Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/888015
46 • October 2017 • Western Real Estate Business www.REBusinessOnline.com CALIFORNIA'S CANNABIS REAL ESTATE CHALLENGE A new year is approaching, and with it comes new laws to California. Many of these regulations will surround the burgeoning cannabis industry, which can be a boon or bust to landlords and investors, depending on how closely they follow the rules. By Jonathan Charak T he new can- nabis regula- tions coming to California in 2018 will drive many fun- damental changes within the largest cannabis industry in the United States. Cannabis operators in California will need to drastically change the way they do business to comply with the new rules and regu- lations. This includes everything from mandatory third-party testing of all cannabis products, to the implemen- tation of a complete seed-to-sale track- ing system, to the adoption of new packaging standards. But before any of these issues can be addressed, op- erators must first make sure that the facilities where they operate comply with the new cannabis real estate reg- ulations. These rules are arguably the most important because of the time and cost associated with compliance but, unfortunately, they also seem to be the least understood. When cannabis operators who ap- ply for state licenses in 2018, they must provide verification that their operating location has already been properly zoned for the specific type of license they wish to obtain. Providing zoning verification may sound sim- ple, but that is the final step in a long and complicated process. An official change in local zoning ordinances typically takes three to six months even in the best circumstanc- es, and usually needs to include the full support of a local city council and a majority of citizens. New ordinances must be drafted, usually by lawyers, open public forums must be held to solicit feedback from members of the community, and state law will require three readings and city council votes before any new ordinance is officially approved. Effecting a zoning change or finding property in an area that has already been zoned for cannabis is not the end of the journey. Some zoning ordi- nances provide approval for only cer- tain types of cannabis licenses, which means operators must ensure they're covered for their specific license. For example, extraction with volatile sub- stances is one license type that is often excluded from existing cannabis zon- ing ordinances. Another factor to consider before committing to any property in a can- nabis-zoned area is the structure of the local permitting fees and special cannabis taxes imposed by the local government. Most jurisdictions with existing cannabis zoning have im- posed annual fees based upon build- ing square footage and/or a percent- age of revenue or gross receipts. These fees can be so burdensome that they make it very difficult for operators to compete in the marketplace, which is why a full understanding of the local fee structure is critical before making any real estate commitments. Given these challenges, an operator who has found a property in a location zoned for its license type and with rea- sonable permitting fees may think the challenge is over. However, the suit- ability of that property for its purpose must still be assessed. Regardless of whether the operator is buying raw land to construct a new facility or ret- rofitting an existing structure, certain critical questions must be addressed. Is there sufficient infrastructure al- ready in place? How costly will it be to bring in or upgrade all necessary utilities? What must be done to com- ply with all applicable environmental regulations and CEQA requirements? Compliance with the new canna- bis real estate regulations is clearly not something to be taken lightly. Given the time requirements, opera- tors should not waste any more time before addressing this matter. Finding the right cannabis property is a long and difficult process that can either make or break any well-run cannabis operation. With great challenges come great opportunities, however, and cannabis real estate is no exception. The first operators to successfully navigate this process and identify their future loca- tion while maintaining a reasonable cost structure will find themselves with a significant competitive advan- tage in the largest cannabis market in the U.S. Jonathan Charak, Co-Founder and CFO, Canna-Hub Most jurisdictions with existing cannabis zoning have imposed annual fees based upon building square footage and/or a percentage of revenue or gross receipts. These fees can be so burdensome that they make it very difficult for operators to compete in the marketplace. Charak