Apr 2, 2022
Should real estate investors consider taking a look at the cannabis industry?
If you ask Bryan McLaren, he will answer with an empathic “yes!”
Bryan, the Chairman and Chief Executive Officer of Zoned Properties, has been leveraging their experience and updated technologies to identify quality real estate for cannabis, broker cannabis real estate deals, and infuse deal flow into their portfolio.
He shares their humble beginnings in this industry, revealing the mistakes that they’ve committed along the way and the lessons they’ve learned. He also talks about what is happening behind the scenes in closing a cannabis real estate deal, setting expectations for potential investors.
[00:01 - 03:01] Opening Segment
- Bryan McLaren talks about their humble beginnings in the cannabis industry
- What’s the role of real estate in cannabis?
[03:02 - 08:41] Servicing the Cannabis Industry With Real Estate
- The real estate market in cannabis only needs three services
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- Bryan talks about them
- This is the pain point that led Bryan’s team to focus on cannabis
- Mainstream professionals are gradually entering the cannabis industry
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- Here’s what to expect according to Bryan
[08:42 - 18:55] The Behind-the-Scenes of Cannabis Real Estate
- How to overcome challenges in such a nuanced industry
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- Bryan explains
- What investors should know about the returns and cap and interest rates in cannabis
- The different obstacles in various markets that investors should expect
[18:56 - 21:15] Opportunities in the Cannabis Real Estate
- The opportunities currently available in the cannabis real estate
- The difference between ancillary versus non-ancillary in the cannabis context
[21:16 - 22:23] Closing Segment
- Reach out to Bryan
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- Links below
- Final words
Tweetable Quotes
“...if you're looking at a cannabis real estate project, it's pretty helpful to have someone that's been through it.” - Bryan McLaren
“...in any big commercial real estate project…you got to be okay with a little risk, and in an industry as complex as cannabis, you have to be okay with uncertainty.” - Bryan McLaren
“...because of [the] risk in the projects and because of the lack of available capital, the returns and the cap rates and the interest rates are at a significant premium.” - Bryan McLaren
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Email Bryan@zonedproperties.com to connect with Bryan or follow him on LinkedIn. Visit Zoned Properties to know more about the available commercial real estate services for the cannabis industry.
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Want to read the full show notes of the episode? Check it out below:
Bryan McLaren 00:00
In those more mature markets, you're really dealing with competitive edge, oversaturation, the boom and the bust of cannabis legalization, or any new industry. It's a gold rush. So in new state markets that have recently legalized, that patience and persistence is crucial. And what I mean by that is very localized at the community level. Of course, you want to bring brain trust experts into your team that can help guide you. So a really good compliance attorney, a very good land use attorney, very good financial analyst. So those are all really important for the business. But when it comes to the real estate, it's the relationship with the local community.
Intro 00:40
Welcome to the How to Scale Commercial Real Estate Show. Whether you are an active or passive investor, we will teach you how to scale your real estate investing business into something big.
Sam Wilson 00:51
Brian McLaren is the Chairman and Chief Executive Officer of Zoned Properties, a strategic real estate development firm whose primary mission is to provide real estate and sustainability services for the regulated cannabis industry. Bryan, welcome to the show.
Bryan McLaren 01:05
Hey, thanks, Sam. Appreciate you having us on here.
Sam Wilson 01:07
The pleasure’s mine. Same three questions I ask every guest who comes on the show. In 90 seconds or less, can you tell me where did you start, where are you now, and how did you get there?
