The cannabis real estate development industry is hot. Many motivated investors are looking to cash in on the untapped potential as local and state regulations continue to move towards more cannabis-friendly positions. Even still, the cannabis real estate industry can be fraught with minor errors that can quickly snowball into costly mistakes. We’ll guide you through some of the most common issues that cannabis real estate developers encounter so that you can start your investment journey on a solid path.
Costly Mistake #1: Lack of Strategic Plan
We’ve never seen anyone try to enter the cannabis real estate development industry without a business plan. However, we have seen more than a few investors get burned with plans that lack the depth of knowledge and strategic planning necessary to be profitable in the cannabis industry.
Changes in the Cannabis Industry
In the earlier years of cannabis investing, most people just needed an attorney and some solid luck to avoid litigation in an industry with little regulation and a hefty amount of illegal competition. With the increase in medical research into cannabis and the culture shift in attitudes toward marijuana, state and local governments are imposing strict guidelines along each area of the supply chain, with most regulations at the dispensary level.
Being successful in cannabis takes more than just being a savvy entrepreneur with a solid investment backing. You need to have a thorough knowledge of the cannabis industry and the ever-evolving regulatory environment… or, if you don’t have that knowledge yourself, you need to hire someone who does. A detailed strategic plan that anticipates potential issues before they arise is imperative for investment success.
Cannabis Regulatory Issues
The challenges of regulations in cannabis are three-fold:
- They are subject to change at any time, but particularly around times of government elections.
- They are time-sensitive, with windows for applications sometimes only available for a short period of time.
- They are prone to human error in the application review process.
This third point is one where investors without a solid plan upfront can find themselves in trouble. Applications for Conditional Use Permits and other licenses are up for interpretation. They are reviewed by humans who may perceive your responses to questions differently. Receiving a “Deficiency Notice” is not an abnormal part of the cannabis real estate development process; however, these notices can become incredibly problematic without a plan or knowing how to resolve them efficiently.
We have even seen situations where a Conditional Use Permit was approved, only for an application error to be discovered later, resulting in a redo of the project. These more significant errors almost always arise from a lack of strategic planning on the front-end of the cannabis real estate development project.
Mitigating this Risk
Not everyone can be an expert in every area. Some cannabis real estate developers are incredible visionaries who can easily spot the next up-and-coming area or unseen opportunity. Some have extensive experience in the real estate market or impressive development projects on their resumes. But for cannabis real estate investors (particularly those who are entering the cannabis industry for the first time), it is a steep learning curve to understand all of the ins and outs of this highly regulated and technical market.
It is essential to make sure that part of your investment team includes someone who is already experienced in the cannabis industry and can help you create a detailed strategic plan upfront, to save you money in the long run.
BeGreenLegal is here to help with the due diligence needed, whether you’re looking for a property or already have one acquired. We offer packages to support you with property suitability, licensing, compliance, and many other areas where you may require additional guidance to achieve a maximum return on your investment.
Costly Mistake #2: Insufficient Project Management
The second most significant mistake we see new cannabis real estate developers make is not staffing their projects sufficiently from the beginning. While the development process can feel like a lot of “hurry up and wait,” it’s important to have a detail-oriented project manager on the job. Especially for those moments when the local township replies to an application needing more information or this is an inspection scheduled with little notice.
Even more important than availability, though, is to have a project manager who can stay on top of the many small pieces that all must fit together in order for your cannabis real estate development project to take off. We’ve seen intelligent business owners get burned in this industry by seemingly small problems they assumed they could “deal with later.” Without a project manager staying on top of issues and resolving them as they arise, those forgotten “deal with later” problems could be the small hole that ends up sinking the ship.
In one scenario, we saw a company that had accidentally miscalculated one of the ratios on their permit. They went ahead with the project and constructed greenhouses, only to have to take the greenhouses down (and lose the related licenses they had acquired for those specific greenhouses) until the permit issue could be recalculated and resubmitted. This resulted in a reactive feedback loop, requiring the company to reconnect with the architects, engineers, utility companies, and more to reconfigure plans and start over. They essentially went through the real estate development process twice, due to an error that was not identified early on.
Mitigating this Risk
Most cannabis real estate developers could not afford to have the time delay or explosive cost increase that come with problems like in the scenario mentioned above. Hiring a skilled Project Manager from the onset of your project is one of the best decisions you can make to set yourself up for success.
Our experienced cannabis industry experts at BeGreenLegal offer Project Management services to help cannabis real estate developers stay on track and work proactively to solve problems before they become significant.
Costly Mistake #3: Poor Budgeting
It probably goes without saying at this point that lacking a strategic plan or project management can cause a cannabis real estate development budget to spiral out of control. However, even those who enter the market with sound plans and a stellar team may find their budgets still miss the mark.
With inflation at 7% and the cost of lumber and other raw materials skyrocketing, cannabis developers are encountering delays as building fabricators struggle to source materials. Coupled with lags in approval times for permits and licenses, some investors are finding themselves with more significant real estate holding costs than originally estimated. However, one area where we see one of the most significant budget errors is in utility costs. Depending on where your cannabis real estate property is located, public utilities may or may not be easily accessible. Areas with accessible utilities still find that they often need a power upgrade installed at least 12-18 months before operations even commence. For more remote areas, these utilities need to be established early on for construction purposes.
Mitigating this Risk
So many budgeting problems relate back to the first two mistakes mentioned above: the lack of a detailed strategic plan and the lack of a dedicated project manager to stay on top of problems before they grow out of hand. With a thoughtful and thorough business plan crafted by someone who knows the industry, you are less likely to encounter those surprise costs that halt some projects in their tracks.
An investment in planning and management now will save your team exponentially more along the way, and help ensure that your project reaches that end goal of that sweet profitability that entices so many ambitious investors to enter the cannabis market. This highly regulated industry takes a great deal of technical expertise to succeed. Still, it is absolutely doable if you have the right people in place.
Setting Your Cannabis Real Estate Project Up for Success
BeGreenLegal has over a decade of experience in navigating the ins and outs of the industry along with all parts of the cannabis supply chain. We focus on scalability and vertical integration for investors who are serious about becoming real players in the cannabis industry. Contact us to discuss how our team can support you with your cannabis real estate development needs.