Green Gold Rush - Real Estate

April 19, 2018

 

By

Jesus Martinez

CTAS Intern, September 2017

University of San Diego

BBA Business Economics, December 2018

martinezj@sandiego.edu

 

Jim Sprouse

CTAS Managing Partner

Jim@calctas.com

 

Cannabis Market and Risk Minimization 

 

Looking for better than average returns? A likely place to find them is in the emerging legal cannabis market. It offers several opportunities for promising returns on investment. Legal cannabis has been projected to be one of the fastest growing industries in the next five to eight years. Because the sale of marijuana is still illegal under federal law, it is inherently riskier than traditional investment opportunities, which, of course, translates to higher-than-average returns.

 

When one considers risk on any investment, she will study systematic risk and unsystematic risk to make a well-informed decision. Systematic risk, risk inherent to the entire market, is studied to assess possible profits and losses due to national and international factors affecting the national economy. Unsystematic risk is the risk unique to a specific industry, directly affecting the industry one invests in. While it is hard to control for either systematic risk or unsystematic risk, if you are considering entering or investing in the cannabis market, you can take steps to minimize risk and increase confidence in investment.

 

When it comes to the cannabis market, unsystematic risk can be minimized by employing an expert consultant knowledgeable in the legal cannabis industry. As a tax and accounting specialist in the cannabis industry, Cannabis Tax and Accounting Services (CTAS) acts as an unsystematic risk minimizer. CTAS is a leading consulting firm specializing in the nascent legal cannabis industry, which successfully guides cannabis-businesses with government regulation compliance in an ever-changing business and netting market share growth.

 

 

Economic Trends, Legal Trends, and Changing Attitudes

 

The legal cannabis industry has been steadily growing since laws on marijuana sale and usage began to change, permitting for its cultivation and sale in various states across the country. The first state to legalize cannabis was California in 1996, allowing for its medicinal use. Currently 29 states, the District of Columbia, Puerto Rico, and Guam have some form of legalized cannabis use. According to statista.com, retail sales for cannabis in the U.S. have been projected to reach $37.3 by 2024. Sales for the year of 2015 was approximately $4.4 billion. This translates to a 750% increase in sales by 2024. As more states are likely to legalize medical and recreational cannabis in the near future, there is a good possibility sales will reach this number.

 

Debra Borchardt reported in her article, “Marijuana Industry Projected to Create More Jobs than Manufacturing by 2020,” published by Forbes.com in February 2017, that a report by New Frontier Data projects more than 125,000 jobs are expected to be created by 2020 by the legal cannabis industry. According to Borchardt, New Frontier Data found that for the year of 2016, the cannabis industry’s estimated to be worth $7.2 billion.

 

New Frontier Data CEO Giadha Aguirre De Carcer declared about the report, “These numbers confirm that cannabis is a major economic driver and job-creation engine for the U. S. economy. While we see…an expected drop in GDP growth, the cannabis industry continues to be a positive contributing factor to growth at a time of potential decline.” The graph below shows the trend for retail sales of both recreational and medical cannabis. According to New Frontier Data’s projections, by 2025 total projected sales for cannabis is estimated to be over $22 billion. The legal cannabis market graph shows that it will approximately triple in size in the next four years.

 

 

Favorable public opinion for cannabis has also been increasing. 61% of all Americans think cannabis use should be legal. 88% believe medical marijuana should be legal.

 

 

The map above from Newsweek.com of the U.S. shows the legal landscape for cannabis for 2018. Most states support some form of cannabis legalization. Although the possession, use, and crossing of cannabis across state borders is not permitted under Federal law, it has gained much mainstream acceptance.

 

A trend in legislation in many cities that permits for legal commercial cannabis activity has been on the rise across states where it has been legalized. Nine states have already legalized the recreational use of cannabis. California’s law making recreational use legal, took effect in January of 2018.

 

 

Cannabis and the California Economy

 

In California, as a fast growing industry, legal commercial cannabis is now seen as a promising and viable source for the generation of additional tax revenue and as a promoter of economic growth by many local and state government officials. In hopes of attracting cannabis businesses, small communities have been changing commercial zoning laws to stimulate economic growth and reduce the unemployment rate.

 

In the article, “California’s capital could ‘be to cannabis what Detroit is to automobiles,’” published by Business Insider in 2016, Sharon Bernstein reports that the Sacramento area would generate $4.2 billion in business and create 20,000 jobs if it became a center of the legalized cannabis industry. A study by the University of the Pacific in Stockton on the economic impact of the legalization of recreational cannabis in the state capital region found that its closeness to farmland and the agriculture industry has the potential for creating a huge marketplace.

 

Desert Hot Springs filed for Chapter 9 municipal bankruptcy in 2001. Facing a legal judgement of approximately $6 million in 2004, the bankruptcy was resolved by selling municipal bonds. Like in many of the small cities in the southern California desert, Desert Hot Springs public officials have been working with cannabis businesses and the community to permit legal commercial cannabis activity.