Bryan McLaren 01:14
Yeah, that's the meat of it, isn't it? So Zoned Properties. We're a commercial real estate development firm based out of Scottsdale Arizona, we are focused on highly regulated and complex commercial real estate investments, development, and services. So we're very focused on the regulated cannabis space. And almost 10 years ago, we got into this space as a commercial investor. So we raised some private capital, saw that the cannabis industry across the United States and the world was starting to turn on, and decided to go after a few initial investment properties for development and leasing to cannabis operators. And needless to say, we've learned a lot of lessons over the past decade, we've made every mistake in the book, you know, and we like to describe it as a labyrinth. So you're kind of navigating this constantly changing and nebulous territory. So we started out really as positioning to become a REIT, a REIT for the cannabis industry, a real estate investment trust, I'm sure most of your audience is familiar with those, and it was probably just a little too early. This was back in kind of 2014 era, a little bit too early for probably the tax and federal circumstances to allow a full-on cannabis rate, though there are many today some really successful ones. So we went a different route, we decided to build a full spectrum of real estate services, as we learn the best practices and mistakes to provide national help and expertise for anyone looking to invest and develop a cannabis project. And that's where we are today. We work nationally in many states, and if you're looking at a cannabis real estate project, it's pretty helpful to have someone that's been through it.
Sam Wilson 03:02
So are you guys actually doing the building or are you more of a consultant?
Bryan McLaren 03:09
Great question. So the construction and direct building is pretty much one of the only things we don't do. So our typical approach for clients, so we have kind of three prongs, three buckets to our company, which just about every real estate project in cannabis is going to need, you're going to need a brain trust. So we have a Consulting and Advisory Service division where we help walk and talk and lead clients through the process. Complex real estate, cannabis isn't the only area that's complex, right big commercials complex all the time. So you got to go through the zoning and planning process, you have to get all your permits, you have to work with design professionals, build, bring the capital. And so our advisory division really helps clients go through that process specific to the nuance of cannabis. We have a fully licensed brokerage firm that helps through the transactional side. And then we have an investment firm that helps either provide direct investment and capital for projects, or we connect project teams to investment capital that's cannabis-friendly. We do not do the direct design, development and construction. So we bring in our own brain trust for our clients to do that work.
Sam Wilson 04:22
Got it. That's really, really intriguing. It's a nuanced business. I mean, you guys went through multiple iterations at what point in time did you know, “Hey, I'm on to something here.”
Bryan McLaren 04:32
It really was the, you know, I think all great business stories. It's the absence of something in the marketplace. I love the phrase “go where others won't or can't,” right. And while mainstream cannabis is gaining momentum, the vast majority of Americans for recent polling numbers support the full legalization of cannabis. But because this is still federally illegal and each state, not just each state has a unique cannabis program, the 40,000 or so localities, you know, the cities, towns and counties, they all have their own structures, right. So I think when we knew we were really on to something, Sam, you know, you're everything you think of in a commercial real estate project, you call a big brokerage house you call a Title and Escrow Company, a land-use attorney, you called debt and capital financing. You would call these people even two, three years ago. And if they didn't kind of laugh at first about cannabis, they would say, you know, there's no way we can work on this. It's federally illegal. So we just found that tremendous need in the marketplace, everyone we talked to that was working on their own projects, were having the same experience. And we had a choice, we can either kind of try to continue down the large public company, you know, REIT model and try and become a bank for cannabis, which wasn't our core competency. At the core, our leadership and team members are operators and real estate developers. So we chose to go the services route. And we, everyone we talked to needed help finding a broker, needed help navigating kind of the roadmap of cannabis. So yeah, and to this day, it's very promising that I'd say within the last six months, you're starting to see mainstream brokers, title companies, land use attorneys, a lot of traditional professionals have now worked on cannabis. So it's moving in that direction.
Sam Wilson 06:39
What effect do you think that will have on the cannabis space?
