3 Expensive Mistakes Made Negotiating Leases For New Cannabis Companies & What You Can Learn From Them
1) Failing to Identify & Underestimating the Opportunistic Landlord
It’s understandable that people want to maximize profits. Even with the incredible run that both commercial and residential real estate has had over the last decade, property owners still want more. At Renaissance Consulting, we prepare our clients that we will be negotiating on their behalf to reduce what we call, “The Marijuana Premium”. We spend hours both over the phone and sometimes traveling to meet face to face for the initial contact. We’ve found that most brokers won’t disclose the MP upfront so we do what can to get it out of them. In short, we’re looking for potential landmines that can cost our clients thousands of dollars. Non-refundable deposits are normal but if you’ve never operated a cannabis company at the cultivation, processing, or retail level, you won’t know what makes sense for the business, IE if the fees you pay to control the property are sustainable or not.
You can saves thousands by having your representative write in contingencies like and out if you’re not awarded the licenseas well as rent abatement while you’re under the review process to be granted your license to operate in a certain jurisdiction. The solution here is simple: speak to someone in the industry who has done what you’re trying to do and at the very least, let them run those number for you. Maybe you spend a few thousand up front to avoid losing several million in potential profits.
2) Not doing the due diligence to understand what the landlord plans to do with the property.
A costly example of this is when a landlord is either in the process now or is going to begin the process of refinancing the property you’re trying to lease. Cannabis is federally illegal. Most landlords are required to sign disclosures that no activity that is deemed federally illegal is going to take place on the property. It doesn’t matter that the state allows for the cultivation, processing, and sale of cannabis. The landlord cannot get federally underwritten financing for the building if your cannabis company is listed as a tenant. If the property is held in a Real Estate Investment Trust, the entire portfolio can be put at risk simply by leasing the space to your cannabis company. Make sure you discuss this with a firm that has successfully negotiated fair and equitable cannabis real estate transactions and knows how to approach the landlord, conduct the necessary due diligence, achieve the unique comfort level needed for the landlord to give you a “Yes” that cannabis professionals understand is necessary, and to do what it takes to secure the lease for you.
3) Trying to shortcut the property search process by using google maps to look verify sensitive use violations.
Common examples of sensitive use are having your cannabis business within 1000 feet of a school, 600 feet from a daycare or business that has an after-school program, 300 feet from an establishment that sales alcohol, and 1500 feet from a residential area in the case of cultivation and/or processing. One big mistake we made was identifying a surrounding business that was marked as a yoga studio. What we didn’t realize until after we had secured the lease was that the yoga studio sublet their facility after hours to a piano teacher who taught kids under the age of 21. Fortunately for us, this was one of our private holdings and we were able to absorb the fees, take the additional loses for breaking the lease and move on.
It is sometimes said that mistakes aren’t really valuable unless they cost you money. Not only did we lose out on an incredible location for a new dispensary that would have netted millions of dollars for us, but we wasted a lot of time, energy, and capital by simply letting the excitement of opening the store get in the way of putting eyes on the property and spending the necessary time to check all of the businesses in the surrounding area.
We have an outstanding team of cannabis specific real estate professionals who love what they do and know the cannabis industry inside and out. We as a team were able to regroup and prevent something like this from happening in the future. Our agents and brokers work tirelessly to not only identify but qualify each property in the area our clients desire to open their new cannabis companies. Make sure you’re working with professionals that have years of experience in the cannabis space or you could be in for some expensive lessons we at Renaissance Consulting had to learn many years ago.