 

In 2016, the mayor of Desert Hot Springs was present at the grand opening of the first permitted cannabis cultivator, Canndescent. Mayor Scott Matas at the opening declared, “This is a historical moment for Desert Hot Springs. Desert Hot Springs has been reactive for so many years in different industries, trying to find its niche. I just couldn’t be more pleased to be mayor of this community and lead these efforts today.” City Councilman John McKee added, “We hope these cultivations generate thousands of jobs and provide good paying jobs for people in the city so they don’t have to drive down the valley.”

 

 

Cannabis as an Economic Driver

 

The changing legal landscape for cannabis in the U.S. presents a promising opportunity to profit from the “Green Gold Rush.” One area where such an opportunity lies is in the commercial real estate market where newly enacted legislation has created a demand and supply situation with the potential for a favorable ROI.

 

The limited supply and high demand for commercial real estate lying within the boundaries zoned for legal commercial cannabis activity are pushing commercial real estate prices up in comparison to the ones lying outside these areas.

 

Some factors adding to limited supply:

  • State regulations take a year to work on.

  • Limited number of permits issued by state and cities.

  • Limited amount of space permitted for commercial activity.

  • Cannabis business activity must be a certain distance from schools and community centers, further reducing permitted areas.

 

The small southern California desert communities have been in the process of changing zoning laws in recent years to allow for legal cannabis commercial activity. In some desert cities, an expansion of the current commercial cannabis boundaries have been proposed. To measure the impact of cannabis as an economic driver and identify investment opportunities, we compare the change in price per square foot of commercial real estate lying inside and outside existing and proposed boundaries of commercial industrial zoning designated for legal cannabis activity in three desert communities: Desert Hot Springs, Adelanto, and Coachella.

 

Because the boundaries for permitted commercial cannabis activity lie within areas zoned for industrial activity, listing prices for commercial real estate properties not zoned for legal cannabis activity were collected to make similar comparisons. Average price per square foot comparisons were made between properties lying within and outside boundaries allowing for commercial cannabis activity.

 

The properties were grouped into one of six categories:

 

1.  Vacant lots lying outside existing boundaries designated for commercial cannabis cultivation activity.

 

2.  Vacant lots lying inside proposed boundaries designated for commercial cannabis cultivation activity.

 

3.  Vacant lots lying inside existing boundaries designated for commercial cannabis cultivation activity without Conditional Use Permit (CUP) approval issued by the city.

 

4.  Vacant lots lying inside existing boundaries designated for commercial cannabis cultivation activity with Conditional Use Permit (CUP) approval issued by the city.

 

5.  Properties with existing warehouses lying inside existing boundaries designated for commercial cannabis cultivation activity without Conditional Use Permit (CUP) approval issued by the city.

 

6.  Properties with existing warehouses lying inside existing boundaries designated for commercial cannabis cultivation activity with Conditional Use Permit (CUP) approval issued by the city.

 

 

Desert Hot Springs

 

The city of Desert Hot Springs is part of the Coachella Valley area located in the desert community of southern California. Desert Hot Springs, with a population of about 26,000 people, has grown by approximately 57% in population since 2000. Neighboring Palm Springs to the south, Desert Hot Springs is the first of the small desert cities to permit commercial cannabis cultivation on a large scale.

 

In the graph below, a sample size of 37 commercial real estate properties listed for sale between June 2017 and August 2017 zoned for industrial commercial activity was used to compare the average listing price per square foot difference in properties located within boundaries designated for commercial cannabis cultivation activity to properties located outside of those boundaries.

 

 

In comparing vacant lots zoned for industrial commercial activity lying outside the boundaries designated for commercial cannabis cultivation activity versus those lying inside the boundaries with a Conditional Use Permit (CUP) approval, there is a 12.6% increase in average listing price per square foot.

 

In comparing vacant lots zoned for industrial commercial activity lying inside the boundaries designated for commercial cannabis cultivation activity without a CUP approval versus those lying inside the boundaries with a CUP approval, there is a 13.6% increase in average listing price per square foot.

 

Adelanto

 

In the two graphs below, a sample size of 60 commercial real estate properties listed for sale between June 2017 and August 2017 zoned for industrial commercial activity was used to compare the average listing price per square foot difference in properties located within boundaries designated for commercial cannabis cultivation activity to properties located inside proposed boundary expansions, and to properties located outside of either boundary.

 

 

In comparing vacant lots zoned for industrial commercial activity lying outside the boundaries designated for commercial cannabis cultivation activity versus those lying inside proposed boundaries designated for commercial cannabis cultivation activity, there is a 99.6% increase in average listing price per square foot.

In comparing vacant lots lying inside proposed boundaries designated for commercial cannabis cultivation activity versus those lying inside boundaries already designated for commercial cannabis cultivation activity without CUP approval, there is a 318.5% increase in average listing price per square foot.

