Forecasting Changes in the Cannabis Real Estate Sector: A Conversation with Christian Tremblay and Sandy Kronenberg

We caught up with Christian Tremblay, vice president at Northmarq with a specialization in properties leased to cannabis tenants, and Sandy Kronenberg from Koach Capital, one of the largest cannabis private equity firms in the U.S., to discuss the recent proposal by the DEA to shift marijuana from a Schedule 1 to a Schedule 3 drug classification. This potential move will have far-reaching implications across the commercial real estate industry, impacting tenants, investors, and developers alike.

In the following conversation, Christian and Sandy outline the anticipated impacts including potential changes in property valuation, buyer interest shifts, zoning law considerations, and risk management strategies amidst the evolving federal policies and legal landscape surrounding cannabis investments.

How do you anticipate the DEA’s proposed move of marijuana from Schedule 1 to Schedule 3 to impact the commercial real estate market for cannabis properties?

Kronenberg: Overall, it should positively affect the cannabis retail real estate market. The rescheduling will likely happen in the late summer or fall, and as a result, cannabis operators will have lower tax liability which should open the door for more lenders to come into the space due to these companies’ balance sheets looking much better than they do today.

Tremblay: I agree. If investors are able to get more traditional lending terms, this should bring more buyers to the space due to the attractiveness of the lease structures and higher cap rates. But we expect this to take time. It’s not something that will not happen overnight.

With the potential for cannabis businesses to take federal tax deductions under the new classification, how might this affect the valuation of cannabis-related real estate assets?

Kronenberg: We believe more investors will feel more comfortable acquiring this new class of properties with the recent DEA and DOJ announcement. Therefore, it will make these assets trade more aggressively.

Have you observed any immediate changes in buyer interest or investment strategies following the DEA’s announcement?

Kronenberg: There hasn’t been an immediate change in buyer interest since the rescheduling hasn’t actually occurred yet. The DEA is now simply announcing its interest and seeking public comments. However, this announcement has definitely been brought up in many conversations with investors and brokers, and it’s helped stock prices too. This has an effect on operators' balance sheets as well.

How might this shift in federal policy impact zoning laws and regulations for cannabis properties?

Kronenberg: Actually, we don’t think there will be many changes, if any, to zoning laws since most of those powers rest with state or local municipalities. I think a rescheduling is unlikely to have a direct impact here.

Are there particular types of cannabis properties that might become more desirable or valuable as a result of these regulatory changes?

Tremblay: I expect retail properties to continue to remain the most desirable to investors, and cap rates should compress once there are more financing options. The majority of the investors purchasing these retail properties continue to be 1031 exchange buyers who are seeking yield.

Given the ongoing federal versus state legal contradictions in cannabis law, how are you advising clients on risk management and due diligence for cannabis property investments?

Tremblay: Like any other asset class, investors need to understand the space and the risks associated by doing their own research before buying these types of properties. We spend a lot of time educating our investors throughout the process and pointing out what makes one property more attractive than another. This typically entails evaluating the lease structure, understanding if the company is a publicly traded multi-state operator or private company, or if it is located in a limited or unlimited license state. It’s also important to understand if the state is medical versus recreational, how many licenses are in the state, and if the tenant has to report unit-level sales. All these details can greatly impact the level of investment risk.