Bryan McLaren 06:44
Yeah, mainstream professionals, I think we're going to see a lot less risk. And we're talking years, you know, it's not just going to be a couple months, even if the federal government legalizes and for the audience at the crux of this is the fact that cannabis which includes both hemp and marijuana, so separate kind of pass of the tree here in the plant, are still considered illegal as a controlled substance at the federal level. Now, the Farm Bill of 2018, legalized hemp, right, but THC and cannabinoids under the marijuana plant within cannabis still remain a scheduled illegal drug. So even if the federal government decides to legalize and de-schedule cannabis, you're still going to have years of the regulatory rollout. So the effect is that I mean, we're a community-based company. That's what this comes down to it. It's all community-centric, you have to go into your local government, you got to work with your local planners, hey, we're building a cannabis project. We're not criminals, we're your neighbors. The history of propaganda on the war on drugs and fear is still very real. So having mainstream professionals, very reputable firms have good reputations and trust within the community, it's huge, Sam, it's, you know, in the early years, I would go up to city councils and try and provide data that showed the property values would go up, right economic prosperity factors like job growth, property taxes, real estate value, all that would increase prosperity in the community. But it's one thing coming from, you know, passionate, experienced cannabis professional. It's another coming from a mainstream land use law firm or the largest, you know, real estate brokerage firm in the state. So that adds really good credibility that this is an amazing industry for our communities.
Sam Wilson 08:42
It seems you know, when you talk about the solving the problems everyone is facing, because that's kind of what it sound like your business was based upon. We'll call everyone, we’ll just use the term everybody's out there going, Oh, my gosh, we don't know how to overcome this. How did you guys figure out ways to overcome all of those, like you said, highly nuanced state, county, city, you know, township, whatever it is ordinances and rules. I mean, that's just a labyrinth, to use your word. How did you figure that out?
Bryan McLaren 09:12
It sounds simple, what I'm gonna say, but it's, I think, for any entrepreneur out there, they know how tough this is, but accepting uncertainty. So it's an industry that's constantly evolving. You may have, you know, Mississippi is a great example of a state, kind of near your neck of the woods, Sam. I mean, the voters put legalizing cannabis on the voter ballot and passed. And then there was a constitutional state, you know, confliction and nuance that reversed the voter decision. And so for the past few years now, the legislature has said, Okay, well, we want to honor the will of the voters. So we need to figure this out. And very recently, Mississippi passed and affirmed the legalization, but, you know, that took years So, like in any big commercial real estate project, you know, I think a lot of people in our industry here and investing and developing commercial real estate, you got to be, you know, okay with a little risk. And in an industry as complex as cannabis, you have to be okay with uncertainty. So being very nimble, it's our business, we tend to run pretty conservatively and risk-averse, which is a little bit of a, you know, it's ironic based on what I just said, but you can't bet the farm on a single certainty, which could change unexpectedly. So for anyone getting in cannabis, whether you're looking to invest in cannabis-related real estate, or develop your own project, understand that there is incredible volatility in the laws and regulations and building codes and permitting that allow you to or your tenant or your operator or your borrower to operate and succeed so that, you got to just embrace the uncertainty. And we like to say we follow the flow of the river so…
Sam Wilson 10:59
That's crazy. But I mean, you know, I'm going back to my commodities trading days, and it was like your money is made in times of volatility. And, you know, for those who are willing to accept that risk, you know, that's where your paydays lie. Do you see? Yeah, it's become more mainstream, in the de-risking, potentially, of the investment space, a, compression of the return profiles, and just kind of less money on the table for those entering the space later on in those starting now.
