By Steven P. Fuhr
Managing member, aGroPack, LLC
It’s referred to as the “pot tax” among I-502 licensees looking for space – the surcharge landlords charge us for growing the evil weed.
Bloomberg News recently reported Colorado landlords leasing to cannabis grow operations are “… charging tenants almost $20 a square foot to lease the Denver property. That’s more than four times the average rent for an industrial building in the city, which was $4.43 a square foot in the first quarter.” (Reis Inc.) And you thought $1 per square foot was too high?
If you’re like me, you were in a mild state of shock when first reading the Denver rates, until you do the math … and realize the same darn thing is happening here in Washington right now.
Dilapidated, un-insulated, underpowered, code deficient steel buildings that leased for 25-50 cents a square foot just last year are commanding more than $1 to $4 – plus “triple net” fees. Some landlords are asking upwards of $10-$15 per square foot for various levels of “turn-key” spaces, and that’s if you can even find it.
If you are one of the many licensees still scrambling to find a workable location, there are some key contrasts between the Colorado and Washington real estate markets worth understanding, and three very different kinds of leases to consider before signing on the dotted line.
The biggest difference between markets lies within how each state interpreted the federal 1,000-foot rule. Colorado, like Oregon and many other states, generally draws no-go lines for cannabis operations around schools, but here in Washington, we have excluded all “places children congregate,” which means day care centers, parks, libraries, arcades and so on.
These much stricter rules mean there are far fewer eligible properties in Washington from the start, and properties may be expensive here soon.
The second big issue is that Colorado, like Oregon and many other states, chose to regulate their medical market before allowing the adult market from the beginning.
All Colorado companies had existing stores or warehouses before converting, so most just expanded.
Conversely, Washington cut the entire medical market out of the picture and decided to start from scratch. So we begin at zero and explode to a market roughly 50 percent bigger than Colorado’s virtually overnight. It’s one big game of musical chairs, only there are way too many people playing, not near enough chairs, and the music is about to stop for many of us.
No matter where your market is, there are three basic types of leases to consider. The first is a simple flat rate, much like paying rent on an apartment. However, most commercial leases are referred to as “triple net,” meaning they add in a range of associated fees with the property. This often includes site improvement costs, general maintenance fees, property management fees and the big one – taxes.
You can start out at 50 or 75 cents per square foot in the first year, but turn that dilapidated building into a code-compliant powerhouse generating $3 million in revenue, and all of a sudden your “triple net” tax payments go sky high. You can actually end up paying more in triple net fees than your base lease rate. The third option is giving the landlord a percentage of profits, which can work if the deal is fair, but the Washington State Liquor Control Board may declare that landlord a “true party of interest” and require background checks.
Regardless of the type of lease, the bottom line is we all need to do the math to see if the rate is worth signing a five- to 10-year lease on. In Colorado, producers report pounds wholesaling for $3,000 to $4,000 ($8/gram) and retailing for around $9,000 to $11,000 ($18-$24/gram with taxes).
Many believe Washington could have even higher prices initially, but it will also fall next year when production rises. Let’s assume you require a 4,000 square foot building to grow 3,000 feet of canopy in, and you yield around 12 pounds a week on average, or 52 pounds a month, or about 24,000 grams a month.
If you get $8 per gram to produce, that’s $192,000 a month in revenue. $10 per square foot would be $40,000 in rent, leaving you $152,000 a month for your other expenses, and hopefully, some profit left over.
Steven Fuhr can be reached with comments or questions at AgroPackWA@gmail.com.