Reclassifying Cannabis: A Potential Game-Changer For Real Estate And Lending In The Industry

Reclassifying cannabis as a lower-risk substance could bring significant changes to the real estate sector associated with cannabis. If the change leads to relaxed lending regulations, more funds could be directed toward facilities.

Cannabis operators are also expected to experience reduced tax obligations, potentially encouraging more lenders to enter the market as these companies' financial standings improve. 

"The increased cash flow from the reduced tax burden will provide financing for expansion of all different types of licenses," Charlie Alovisetti, partner at cannabis law firm Vicente LLP, told Bisnow. "And the momentum from the rescheduling will hopefully lead to improvements in banking access, payment processing and ability to obtain bank debt, all of which will also spur growth and the need for new and larger facilities."

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California-based Innovative Industrial Properties Inc. IIPR anticipates that rescheduling cannabis from Schedule I to Schedule III will position the industry for descheduling within the next two to three years.

Even under Schedule III, state operators "would still be in conflict with federal law. … They'd still be selling cannabis without a prescription," President and CEO Paul Smithers said during the company's first quarter call.

Although nearly half of the states have legalized adult recreational use of marijuana, cannabis businesses have been hindered by the plant's classification as a Schedule 1 drug, which places it among substances like LSD, heroin and ketamine.

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IIPR's tenants include some of the largest and most popular cannabis companies, including Trulieve, Curaleaf and Cresco Labs. It has 30 tenants with the top 10 accounting for 76.4% of its annualized base rent.

Relaxed regulations could open the industry to more research, increasing demand for research space at hospitals, universities and life science facilities, Daniel Tropp, president of industrial real estate brokerage AEBOV, told the Green Market report.

It's unclear if rescheduling would expand the Food and Drug Administration (FDA)'s oversight of manufacturing facilities. Tropp mentioned that increased compliance costs would impact demand for manufacturing space and pricing.

Additional capital for cannabis operators could prompt some to pursue vertical integration and acquire additional licenses and facilities, resulting in increased demand for industrial properties for cultivation, manufacturing, and retail activities.

Tropp suggested that the benefits real estate could derive from research requirements and the reinvestment of tax savings could "outweigh the possible headwind of higher costs to manufacturers" from greater FDA involvement.

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