Is it High Times for Cannabis Real Estate in New York?

Whether you call it the “green rush,” reference the “sweet smell of success” or are welcoming in the “stoned age,” the possibilities for puns and allusions to introduce an article about the burgeoning cannabis industry can make an intrepid real estate reporter feel a bit lightheaded (and not because they’ve been partaking of the product in question).

So, let’s skip all that and acknowledge a simple truth: legal cannabis is big business. In 2020, according to Forbes, legal cannabis sales reached a new high of $17.5 billion, which represented a nearly 50% increase over 2019. BDSA, a cannabis sales data platform, predicts that by 2026, legal sales of recreational cannabis will hit $41 billion annually.

As more states legalize cannabis, they have experienced a surge of interest and investment from prospective retailers, distributors and growers that is virtually unprecedented in modern retail.

And it’s not just the various parties along the cannabis supply chain that are interested in the possible financial rewards from legalization — many property owners want to get in on the action, as well.

“There’s serious FOMO [fear of missing out] in the cannabis industry; everyone wants to be involved in some way, shape or form,” said Kaelan Castetter, director of policy analysis at the Castetter Cannabis Group, which handles policy work, regulatory analysis and strategic planning for investors and entrepreneurs that are involved, or seeking to get involved, in the New York cannabis industry.

New York state officially legalized cannabis in April 2021. That means it’s now legal to ingest or share cannabis in the state, but it’s not yet legal to sell it. That’s because the rules and regulations that will govern the distribution and sale of cannabis in New York are still being drafted. But if you’re interested in opening a cannabis dispensary in the state, this is not the time to hesitate, according to Gregory Tannor, executive managing director with commercial real estate brokerage firm Lee & Associates.

“We are representing several operators in the state that are looking to ‘lock in’ real estate for dispensaries,” Tannor said. A tenant representation-focused retail broker based in New York City, Tannor said that approximately 90% of his team’s time has been dedicated to cannabis projects since November 2020, when he first heard that legalization was imminent in New York.

Since then, Tannor has developed a tactical approach to help his clients navigate this unique situation — one in which the law requires retailers to secure real estate for their dispensary in advance of applying for a sales license, without knowing what limitations will be imposed on such retail sites by the state’s rules and regulations. Tannor is particularly well-positioned to provide this guidance, because in addition to his brokerage work in the space, he is part-owner of a cannabis company based in Massachusetts.

LoopNet spoke with Castetter and Tannor to better understand the nascent legal cannabis industry in New York and obtain clarity on some of the complicated real estate-related questions that prospective dispensary retailers are asking as they consider establishing a presence in the New York market.

As Castetter noted, securing a location for a cannabis business is fundamentally different than most other retail uses. “The biggest takeaway is that a lot of your decision-making is going to be guided by policy and regulations, because it’s such a tightly regulated industry.”

“You’re definitely going to see a tightly controlled industry. It’s not going to be Vermont.”

Kaelan Castetter, director of policy analysis, Castetter Cannabis Group

According to Tannor, the answer to this query is absolutely affirmative. That may seem premature, given that the state’s rules and regulations are still inchoate, but Tannor has developed some strategies that he believes will protect retailers.

Firstly, not only has Tannor reviewed draft language for New York’s rules and regulations, but he’s done a deep dive into the guidelines that already exist in legal states across the country. He has been particularly focused on the parameters at play in Massachusetts, which he says is “one of the hardest states to get past,” as its “rules and regulations are pretty challenging.”

Based on this research, Tannor developed a list of considerations for potential retailers. For instance, dispensaries will probably be restricted with regard to their proximity to places of worship, to schools and to existing medicinal cannabis dispensaries or prospective recreational competitors.

There will also likely be constraints on branding — slang terms such as “weed” or “ganja,” and illustrations of bongs or marijuana leaves on signage will be prohibited. “Signage is going to be very limited,” Tannor said. Retailers also likely won’t be permitted to display their wares in store windows, and the state will probably even require those windows to be frosted over, at least up until a certain height.

Castetter agreed that it was prudent to assume that New York would take a relatively stringent approach to its regulations. “You’re definitely going to see a tightly controlled industry. It’s not going to be Vermont,” he said, referring to the latter state’s comparatively liberal cannabis laws.

Nonetheless, Castetter is hopeful that New York will ultimately take a balanced approach. “Regulators and lawmakers understand that you need to reduce barriers to entry and compliance costs if you’re going to seriously have a spot for small business and small-time entrepreneurs and entrepreneurs that come from disadvantaged communities,” he said.

In addition to concerns that are unique to dispensaries, Tannor explained that cannabis retailers will want to be mindful of many of the issues that other retailers commonly confront when seeking a location.

For instance, prospective operators should look for “activity generators,” which include “high-volume restaurants, museums and other retailers, like the Apple store, where lines are created for a product release; anything that captures enough audience and enough eyeballs on your space to get the brand recognition out there,” Tannor said. In urban locations, such as New York City, he indicated that proximity to public transportation is also key.

In order to safeguard retailers that pick a location now, only for the rules and regulations to later invalidate their selection, Tannor developed a “kind of blanket termination agreement. Should the rules and regulations not allow this site, we can just terminate the LOI and/or terminate the lease.”

