As California and North Coast regulations for cannabis-related companies settle out, the frenzy of commercial property acquisitions in the Santa Rosa area has cooled a bit. Yet the newly legal industry has left a mark on property pricing and contract structure.
Several properties gained a lot of Santa Rosa commercial real estate market attention in the past two years as they sold for higher-than-typical prices with designs on attracting cannabis tenants.
Now they’re back on the market, like buildings at 2835 Duke Court, 2049 W. Steele Lane, 3320 Industrial Drive, 2150 Bluebell Drive and 3023 Santa Rosa Ave.
“The frequency of people reaching out for leases has slowed down a bit,” said Steve Skinner, an agent for commercial real estate brokerage Keegan & Coppin Co. Inc./Oncor International. He is marketing some of those facilities for sale. “The reason those properties are back on the market is the laws, the business and business relationships have changed.”
Some properties with lease pricing at $3–$6 a square foot monthly are sitting empty, or get deals that fizzle out with the tenant’s business within six months, Skinner said. That’s compared to longtime rates of as much as $1 a square foot a few years ago.
And sale prices for cannabis-positioned industrial buildings have soaring to $225 a square foot, and a construction company working on Santa Rosa home rebuilds outbid cannabis contenders to get a building for $223 a square foot in February, according to Skinner.
“Noncannabis users are climbing to meet the market,” he said.
While location is a key factor in real estate value, it’s even more so for prospective cannabis tenants, as certain uses like manufacturing and distribution are only allowed in specific zoning areas such as “business park” and outside a 600-foot radius from a school. Cultivation operations are another matter.
KNOW YOUR UNKNOWNS
In Mendocino County, buyers of property do not usually disclose they’re in the cannabis industry, according to Dick Selzer, broker-owner of Realty World Selzer Realty, based in Ukiah.
“Sometimes, there is reluctance to disclose that to an agent because of the reluctance of notifying neighbors,” he said. Unless a lender in involved with the property or the seller is financing the deal, the topic may not come up.
But leasing space is another matter. A cannabis licensee needs a lease to start the application process for a local permit, which will require authorization from the landlord as well as disclosure to permitting authorities the contact information for the property owner, said Dan Beck, whose Santa Rosa-based firm Canna Legal focuses on certain North Coast areas.
“In this area, more or less, the consensus among landlords is they want rent from day one, regardless if they have a permit,” Beck said.
Property owners have obligations to investors, lenders and insurers about what happens at and to their facilities. Common concerns from owners that Selzer’s agents work with are its current illegal status under federal law and the financial stability of players in the industry.
Credit worthiness is a key issue. But the illegal status at the federal level has nearly shut out the industry from access to capital sources overseen by federal regulators. And funding sources for property owners can be under the same constraints, which is not typically a problem for traditional tenants, according to Beck.