installation of complex lighting and climate control systems. Design Risks. There are also risks during the design phase of construction. Many investors have only a cursory knowledge of cannabis cultivation and processing and lack the ability to fully evaluate project designs to determine if they meet the necessary specs for desired production. In these instances, engaging a specialized consultant or owners’ representative can help fill potential gaps in the knowledge of the construction team. Regardless, the developer must carefully consider selection of the design-and-build teams to ensure they have the necessary expertise to construct a complex facility for a niche industry. Market Saturation and Oversupply. Another risk factor that has increased significantly in the last few years is market saturation and oversupply of cannabis products. In many states where cannabis is legalized, particularly in the growing powerhouses on the West Coast, current supply far outstrips demand, leading to growers and distributers sitting on a vast amount of product in storage. This glut has caused legal prices to plummet and has led to the shuttering of many smaller growers who are unable to wait for a return to higher pricing, which may not occur without federal legalization of interstate cannabis commerce. This is important for investors to keep in mind when deciding where to base an investment as well as which segment of the market they will target. It is also worth considering that the most profitable option may
to similar industries, this represents a significant risk to real estate owners who would otherwise be collecting relatively risk-free income from their tenants.
not be investment in a production facility but instead a service provider or auxiliary vendor to the industry. The initial wave of high prices may not return in the established legal states. However, industry growth is still projected as medical demand rises and other states potentially move toward legalization, creating other opportunities for profitable ventures within the industry. Tenant-Operated Businesses. Many investors decide to gain exposure to the industry by allowing their tenants to operate the cannabis businesses. Although this certainly shifts the bulk of the risk to the tenant, there are still risks the property owner needs to consider. The primary one stems from the way legalization and licensing are structured in many states. Even in states where recreational cannabis is legal, there are zoning restrictions that limit where cannabis-related business activities can be performed. These location-based restrictions mean that when licenses are issued to the business owner, they are also tied to a specific parcel. As these licenses are legally linked to specific properties, this means the property itself is at risk of having liens placed against it if the tenant’s business falls behind on tax payments. There have even been instances of property management firms leasing space to cannabis businesses and owners only finding out when they receive notifications from local tax departments informing them their property was at risk of seizure un- less back taxes were paid. Because the tax burden on cannabis-based business is often very high compared
PROFITABLE PATHS STILL EXIST
John Sutter, the owner of the mill where gold was first discovered in California, was bankrupt a mere four years after the initial discovery. Many of the first cannabis companies of the Green Rush have experienced the same outcome. The initial burst of profits has fallen victim to the dramatic increase in supply and corresponding drop in retail prices, and yet there are still many paths available to profitable investment in the cannabis industry. The industry is expected to grow significantly over the next decade, and investors that properly manage risk and avoid the “Gold Rush” mentality have the potential to secure favorable returns. As Mark Twain once so eloquently wrote, “History never repeats itself, but the Kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken frag- ments of antique legends.” Investing is inherently tied to looking toward the future, but the most successful investors will always keep an eye on the lessons of the past. •
David Jacobs is a senior specialist with Owner Builder Advisors. His experience includes construction labor, construction risk management, and sales. He utilizes
his background of both onsite and in-office con- struction work to better assist OBA clients. Jacobs is an avid outdoorsman and spends weekends guiding bike and kayak tours.
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