According to Tannor, these agreements actually offer flexibility for both the retailers and property owners. “We have dozens of deals on the table for multiple operators, and we have these positions that are kind of locked-in, but not really locked-in, where the landlord [also] still has the opportunity to market the space.”

Tannor said that this approach works well for smaller, independent retailers that don’t want to expend capital before the rules and regulations are finalized. However, for larger operators with more substantial capital resources, Tannor developed an agreement he calls a “lock-see,” where the retailer “is actually paying the landlord X amount of dollars to take the space off the market to secure their location.”

Tannor acknowledged that the lock-see “is a really aggressive approach, but if you have the capital behind you, it makes total sense, because you can basically plant your flag and position yourself in that submarket.” This is particularly advantageous for dispensaries, as most insiders believe that the eventual rules and regulations will require dispensaries to be situated up to 1,500 feet from each other in New York City, while suburban and rural markets will likely limit the number of dispensaries in their municipalities, if they allow them at all.

According to Tannor, some dispensaries have even signed leases and begun paying rent. “It really all comes down to who the operator is and how much risk capital they are willing to put up.”

Of course, all of these strategies require a property owner that is amenable to leasing space to a dispensary. Which brings us to our next query …

“They’re essential, they’re sustainable and they’re Amazon-proof.”

Gregory Tannor, executive managing director, Lee & Associates

Tannor said that since November of last year, he’s spoken with hundreds of landlords in New York state in an effort to make them comfortable with this relatively novel use of retail space. “We held their hand to get the misconception of a dispensary out of their head,” he said.

Tannor added, “Don’t forget that this is brand new to the state. The majority of [property owners] have never visited a cannabis dispensary in a legal state” and don’t understand “the type of demographic coming in and out.”

According to Tannor, property owner concerns included odors that the store’s products might produce, the kind of customer the locations might attract and — given the vagaries of cannabis’ legality on a federal level — how retailers would pay their rent. “A lot of landlords ask … ‘Are they paying me in a bag of cash every month?’”

Tannor explained that consumption won’t be allowed on dispensary premises, so aromas aren’t an issue; that dispensaries can utilize community banks and credit unions for their financial transactions and pay rent via debit cards or direct deposit like any other tenant; and that cannabis is practically a luxury item, particularly given taxation rates, that tends to attract an upscale consumer.

Moreover, Tannor said that dispensaries satisfy the three primary criteria that he thinks all retail property owners should consider when leasing space to a new tenant. “They’re essential, they’re sustainable and they’re Amazon-proof,” he said.

Ultimately, Tannor found that once property owners had a clearer understanding of what a dispensary looks (and smells) like, and who comprised their customer base, most landlords, save for a few outliers, were open to the use.

In fact, he added, “they’ve actually asked, ‘how do I get into the game?’ Not just owning real estate, but wanting to be part of the business.”

According to Castetter, this dynamic has given rise to a number of partnerships between property owners and dispensaries. In some situations, the property owners have become investors in the retailer, while in other scenarios they’ve elected to take a percentage of the dispensary’s revenue in lieu of rent.

Castetter also explained that the so-called “green rush” has given rise to a phenomenon he refers to as “canna-leasing” where “the price-per-square-foot, if you’re a cannabis business in retail, could be two, three, five times more than” what the owner would charge for a non-cannabis use. Castetter said that canna-leasing is most common in larger, more competitive markets, such as New York City, and less of an issue in rural locations.

Dispensaries also need to contend with the possibility that even if they find a receptive property owner and a reasonable rental rate, that owner may still be prohibited from leasing them space. This is because the financial institution that provided the property’s financing may have prohibited uses, such as cannabis, that are illegal on a federal basis.

Tannor said that local banks and credit unions are less likely to exclude the use, while “I’m not going to any building that has TD or Bank of America as a lender, just because I know what the answer is going to be. There are still a lot of lenders that will not touch it until [it’s legal] on the federal level.”

Castetter said that this paradigm “creates opportunities for smaller landlords, who have a little more appetite for risk and are less intertwined with their financial institutions or the federal government.”

“New Yorkers, all over the state, smoke pot ... wherever you are, you’re probably going to do well as a dispensary.”

Kaelan Castetter

Tannor said that this is a question that he’s monitoring very closely and he’s regularly in contact with local politicians throughout the state to understand their positions.

The good news for cannabis entrepreneurs is that the state’s biggest market shouldn’t be a problem. “New York City and the boroughs, we know that they’re in,” Tannor said.

However, some of the state’s other population centers are more in question. Tannor suggested that numerous towns and villages in Nassau, Suffolk and Westchester counties — New York City’s suburban centers — seem poised to limit or even ban dispensaries, at least initially.

Tannor said that Nassau County, on Long Island, is particularly challenging for cannabis businesses. “Nassau County is one county that I will not touch, just because I know their views on it. And it’s not county law, it’s the towns and the villages … I believe that the majority of Nassau County is going to be out.”

Castetter suggested that the best opportunities might be found outside the New York metropolitan region. “Your best value is most likely going to be upstate,” he said. He advised that entrepreneurs should consider downtown districts in smaller cities upstate, such as Syracuse and Rochester, that have been recently revitalized.

Even with all of the complications, concerns and uncertainty surrounding cannabis in New York state, Castetter said that it’s still a compelling market. “New Yorkers, all over the state, smoke pot in pretty high numbers. So, wherever you are, you’re probably going to do well as a dispensary.”