Appraisal Institute of Canada
2018 – Volume 62 – Book 1
Growth industryCody Gale, MAI, President, Colorado Appraisal Consultants, Denver, Colorado
An appraiser from Colorado talks about how increasing acceptance and legalization of marijuana are changing the real estate landscape
©2017 Reprinted with permission from the Appraisal Institute, Chicago, Illinois. All Rights Reserved.
As Canada prepares for the legislation of marijuana, AIC looked to our neighbours to the south for examples of how valuation professionals have adapted in states where similar legislation has passed.
Arriving on site to appraise a large, heavily secured marijuana grow facility can be daunting. One of my recent projects, a 60,000-square-foot grow facility near Denver, Colorado looked on the outside to be a poorly maintained and nearly vacant industrial building, as most grow facilities do. They are purposefully inconspicuous because the owners and operators do not want to attract undue attention. The giveaway that something was going on at this building was the huge power panel on one side and an excessive number of roof-mounted cooling and ventilation units.
After showing my identification and gaining entrance through a reinforced steel door, I saw that half the building was outfitted for very sophisticated grow use, while the other half remained dilapidated. The grow space was so bright that I had to wear sunglasses to see anything.
Many rooms had the newest lighting, fertilization and HVAC systems. The owners had spent $1.5 million upgrading the building for the marijuana industry, with electrical upgrades alone – including six power poles required by the local utility company – costing more than $500,000.
Inside, I felt eyes on me wherever I went – security was ever-present. I saw thousands of plants in different stages of growth, whiteboards with cultivation notes scribbled on them, and a list of funny names given to all the rooms.
In a small manufacturing/assembly area, employees worked on marijuana plants as if they were assembling little trinkets. A dozen or so people with scissors were sitting at tables and taking the buds off the stems, tossing the trimmed product into giant bins. As I walked past with my camera and clipboard, they stopped and stared; such stares are common whenever I inspect cannabis operations. I have learned to act cool and professional and not to react to anything I see.
Back at the office, I sifted through work files of appraisals I had performed on similar properties, looked through my stockpiled data and analyses, researched new data, and performed calculations – and then more calculations. A few weeks and several hundred pages later, I had a report with four different valuation scenarios and a well-supported opinion of value.
This particular client paid me with a cheque, which is rare. Typically, I am paid in cash when I appraise these types of properties. It is amazing how different your appraisal fee feels when it is handed over in $20 and $100 bills. Most transactions are in cash because federal law in the United States prohibits banks insured by the Federal Deposit Insurance Corp. from being involved in the marijuana industry, even in the 29 states plus the District of Columbia where medical and/or recreational marijuana has been legalized.
Degree of difficulty
Appraising a marijuana grow facility or a dispensary is considerably more difficult than appraising a standard property, and it is not unusual for me to spend three times as long to complete reports for these properties. The valuation itself is complicated, but it helps to have a great template.
Grow properties are unique in terms of build-out and zoning. In a lot of cases, the existing leases – with imprecise, confusing or misleading language – can complicate the valuation, as does the issue of what constitutes real estate and what constitutes personal property.
Dispensaries can be a little easier to appraise because they often have a typical retail build-out. But newer regulations can make it difficult for dispensary tenants to change locations, so these assignments are not as straightforward as they once were.
The lack of market data is one challenge for both property types. There are, of course, sales and leases, but they do not consistently show up in commercial databases, and parties are less likely to provide transaction details. Build-out costs can vary substantially between properties. And the value of a property to an investor is different from the value to an owner-user. The lack of available financing and rates information also adds a level of difficulty because federally insured lenders are prohibited from lending on a property used for the marijuana industry.
At this point in my cannabis appraising career, I have advanced spreadsheets and a firm grasp on rental rates, sale prices, cost and cap rates. But getting to this point was not planned.
My first marijuana-related assignment was a retail space within a multi-tenant property that was, unbeknown to me, a cannabis dispensary. Once I found out, I could have turned down the assignment, but instead I stated my fee and showed up to perform the work. The space was relatively small and the lease rate was at-market, so my entry into the sector was relatively low-risk.
After that, I appraised several more dispensaries. But the sector appeared headed for a bubble, and I was worried about the potential finger-pointing if it burst. I decided it was not worth the risk and turned down subsequent assignments.
But the bubble did not burst. Dispensaries popped up everywhere, and I saw how cannabis was influencing the industrial real estate sector. I could not avoid the work any longer – and there was a lot of work I was missing out on – so, after a couple of years away, I went back to these jobs.
I have worked on just about every type of retail dispensary, including freestanding properties, those in larger retail centres, high-end dispensaries in expensive parts of town, small dispensaries in converted houses, and soon-to-be dispensaries taking over dilapidated properties.
I have appraised small and large grow operations, cannabis testing laboratories, and land related to the industry.
In Denver, cannabis has driven residential and industrial real estate to all-time highs. The average asking industrial rental rate in Denver rose 48% in a little over four years. The vacancy rate dropped from more than 8% in 2009 to less than 2% in 2015. Similarly, residential real estate throughout the metro area has experienced enormous growth. (Colorado voters passed Amendment 64 legalizing the recreational use of marijuana in 2012, with implementation beginning in 2014.)
Unfortunately, standard industrial users must compete with the cash-heavy marijuana industry for practically all types of space, and the amount of available space is shrinking because of eminent domain related to the light rail expansion, the National Western Stock Show complex and early-stage acquisitions related to expansion of Interstate 70. New construction is up, spurred by a demand for space, a decline in cap rates, and an increase in rental rates and sale prices.
I am not claiming that the area’s high rents and low vacancy are solely the result of the marijuana industry. Other factors include an improved economic climate, high employment rates, and population increases. However, cannabis undoubtedly plays a significant role, and Colorado’s legalization of marijuana has been a boon to the local and state economies.
What is next? The future remains unclear. Federal regulations in the US could negatively impact the use of marijuana or help stabilize it. The market could dip. However, I see strong demand for the product, so I think the marijuana industry is in its infancy. Its continuing effect on real estate could dramatically bolster the health care, hospitality, entertainment, restaurant and residential sectors, and even grow-related services such as testing, safety and security.