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After its retail properties took a hit during the pandemic, Delshah Capital decided to explore a burgeoning new industry. The New York real estate firm listed three of its Downtown storefronts on 420 Property, a site for cannabis space.

It has since received “a bunch of inquiries,” mostly from smaller operators, said Chad Roberson, partner at Delshah. But he is hesitant, seeing them as risky tenants facing entrenched obstacles.

One is competition from the illicit cannabis trade, now considered a gray market because enforcement has all but stopped. Another is financing: Because the product remains illegal at the federal level, traditional loans are not an option.

“As a landlord, you’re asking me to consider a cannabis tenant who’s going to have a way higher fixed cost structure than the gray market,” Roberson said. “And then you’re telling us we can’t get bank financing?”

Despite these issues, some believe that cannabis will be the next industry to save retail.

“It’s almost like having a medical client or urgent care client. Their business will never close,” said Colby Piper, RIPCO’s cannabis real estate specialist. “I almost consider them lifelong tenants.”

Because mail-order marijuana is not legal and dispensaries are considered essential businesses, brokers call them Amazon- and pandemic-proof — protected from two forces that have eroded brick-and-mortar retail.

Still, dispensary owners need to bring several crucial elements together: space, a license and customers. In the cannabis industry, that is no small feat.

Building owners warm up

Delshah is one of many New York commercial landlords anticipating an influx of licensed cannabis dispensaries following the state’s March 2021 enactment of the Marijuana Regulation and Taxation Act. But building owners weren’t always so open to the idea.

For months before the law passed, Lee & Associates broker Greg Tannor said they were dismissive of his pitch to bring in a dispensary. But he persisted.

“We brushed it off and I said, ‘You know what? This is actually going to happen. You shouldn’t really be laughing at us,’” Tannor said. “And sure enough, a bill passed.”

Now, with the first licenses expected to be issued before the end of the year, sentiment is shifting about what is projected to become a $1 billion industry in 2023.

“[Landlords] are getting more interested,” said Piper. “They are, I like to say, canna curious.”

To get a license, dispensary owners must first secure retail space. Retailers and landlords have started to seek each other out. The properties Delshah listed are in the Meatpacking District and East Village, neighborhoods with high foot traffic.

“It goes back to the basics of real estate,” said Ryan George, founder of 420 Property, noting that a dispensary site should have good exposure to shoppers because advertising is “obnoxiously expensive.”

Dispensary owners must also consider a site’s vulnerability to robberies — buyers tend to use cash — and more mundane issues, such as whether it has 3,000 to 5,000 square feet of operating space, George said.

Space race

The new marijuana law dictates that dispensaries cannot be within 500 feet of a school or 200 feet of a place of worship. In a city with upwards of 1,800 schools, 5,000 churches and 1,000 synagogues, eligible retail space gets winnowed down quickly.

“No other state has said, ‘We’re going to raise $200 million and build dispensaries for you.’”

On top of that, the city’s 59 community boards can influence the way licenses are distributed by suggesting increases to the school and religious buffers, which would shrink the number of potential sites even more.

If prospective retailers find a prime spot, they still have to contend with the possibility that someone may beat them to it. That someone might be the state of New York.

State lawmakers budgeted $200 million to build out 150 dispensaries by 2024. The Hochul administration’s Seeding Opportunity Initiative aims to reduce the prohibitive startup costs for entrepreneurs with prior marijuana convictions and their family members — those most directly affected by the war on drugs.

“No other state has said, ‘We’re going to raise $200 million and build your dispensaries for you,’” said Jeffrey Hoffman, a cannabis attorney. “When I saw this, I knew New York was going to be very serious about the social and economic equity component.”

CBRE is working with the state Dormitory Authority to scope out dispensary sites. Those locations will receive the first dispensary licenses in the state, essentially giving the state dibs on retail cannabis space.

Owners with tenants not participating in the program will have to wait — and hope — for them to snag licenses, and cross their fingers that the state does not set up a location down the block.

The location-first rule poses another risk in that dispensary owners need to secure and prepare a space without knowing if the license will be granted. “You have to be basically prepared to lose that money, because it’s a very competitive application process,” Tannor said. “And not everybody is going to win.”

But property owners can write leases that mitigate their liability if a tenant does not pan out. To figure out the best way, Tannor says he created a “secret sauce” based on conditions facing tenants and landlords.

“We have the worst of all worlds: a huge amount of cash coming in, but no banking.”

“Some people are starting to pay rent now, or a fraction of the rent,” Tannor said. “Others are plunking down a good amount of security deposit. Some other operators are taking a free ride until the application period opens up. It depends on what keeps you up at night.”

Making bank without banks

One thing that keeps building owners and new businesses up at night is interest rates. Cannabis loans tend to be costly because federal institutions will not touch them. Some politicians are calling for the Small Business Administration to give cannabis operations equal access to financing, but for now, pricey private loans tend to be the only option.

“Those rates are 200 to 400 basis points above bank financing,” Roberson said. “It’s really expensive. It’s a risky proposition.”

Landlords who have an eligible property with no mortgage are best positioned to lease to a cannabis dispensary because it removes a loan from the equation, said RIPCO’s Piper.

But real estate relies heavily on debt, which can complicate if not prevent a cannabis deal.

“Right now, what we have is the worst of all worlds,” said Jim Landau, a cannabis attorney and director of the New York City Cannabis Industry Association. “There’s a huge amount of cash coming in, but no banking.”

Competing in the gray area

The incipient regulated industry will be competing with the legacy market — weed dealers with little overhead who have been selling to a loyal customer base for decades.

Legal players, meanwhile, face steep startup costs. “As a general rule of thumb, I tell people, don’t attempt to open a cannabis business without at least a million dollars liquid,” said 420 Property’s George. And given the risks to landlords, cannabis retailers’ rents are likely to be expensive as well.

Because of these factors, not many dealers are likely to go legal.

“You have to be prepared to lose that money, because it’s a very competitive application process.”

“The structure of the gray market has a long track record and is highly liquid,” Delshah’s Roberson said. “People that are going to have to pay a couple hundred grand for a dispensary license, they’re just going to say, ‘It’s not worth it.’”

Gray market sellers who operate too visibly, like the 66 that were handed cease-and-desist orders this year by the state’s Office of Cannabis Management, can expect to be shut down once licenses go out in earnest and the tax dollars start flowing, Hoffman said.

“Just like the State Liquor Authority is not going to allow an unlicensed bar that is operating openly and notoriously, the regulatory body for cannabis will act likewise,” he predicted.

But nimble operators, some of whom want to go legit but see no clear path under the state’s regulations, will remain competitive.

Given marijuana’s widespread use, the prospect of legalization in New York generated optimism that the industry would bring an infusion of investment and fill the pockets of dispensary operators and their landlords.

But between the government’s social-equity goals, licensing framework and gray-market enforcement challenge, a cloud of uncertainty has formed. “We know very little about how [the dispensaries] will operate,” Hoffman said.

The listing site founder agreed.

“The cannabis business is not for the faint of heart,” said George. “A lot of people have gotten into it thinking it was going to be easy money, and it’s really difficult. It’s an industry that’s riddled with regulations and roadblocks.”

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