Cash And 'Cannabis Rents': Landlords Warming Up To Pandemic-Proof Weed Retailers
The Artist Tree in West Hollywood looks like any other inviting, high-end store: It has colorful murals inside, open space, light wood. But it now stands out as unique because it is one of fewer than a dozen cannabis storefronts in the city operating right now. It’s been a good time to be open, co-owner Lauren Fontein said.
Right before the lockdown, she said, the store saw higher average sales than normal as people stocked up. In the early days of the lockdown in the LA area, around April, there was a drop in business that she attributes to people being more cautious about going out in general. But in the last few months, there’s been a ramp-up in sales.
“We’ve been busier since July than we were before COVID began,” Fontein said.
Though The Artist Tree also does curbside pickup and delivery, a lot of that business has still come from shoppers directly in-store.
Lawyers, brokers and retailers working with and in the cannabis industry in the LA area say that sales are up and demand is strong. Cannabis was designated an essential business early on and didn't face lockdowns like the ones experienced by storefronts for retail destinations like gyms, bars or live music venues.
With cannabis tenants doing so well, some experts anticipate that it could get easier for retailers in the industry to find space as the market shifts and tenants hold more power over landlords who have space to spare.
For those looking to enter the heavily regulated industry, finding a retail space is a huge hurdle. Because cannabis is still illegal federally, the pool of available real estate is often limited to those spaces whose owners own them outright. Among those owners, the pool of landlords who are open to renting to cannabis tenants has been smaller still. Nevertheless, there is continuing traction for opportunistic investors.
“We do anticipate there will be a significant opportunity presented by tenants leaving retail,” said Cassia Furman, partner at the law firm Vicente Sederberg, which specializes in the cannabis industry.
Those who do rent to cannabis tenants have had the benefit so far of charging what are referred to as "cannabis rents," which can be as much as double or triple the market rate price for a space. The practice has been a boon to landlords so far, but that could be poised to change.
Andrew Sinasohn is an executive vice president with Zacuto Group, a Venice-based commercial real estate brokerage that deals with a number of cannabis clients. He said one of his tenants is paying a nearly 70% markup on a retail space in Downtown near the Historic Core. A non-cannabis tenant would have paid $4 per SF in the storefront; his client is paying is $6.75 per SF.
These higher rents are often coming in cash. Sinasohn said that many of his clients, who are largely in the Downtown area, are mainly cash businesses and are paying landlords that way, both for their monthly rent and for their security deposits, which Sinasohn said tend to be larger than normal.
“The market flipped and it’s a tenant-favorable market. [Tenants] carry the power right now,” he said. “Now, there’s every space in the world available.”
Mishka Ashbel, co-owner of the cannabis retailer MMD, said MMD has four locations and had expansion plans in place prior to the onset of COVID-19 that are still moving forward. The tone of those negotiations for storefronts has changed, Ashbel said, although at least for now, paying those cannabis premiums for space is still part of doing business.
“The conversation is just a little bit easier because of the loss of retail and office space,” Ashbel said. “Cannabis is starting to look like a wonderful alternative.”
Of course, not every storefront has had a smooth time over the last eight months. Janice Hardoon, co-owner of CBD retailer The Antidote on Melrose Avenue, said that store was right in the middle of high-profile protests earlier this summer. Foot traffic has only just returned to normal in the last two weeks or so, she said.
But Hardoon, who is also the owner of a storefront in Koreatown, said at The Antidote, delivery had really picked up during the pandemic. “I think that’s where cannabis is headed,” Hardoon said.
Furman said that at least one storefront will likely continue to be necessary for those entering cannabis retail because of its value in building a brand identity.
"Even if a business does most of its business via delivery, a storefront is deemed helpful in establishing the company as a player," Furman said.