Bryan McLaren 11:27
Yeah, absolutely. Sam. And as I said, In the beginning, you know, you kind of go where others won't, and can't, you know, amazing phrase I'm stealing from many entrepreneurs, you're borrowing rather. But yeah, for context for the audience, I mean, so here's the big thing with cannabis real estate projects from an investment and financial return, because of that risk in the projects, and because of the lack of available capital, the returns and the cap rates and the interest rates are at a significant premium. So, you know, four or five years ago, if you were going to try and borrow 2 million, 5 million, let alone 10 million-plus to go build your own project, you were likely going to pay 16, 17, 18% interest rates on that commercial debt on a good deal. Today, the large real estate investment trusts that have entered the space public and private, that are dedicated to cannabis projects, they offer a range between 11 and 16% on a sale-leaseback cap rate. So it's, you know, incredibly important that these REITs have entered the cannabis industry. Without them, there would be a fraction of the real estate development that has occurred to allow the cannabis industry to grow into the, you know, close moving into 100 billion plus economic impact industry. Our best guess at the current time is the cannabis industry will need about 50 to 75 billion worth of commercial real estate capital to meet its needs in the next few years, likely doubled out over the next decade. And so these REITs are really the only game in town now that is changing as of the past three to six months, there are more and more state and local banks that are entering the space. We've seen term sheets on smaller real estate deals in the five to 7% debt interest rate, so it is absolutely compressing. But any investor in your audience really needs to understand is that just because those numbers are starting to look attractive, that doesn't translate into investment return unless the project's successful. So yeah, we really view ourselves Sam as kind of playing in the same sandbox as those rates in those banks. We are a brain trust for their clients and for them directly and a risk hedge. So we are the group that's going to go in on behalf of the project on behalf of the client. Make sure the vetting of that real estate, the zoning, the permitting, that all their submittals are accurate, and that they're not going to get a letter from the state’s marijuana division, saying, “Hey, your permit is invalid, you need to cease operations tomorrow,” which happens and that's certainly not what a landlord or investor wants to hear, you know, when they put millions into a project.
Sam Wilson 14:21
For sure. What are you guys doing? I mean, if you go into say, Mississippi, and they've now well legalized it, but then you've still got all those kind of like you said local hurdles to get over as well. How do you navigate that? I know you said accept uncertainty is the is the primary thing you're gonna have to do. But I mean, there's strategic things you're doing that'll navigate that. What does that look like?
Bryan McLaren 14:43
I think on that same, it's a combination of patience and persistence. So really, especially when you go into new state markets, which are very different from mature or maturing markets, like a Colorado or Washington or Oregon, in those more mature markets, you're really just dealing with competitive edge oversaturation, the boom and the bust of cannabis legalization or any new industry, it's a gold rush. So in new state markets that have recently legalized, that patience and persistence is crucial. And what I mean by that is very localized at the community level, of course, you want to bring brain trust experts into your team that can help guide you. So a really good compliance attorney, a very good land use attorney, very good financial analyst. So those are all really important for the business. But when it comes to the real estate, it's the relationship with the local community. So you got to be very sensitive of this is a new industry that for the past 100 years, people have been told, you know, the devil's lettuce is gonna cause people to go crazy and run in the streets and property values are going to plummet. And it's a gateway drug, you know, but we now have enough cannabis industry evidence across this country we're at now I think it's 37, soon to be 39 states have medical and or adult use programs. Recent polling shows high 80%, 86, 87% of the American electorate supports legalization. But that doesn't necessarily mean it translates at the local level. There's still that fear that if a cannabis grow site, or or dispensary retail site opens up in my neighborhood, you know, we're going to have increase in opioid epidemic or property values will plummet. So it's what we try to really do at that local level is educate community members. Here's fact-based evidence from the past decade of real estate programs that show almost always the opposite, decrease in violent crime, increase in value increase in economic growth, and do it patiently but persistently.
Sam Wilson 16:51
Yeah, and that's a very, very long game, I would imagine.
Bryan McLaren 16:55
It is, we know real estate's a long game, right. So it's, I think, for those investors that have been standing on the sideline, which also is very appropriate, you know, we talk with lots of non-cannabis mainstream REITs, you know, multibillion-dollar grocery-anchored commercial strip center REITs that are basically leaning across the line saying, okay, there we go yet, you know, they're preparing and they're playing 100-year game, you know, you're not playing a year game.
Sam Wilson 17:26
Right, yeah, because what I hear you saying when you say those large grocery store anchored, you know, centers is that those REITs are not yet accepting the tenants to be, you know, correct, the right term, but basically, it's where they can then sell the product, they're out, you know, out of their strip centers.