 

In comparing vacant lots zoned for industrial commercial activity lying inside the boundaries designated for commercial cannabis cultivation activity without a CUP approval versus those lying inside the boundaries with a CUP approval, there is a 564.3% increase in average listing price per square foot.

 

 

 

In comparing properties with existing warehouses lying inside the boundaries designated for commercial cannabis cultivation activity without CUP approval versus properties with existing warehouses lying inside the boundaries designated for commercial cannabis cultivation activity with CUP approval, there is a 23% increase in average listing price per square foot.

 

 

Coachella

 

In the graph below, a population size of 23 commercial real estate properties listed for sale between June 2017 and August 2017 zoned for industrial commercial activity was used to compare the average listing price difference in properties located within boundaries designated for commercial cannabis cultivation activity to properties located outside of those boundaries.

 

 

In comparing vacant lots zoned for industrial commercial activity lying outside the boundaries designated for commercial cannabis cultivation activity versus those lying inside the boundaries with a CUP approval, there is a 191.9% increase in average listing price per square foot.

In comparing vacant lots zoned for industrial commercial activity lying inside the boundaries designated for commercial cannabis cultivation activity without a CUP approval versus those lying inside the boundaries with a CUP approval, there is a 70.6% increase in average listing price per square foot.

 

 

Summary of Findings

 

The averages of price per square foot for the three desert cities can be viewed as a real estate market sample for the rest of California. Although listing prices for commercial real estate are not as reliable as prices from properties sold in the past year to use for analysis, the graphs for each of the small desert cities show there is a significant difference in price average for properties lying within and outside the boundaries approved for legal commercial cannabis activity.

Opportunities for investment are found in the vacant lots for sale lying within existing boundaries approved for commercial cannabis activity but without the Conditional Use Permit approval and vacant lots lying within proposed expansion of boundaries for commercial cannabis activity. In the case for the city of Adelanto, the average price per square foot of vacant lots lying inside proposed boundaries is $2.12. The average price per square foot for vacant lots lying inside existing boundaries designated for cannabis without CUP approval is $8.86, an increases of 318.5%.

An investor can build special warehouses for indoor cannabis cultivation and lease them to cultivators. Rent for these warehouses are 25% higher than the market rates. In Desert Hot Springs, a business park is being built to take advantage of the higher lease rates. According to the project’s website, “Coachillin' Canna-Business Park is bringing together industry leading professionals with global affiliations, and stands alone as the first & largest cooperative canna-business compound of its kind.  It's designed to be a center of excellence & innovation, setting a new standard of sustainability for California's budding cannabis industry…will feature more than 3,000,000 sq. ft. of sustainable cannabis cultivation, manufacturing, processing, laboratory testing, distribution, and touring / education facilities.”

Sources Cited

 

  • http://www.newsweek.com/marijuana-legalization-2018-which-states-will-consider-cannabis-laws-year-755282

  • https://www.forbes.com/sites/debraborchardt/2017/03/15/even-if-trump-challenges-marijuana-the-market-could-still-hit-18-billion-by-2021/#23ef9a76385e

  • http://www.sandiegouniontribune.com/business/sd-fi-marijuana-business-20170209-story.html

  • https://www.cbsnews.com/news/support-for-marijuana-legalization-at-all-time-high/

  • https://www.clarionledger.com/story/news/local/desert-hot-springs/2016/09/30/first-marijuana-cultivation-facility-southern-california-opens-desert-hot-springs/91119818/

  • https://www.privateerholdings.com/blogmaster/2016/11/4/privateer-holdings-closes-40-million-in-convertible-note-financing

  • http://www.governing.com/gov-data/state-marijuana-laws-map-medical-recreational.html

  • http://www.thecannabist.co/2017/02/22/report-united-states-marijuana-sales-projections-2025/74059/

  • http://cannabusinesslaw.com/2016/11/the-city-of-desert-hot-springs-commercial-medical-cannabis-businesses-welcome/

  • http://pineappleexpress.com/news/special-report-commercial-grow-houses-pay-above-market-lease-rates

  • www.statista.com/statistics/596631/us-medical-marijuana-retail-sales-estimates/

  • http://www.businessinsider.com/r-california-capital-could-reap-billions-from-legalized-pot-study-says-2016-10

  • www.forbes.com/sites/debraborchardt/2017/02/22/marijuana-industry-projected-to-create-more-jobs-than-manufacturing-by-2020/#18c35fcd3fa9

  • https://data.bls.gov/timeseries/LNS14000000

  • http://www.bestplaces.net/economy/city/california/desert_hot_springs

  • https://www.eurekareport.com.au/articles/139037/medical-marijuana-and-the-one-hit-wonders

Notes

  • The geometric mean was used to calculate average price per square foot to reduce the effect of outliers.

  • Listing prices were gathered from loopnet.com and catylist.com

     

     

     

     

     

     

     

     

     

 

 

 

 

 

 

 

 

 

 

 

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