Excuse Dion Markgraaff if he seems a little charged up about the business opportunities that await if Californians vote to legalize recreational marijuana. Over-enthusiasm sort of comes with the territory.
“We’re talking billions and billions and billions of dollars,” said the president of locally based HempMeds Mexico, which exports a non-intoxicating, medical form of marijuana called cannabidiol, or CBD. “People don’t even realize how big this will be.”
Some might. In a shared euphoria tempered only by regulatory buzz-kill, local farmers, retailers and commercial real estate professionals are lining up new ventures in case Proposition 64 wins voter approval Nov. 8.
Local industry insiders speak of a variety of preparations, from tourism businesses planning to accommodate out-of-state visitors at San Diego “bud-and-breakfasts,” to hydroponics stores gearing up to place large orders for lights and other indoor-growing equipment in case passage of Prop. 64 sparks new interest in producing pot for personal use.
Naturally, they’re a bit paranoid about dropping names. But they insi
st interest is high.
“People are researching and, you know, educating themselves in the event that an opportunity opens up,” said Michael E. Cindrich, a San Diego lawyer who is advising business people on how to prepare for the proposition’s passage.
Change Won’t Come Overnight
While some things would change quickly, like a proliferation of in-home grow operations, don’t expect to wake up Nov. 9 to a new world of open-air marijuana cultivation, sales and consumption. In fact, people in the business say the most important changes would not come until Jan. 1, 2018 at the soonest.
That’s the date California is expected to put into effect strict new rules for licensing the production and sale of medical marijuana. Consultants say these regulations, the first on many levels since voters approved medical pot in the state 20 years ago, will likely guide California’s approach to recreational cannabis, as well.
Whatever happens at the polls, cannabis represents a huge and growing market. Bay Area-based ArcView Market Research estimates U.S. sales of legal pot grew 17 percent in 2015 to reach $5.4 billion. It predicts the domestic market will have expanded an additional 24 percent by the end of this year.
San Diego appears well-positioned to attract a healthy share of that business, thanks to its sunny climate, tourism friendliness and expertise in raising small plants for sale.
“We’re the No. 1 nursery county in the nation,” boasted Eric Larson, executive director of the 1,400-member San Diego County Farm Bureau. He said the bureau recently put on an informational seminar about preparing to grow legal cannabis, and the event sold out with about 90 attendees. Many had to be turned away, he said.
Finding the Properties
Two interwoven factors could put a damper on all of this: local rule-making and scarce availability of proper commercial space.
Even if Prop. 64 passes, municipalities would be able to set zoning and other rules that growers, manufacturers and retailers would have to abide by, such as certain minimum distances from schools. Regulations already in place locally on medical pot dispensaries would likely stand, at least for a time.
Because so much of the existing regulatory framework deals with conditional use permits that are property-based, the second limiting factor — commercial real estate — has spawned a competition for the relatively few buildings local zoning laws permit for cannabis operations.
“It’s becoming a land grab,” said local cannabis business consultant Christopher Siegel. He said he is helping would-be cannabis entrepreneurs tie up qualifying properties by bringing in temporary tenants until the start of 2018. At that point, the new state rules are expected to allow such enterprises to open with full legitimacy, regardless of Prop. 64’s outcome.
Federal Law
But there’s another problem. Not only do few cannabis businesses have the cash on hand to buy a business property, marijuana remains illegal at the federal level. This means banks and other lenders are inclined to turn away money and business opportunities they deem illicit.
Enter Innovative Industrial Properties Inc., a San Diego-based real estate firm hoping to solve these problems after selling shares on the New York Stock Exchange.
On Oct. 17, Innovative Industrial presented the U.S. Securities and Exchange Commission with a prospectus for selling stock worth $175 million to buy as many as 20 indoor growing facilities through sale-leaseback transactions and third-party purchases.
It said the properties would range in size from 25,000 to 150,000 square feet, and that its clientele would be limited to “experienced, state-licensed operators” engaged only in activities related to medical cannabis.
Variety of Products
The company is no newcomer to commercial real estate. Chairman Alan D. Gold co-founded BioMed Realty Trust, a San Diego-based real estate investment trust that bought, developed, owned, leased and managed laboratory and office space for the life science industry.
BioMed Realty sold earlier this year to Blackstone Real Estate Partners VIII LP for about $8 billion.
Markgraaff’s company, HempMeds, is part of a San Diego private equity investment company called General Hemp, which mostly deals in medical CBD. If Prop. 64 passes, he said, thousands of new dispensaries will open statewide, and many will stock the kind of non- or minimally intoxicating products his company refines from cannabis legally grown and imported from Europe.
At that point, he said, consumers will turn to pot for true medical purposes.
“Not everyone wants to get totally high,” he said.
