Property Ownership and Cannabis Investing — What’s the Link?

Cannabis investing has taken a downturn in recent months. Cannabis was once considered a “green rush” where it was impossible for companies not to make money, given the speed of legalization expansion and the potential for significant investor returns.

But the delay of any changes at the federal level and onerous taxes imposed by state governments have created a challenging environment to make money. Coupled with the continued stigma of the plant and fears of an economic downturn, finding people interested in cannabis investing can prove quite challenging.

But investors are not the only way to get a company off the ground and make it profitable. It’s not just about the revenue but also the assets. And real estate is a timeless asset.

Case Studies in Success and Failures: How Real Estate Can Make or Break a Cannabis Company

Success: Canopy Growth

Canadian-based Canopy Growth is one of the largest companies in cannabis. The company focused early on acquiring properties, opting to own every part of the seed-to-sale pipeline. Canopy owns cultivation facilities, distribution centers, and retail spaces, giving it total control over every piece of the process. Because of the strength of Canopy’s assets, the company was able to attract investment from Constellation Brands, one of the biggest names in beverages. This was significant for Canopy for apparent reasons, but also because it marked the entry of Constellation Brands into the cannabis space.

Failure: MedMen Enterprises

MedMen was an early frontrunner in the cannabis industry, boasting retail locations in high-profile cities across several states. Unfortunately, this expansion relied on lease agreements for retail spaces, creating long-term financial obligations that surpassed the company’s revenue. With no way to reduce the cost of operating dispensaries, MedMed was forced to backtrack its operations.

Success: Green Thumb Industries

Green Thumb, or GTI, is a Chicago-based cannabis company operating across multiple states. In each state GTI expands in, they focus on developing property ownership, including cultivation facilities and retail spaces for dispensaries. This approach allows GTI to create a stable base of expansion and reduce its operating expenses over time. Because of its real estate portfolio size, GTI has also attracted large investors.

Failure: DionyMed Brands Inc

Canadian-based DionyMed ran into financial problems in 2019 when a turn in the market meant their sales weren’t enough to cover their expenses, leading to liquidity problems. DionyMed filed for receivership, a remedy filed in court to help creditors get what they’re owed without filing for bankruptcy.

The failures of MedMen and DionyMed highlight the importance of property ownership as a safety net against the volatile waves of the cannabis industry.

While owning property adds a large upfront expense to a business, it can also provide long-term stability and legitimacy. Owning property is a boon in any industry, and cannabis is no exception.

When you lease or rent, your company is accountable to the desires of your landlord — and many companies have found themselves without a location once a landlord got blowback for housing a weed business. Landlords can increase rent, change lease terms, or put companies out on the street with little notice. This uncertainty can make it extremely hard to do business, be profitable, and scale.

Property ownership is an asset that appreciates over time; after all, they’re not making any more land. This ownership can stabilize your company in times of uncertainty and help you mitigate risks. It can also offset current debts or help you qualify for more loans. Property ownership allows you to have a consistently stable line item on your P&L sheet; both banks and investors love stability.

Owning a property is a great way to attract cannabis investors (but not the only way.) As a business grows, your equity in it increases over time. But when you own property, you’re also increasing the equity in the property over time, building equity in two ways. Owning real estate takes you from being a cannabis business in a single industry to being in multiple industries; cannabis and real estate.

Just look at how Canopy Growth and Green Thumb Industries expanded their business by focusing on owning real estate for every piece of the pipeline. This strategy gave both companies immense stability in knowing their rent wouldn’t go up, their cultivator wouldn’t change the price, and they would be paying the same amount in mortgages year over year — stability MedMen and DionyMed didn’t have. Cannabis is essential to the consumer, but real estate is vital to investors.

Think of owning property as a home equity line of credit against your cannabusiness. Properties can be used as collateral to attract investors or other types of funding, securing more capital and helping you offset the initial investment cost. Over time, you’ll own more of the property while attracting more investment in your business, which allows you to offset the cost even more.

As the cannabis industry continues to experience volatility, property ownership will only become more critical in the eyes of investors and for the long-term success of businesses. Given the stability of owning real estate, companies that rent will continue to face a long uphill struggle for security and profitability.

Investing in property is no small expense and certainly isn’t for everyone. But it can be a differentiator for brands and companies looking to stand out in an already crowded investor pool. The success of any cannabis company is complex, but for Green Thumb and Canopy Growth, owning real estate was the linchpin that allowed them to expand more rapidly and sustainably than their competitors.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by emailing [email protected] or calling 646-854-1093 for a customized letter of commitment or learning more about your cannabis insurance options.