Bryan McLaren 17:42
Right, and that's part of the nuance, I'll keep this brief. I know, I've just been chatting your ear off here, Sam. But servicing commercial real estate is a whole other side of the equation. So much of what we've discussed so far is kind of a standalone real estate cannabis project, getting approvals and successfully delivering the project. On the retail side, the adoption of cannabis use as tendency of these large commercial strip centers, you know, or even more nuanced, like imagine an airport terminal having, you know, cannabis for sale like alcohol, I think the servicing of those projects, and when I say servicing, I mean servicing insurance or collecting rent roll or debt on large commercial. Those are all nuances that almost all of those traditional real estate contracts, say no federally illegal activity, right. And so, you know, you have a $300 million strip center with a movie theater and large department stores, you know, that even if that cannabis retail, you know, tenant says I'll pay 10 times your average rent rate, it's probably pretty minimal compared to the overall cash flow of the project. So that's the hurdle. We're gonna see a lot of mainstream adoption, when that changes, it's going to take time, but those are the kind of windfalls that will come from federal banking reform. Interestingly, the MBA the Mortgage Bankers Association, for the first time ever last year, we put together a cannabis panel. And fascinating one of the people we had on the panel was a large-scale portfolio servicer. And they said in real-time, as of this is about a year ago, virtual, you know, mid pandemic lockdown, but they were dealing with this firsthand, the insurance underwriters were saying, this might void your insurance policy for this whole project, you know, how do we collect rent and deposit into FDIC bank when, you know, the rent rolls from a federally illegal activity? So it's, you know, there's huge opportunity because there's huge complexity, as you said.
Sam Wilson 19:48
Love it. We are out of time here, but I've got one last question and maybe there's a quick way to answer this. Do you see a decoupling of the business itself from the real estate in order to kind of mitigate risk?
Bryan McLaren 20:02
Yeah. So in the cannabis industry, especially when it comes to capital and public companies, so its own properties as a public company, we've been fully audited and SEC reporting now for six years. So we know how to navigate that federal level of compliance and regulation. What's really important in your question, Sam, is what's called ancillary versus non-ancillary or in layman's terms, is the company plant-touching or not? So whether it's a real estate company, as long as you don't have ownership in the operation in the tenancy, it's not a related party, you're not taking up percent base rent from sales, then what we've seen so far, overwhelmingly, and I'm not aware of a single case, I can think of nationally right now where the real estate investor or real estate was jeopardized, as long as it stayed non-plant-touching, so, and that's, you know, if you're selling lights to grow, if you're selling insurance. As of 2022, those ancillary non-plant-touching service providers are considered to be operating within a legal and compliant manner, right.
Sam Wilson 21:10
Right, understood.
Bryan McLaren 21:12
History will tell the story, right?
Sam Wilson 21:14
Indeed it will, Brian, thank you for taking the time to come on today. Last question for you is this. If our listeners want to get in touch with you or learn more about what you do, what is the best way to do that?
Bryan McLaren 21:22
Yeah, and there's so much appreciate y'all having me on Sam. Hopefully for the audience, they got some good takeaways and happy reach out anytime you can visit our website, www.zonedproperties.com. Very active on Twitter @zonedproperties and on LinkedIn. We're constantly posting local zoning case studies on cannabis legalization. And for anyone that just wants to have a conversation, you can reach out to me directly. Bryan, B-R-Y-A-N, at zoned properties dot com.
Sam Wilson 21:52
And that’s zoned, Z-O-N-E-D, properties dot com. Bryan, thank you so much. Appreciate it.
Bryan McLaren 21:58
Yeah. Thanks, Sam.
Sam Wilson 21:59
Hey, thanks for listening to the How to Scale Commercial Real Estate Podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen, if you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories so appreciate you listening. Thanks so much and hope to catch you on the next episode.