Benzinga | May 26, 2021 08:09AM EDT

New East Coast Recreational Market Spurs Real Estate Land Rush for Cannabis Properties

While federal legalization still hangs in the balance, more and more states are easing long-standing restrictions on the use of cannabis. In the 2020 election, all 6 states that put forward ballot measures to legalize or decriminalize cannabis passed those measures with strong support. This brings us to a total of 36 states with some level of legalization. As more states move in this direction, real estate investors are rushing to grab up cannabis properties so they can take a piece of an industry that's anticipated to grow to $41.5 billion by 2025.

Sale-Leasebacks on the Rise

Some of the most promising opportunities real estate investors are finding are sale-leaseback deals. Because the federal government has been moving so slowly on its decision to grant federal legalization, cannabis producers and retailers still struggle with liquidity issues because of restricted financing options.

To increase liquidity without taking on more debt, many of these businesses are turning to the sale-leaseback, a unique financing option in which the business sells its property to a real estate investor and then leases it back from that investor in order to continue operating in the space.

This injects much-needed cash flow into the business and provides the investor with an instant return on investment in the form of regular lease payments -- a win-win.

Some recent examples of major sale-leaseback deals in the cannabis industry include 2 major purchases by Innovative Industrial Properties (NYSE:IIPR). In July 2020, the San Diego-based real estate investment trust (REIT) bought Columbia Care Inc.'s (NEO: CCHW) (OTC:CCHWB) Vineland, New Jersey, facilities for $14 million and Cresco Labs Inc.'s (CSE:CL) (OTCQX:CRLBF) Fall River, Massachusetts, property for $28.8 million. Both were sale-leaseback deals.

What Will Become of Sale-Leaseback Deals After Full Legalization?

As mutually beneficial as these lucrative sale-leaseback deals are, the trend is likely to be short-lived if federal legalization does come -- a policy change that seems likely at this point. When full legalization arrives, restrictions on financing options will loosen considerably. As a result, sale-leaseback deals may decline as cannabis businesses gain access to more traditional sources of financing.

Buying Cannabis Properties Directly

Existing cannabis businesses seeking investors for sale-leaseback deals aren't the only way real estate investors are securing their piece of this growing industry. Investors are also buying land, warehouses, retail space and other properties that have potential to be used for cannabis operations.

Investors in New York, for example, are buying up cultivable land and production facilities in Hudson Valley and areas further upstate in anticipation that this will become a major player in the industry going forward.

This route comes with more roadblocks than a sale-leaseback deal, however. If investors want to sell or lease properties for use in cannabis cultivation or distribution, they need to check zoning requirements and obtain the proper licenses for that property.

To make that process easier, marketplaces like 420Property.com are providing a space for real estate investors and cannabis businesses to browse available real estate and cannabis businesses for sale. By connecting its users with other real estate and business professionals in the cannabis industry, 420property makes it easier to find the right opportunities without having to sift through hundreds of listings that aren't suitable for cannabis operations.