will add to your expenses and take longer to recover.

“The way to mitigate that is to have the right contractor and the right consultants hired, … people who have been through the process … so that you’re getting the biggest bang for your buck.”

7. Avoid renting or leasing, if possible.

“If you can purchase a property, that’s always the best. You’re not subject to the landlord or changes to your lease. You really control your own destiny at that location.

“If you do lease, I strongly recommend getting a purchase option. As most companies grow, they’ll arguably have more money to spend over time. If you have a purchase option, that’ll give you protection that your landlord can’t kick you out without giving [you] the opportunity to exercise [that option].

“It’s also an exit strategy for the business. If you have an option [to buy the property], and [you] sell the business, that option could arguably be exercised and add value to the business.”

“One thing that [vertically integrated] operators don’t put enough credence in is your distribution between your production facility and your retail outlet. I may have a dispensary in Denver, but if my cultivation or extraction facility is hours away, I have to plan for [delivery] time and costs in between.” – Jason Thomas, CEO, Avalon Realty Advisors
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8. Don’t forget distribution distances and costs.

“One thing that [vertically integrated] operators don’t put enough credence in is your distribution between your production facility and your retail outlet. I may have a dispensary in Denver, but if my cultivation or extraction facility is hours away, I have to plan for [delivery] time and costs in between.

“For a vertically integrated business, look at where you’re producing and where you’re distributing, and the time in cost and effort involved in bridging that last mile. That’s a significant business decision ... to make. Understand that’s going to impact your bottom line. ... The more you can minimize it, the better.”

9. Don’t lose patience.

“Part of the challenge in finding a location is finding the right location. ... With the rush and the irrational exuberance of the industry, oftentimes people will take the first property they find, regardless of any other dynamics. They’ll just push the round peg in a square hole because they feel like they found the only one out there.

“A lot of these properties that I’ve seen lease and sell around Denver were in poor locations for a retail outlet—centers that have done very poorly because they have no traffic, no real prominence or identity.

“[Cannabis] is the only industry I’ve ever encountered where location isn’t driven by the business dynamics, but by the requirements of the industry and the perception that, ‘If I don’t take this, there is nothing else.’”

Jeff Halbert, President and CEO

Canna Site Advisors, California

10. Don’t neglect negotiating an exit clause or early termination right (ETR).

“One thing I advise, especially for startup businesses that are [searching] for their initial locations, is to include an exit clause or early termination right (ETR) in lease negotiations with the landlord. If something comes up in the business model from an operational standpoint or whatever, if they sign a five-year lease, they have the option to get out of that lease in three years, for example.”

“That’s a tip that some people may not think of, and they’ll sign a five- or 10-year lease and be stuck at that location financially and not have the ability to move or adjust as market conditions and their operations change.”

11. Don’t wait to canvass local neighborhood groups until after public hearings.

“The public approval process is not something to be taken lightly. Applicants need to canvass and provide neighborhood meetings to educate the immediate neighborhood about the pros and cons of their business operation. A lot of it is just that people don’t know, so when they don’t know, then the answer is, ‘No, we don’t like it.’

“They have to go through an education process in advance of these public hearings to educate the local neighborhood groups and get their support if at all possible. So, when they get to that critical point of an up or down vote at the city council or the board of supervisors, they’ve been prepared.

“A lot of people take [the public hearing process] for granted ... but it’s hard to overemphasize the importance of doing the groundwork before you get to that public hearing in order to garner support or at least have an exposed knowledge about what you’re going to be running into.”

12. Don’t forget to plan and save for expansion.

“A lot of cannabis businesses, when they’re expanding especially, are using the cash reserves they have on hand to purchase buildings—in areas where they feel they can do good business based on their site-selection criteria—either by themselves or with other investment partners. That way, they control the property [versus having a landlord who owns it] and can take as much time as they need to get their approvals.

“Then it’s just a matter of getting the [necessary] time with the seller … for you to get confident enough to close escrow on the purchase. You’re not under the pressure with a landlord of having to move forward on a lease that you’re not sure you can get approvals on.”

Ryan Jundt, Vice President of Sales

Cannabis Property Brokers of Michigan, Michigan

13. Don’t choose property outside the “green zone.”

“By far, the first and most important thing you have to look at is to make sure that the location meets your local/municipal zoning ordinance. If you’re not in the ‘green zone’ or whatever variation of rules that municipality has, you won’t even be able to become operational. I’ve met multiple groups that have actually purchased a building without tying it back to the local [zoning] ordinance.”

“It’s really smart to go in and talk to all your city officials. Be really open on who you are, what you’re doing and how you’re planning on doing it.” – Ryan Jundt, VP of sales, Cannabis Property Brokers of Michigan
© Juanmonino | iStockphoto
14. Don’t forget to invest in time with city officials.

“Once you’ve fully vetted a property and made sure it meets all the zoning ordinances, you also need to know if the municipality will actually approve this thing. There are properties that will be zoned perfectly, but there may be a neighbor or a business that will object even though you meet all the municipality zoning ordinances.

“In one instance, we were expecting to get our municipal license at a meeting, and a pastor and some of his congregation came in and said they didn’t want marijuana in their community. It resulted in us going from getting our municipal license to a moratorium being placed in the municipality for the next six months.

“It’s really smart to go in and talk to all your city officials. Be really open on who you are, what you’re doing and how you’re planning on doing it. Most of the time, the city officials will reciprocate and tell you if you might have an issue, because they know their community.”

15. Don’t be afraid to be near other dispensaries.

“This industry, especially in Michigan, is still new enough that you kind of get the Walgreens-CVS effect. Because [it’s so new] and there are so many limitations on consistent supply of product, people are more apt to drive to your store if you have two or three other stores around you.

“We’ve put real estate packages together in municipalities where it’s the first dispensary. Although being the first is really good for brand recognition and customer loyalty, we’ve actually found that those shops get busier with two or three locations coming in around them.

“There’s a municipality here in Michigan where their focus has been to kind of be the dispensary hub of northern Michigan. … It just keeps drawing people from surrounding communities because they know they can get their shopping done all in one [area].”

Jolene Hansen is a freelance writer and frequent contributor to GIE Media publications.