It’s high time for marijuana REITs
The marijuana industry needs financing and real estate for it’s expansion. New REITs spring up to meet the need.
Investing in real estate offers many opportunities to earn high returns — in the case of catering to medical marijuana growers, the “high” is literal. Because the entire industry was illegal not long ago (and technically still is on a federal level), very few support businesses service the marijuana industry.
Growers came out of hiding first, and among the first businesses to service them were retail property owners, generally those who couldn’t find other tenants. For owners of vacant commercial space in bad areas, these tenants were golden because not just did they want the space, they paid a premium for it. This premium survives to this day.
As the industry grows, growers and middleman suppliers face challenges to expansion. Obtaining capital to expand a business that isn’t technically legal is tough, but added to that increasing competition pressures sales prices making income less predictable. Despite these challenges, some groups are taking on the challenge of providing capital and space to this budding industry.
A nascent San Diego real estate firm that aims to own buildings used to grow medical marijuana has filed to become publicly traded on the New York Stock Exchange.
Innovative Industrial Properties, lead by former BioMed Realty Chief Executive Alan Gold, submitted its prospectus Monday to the U.S. Securities and Exchange Commission.
Founded in June, the company is seeking to sell 8.75 million shares at around $20 each for net proceeds of $175 million, according to the prospectus. Innovative Industrial plans to use the money to buy 10 to 20 indoor grow facilities for state-licensed medical marijuana producers in nine states, including California. …
Marijuana growers used to hide plots in the woods and hope the DEA didn’t find them. More sophisticated growers moved indoors where they could control the climate, but hiding a large growing operation carries its own perils.
Now that medical marijuana is legal, indoor growers face fewer regulatory hurdles, but finding a commercial building with a cooperative landlord in a welcoming jurisdiction is still a challenge. These difficulties create opportunities.
Demand for marijuana filters down to growers who need to find a place to grow their product. Since the supply of buildings where they can grow marijuana is scarce, growers pay a premium to rent or buy these buildings, representing an opportunity for developers willing to learn this business.
REITs commonly specialize in specific property types – such as office buildings or strip malls. But Innovative Industrial is going after an unusual niche.
The company believes state-licensed medical cannabis growers sometimes struggle to get bank loans or other traditional financing for their businesses – in part because marijuana remains illegal under federal law. …
This risk further reduces competing supply and raises the potential profit to those catering to the industry.
Of course, risk is more than an abstract idea. The DEA could aggressively enforce current federal law and shut these businesses down, causing investors to lose significant sums.
The company thinks it will face less competition from other REITs and institutional real estate buyers because of the “unique nature of the real estate and its tenants.”
But there are competitors, such as Grow Condos, whose stock trades trades over-the-counter. The Oregon-based company provides condo-style, turn-key grow facilities to cannabis growers.
This industry will also find favor among crowdfunding sources as well, particularly since small investors (who like to get high) may want to invest simply because they like the idea of helping out growers.
The legal cannabis industry grew 17 percent last year to $5.6 billion, according to industry research firm The ArcView Group.
Twenty-six states currently allow medical marijuana, including California. More are expected. In November, California voters will decide whether to join Colorado and a few other states in legalizing recreational marijuana use.
If California legalizes marijuana, growth will be even more robust next year.
While public attitudes toward cannabis may be changing, Innovative Industrial still faces risks. They include a tenant base made up mostly of start-ups; buildings outfitted for indoor cultivation that may be difficult to re-lease should tenants fail; and the specter of new regulations that could hamstring the medical marijuana industry, according the prospectus.
Despite these risks (and the desires of many who wish nobody smoked pot), marijuana will be a growth industry for the foreseeable future.
At some point, the novelty will wear off, and the health hazards will be emphasized more than the health benefits. Fifty years ago, many people smoked cigarettes, but today, very few do. Marijuana will enjoy a period of expansion and acceptance followed by a slow decline, but not before a lot of people get really high and many others get really rich.