An economics professor on the mysterious world of cannabis real estate

Cannabis entrepreneurs know what to do with cannabis. They know what to get when a customer walks in. They know where to go to store prices and merchandise. But they don’t know how to…

An economics professor on the mysterious world of cannabis real estate

Cannabis entrepreneurs know what to do with cannabis. They know what to get when a customer walks in. They know where to go to store prices and merchandise. But they don’t know how to navigate the financials of their businesses. They don’t know how to make money.

We’re told the pot flower business goes like this: “Pay the taxes. Hang with the accounting firm. Buy the licensed product. Move on.

The edibles side, however, is different.

So people such as Gallaudet University economist Daniel Gomez have a tough time comprehending recent real estate transactions in Potomac, a Maryland suburb in Prince George’s County — or why Potomac neighbors Bethesda, Washington, and Arlington.

Just to sum it up, Gomez estimates that one cannabis firm based on Potomac had about $1.3 million in revenue last year, and spent about $1.8 million on leased office space. This week, the company’s landlord put up for lease the entirety of the building, worth about $300,000 per year. Meanwhile, a tenant had moved in five months ago, and the landlord just said, “Oh well, we think it’s time to rid ourselves of this tenant and bring a medical cannabis facility in.”

For the owner of the Building Service Company, which put the building up for rent, there is this nightmare scenario:

If you build something, someone will come along and tear it down. It’s as simple as that. Imagine if I put up a building that was ultimately a million-dollar investment, and someone was going to tear it down right after I moved in and buy the land a few acres away and build a warehouse. That doesn’t work. Even if someone rents it and thinks it’s an asset, is that really an asset?

Gomez’s problem: As a study last year from the National Academies said, it’s time to begin studying the industry. But how to research and assess businesses? That’s “so not sexy,” says Gomez. At this point, he notes, the industry is entirely unregulated by federal law, the Cannabis Tax Act and related state laws have been found unconstitutional, and he says you’re unsure what taxes are already taxed, especially if the taxes are not collected in hard-to-price inventory such as flowering buds.

You can’t even have an independent accounting firm look at the rent, Gomez says, because the landlord doesn’t know what other, bigger accounting firms are charging.

At Gallaudet, Gomez is focusing on another batch of real estate transactions around northern Virginia. “There is a lot of variation,” he says.

He suspects that as the Trump administration pushes forward with hard-line positions on marijuana, regulatory pressure will increase. And that means landlords might become more aggressive.

“From a behavior perspective, it would make sense,” Gomez says. “I would think that landlords would be more motivated to move in and try to acquire these large medical marijuana facilities that were being held by other tenants.”

After all, Gomez says, a medical marijuana system is no longer hypothetical. States will learn. And as Gomez notes, the market will determine how many pot shops survive on local streets.

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