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In August 2020, Congress established a new opportunity zone for real estate investors and business owners with the designation of Hemp Opportunity Zones. As with other opportunity zones, these come with significant, long-term tax advantages to the investor.
IvyLee Rosario • Commercial Property Executive
With 10 states plus Washington, D.C., legalizing cannabis for recreational use and medical marijuana legal in another 23 states, the marijuana industry is providing an opportunity for those in the commercial real estate to dip their toes into something new. According to the National Institute for Cannabis Investors, legal cannabis sales are projected to grow from $10.8 billion in 2019 to nearly $100 billion in the next five years.
Even at this early stage, the legal cannabis business appears to be exerting an impact on commercial real estate, According to a National Association of Realtors study, 34 percent of commercial members report an increased demand for warehouse space in states where medical marijuana is legal. Another 31 percent have seen an uptick in retail demand and another 18 percent report a similar increase in land demand.
“Cannabis seems to have the fastest growth projection of any major up-and-coming industry,” noted Charles Jack IV, senior managing director, Integra Realty Resources. “More states are likely to approve not only medical, but (adult recreational use).”Adult recreational use generates 80 percent Nevada’s marijuana-related revenues, he notes. But unique nature of the legal cannabis business dictates that potential participants should do their homework thoroughly before making the decision to enter the business.
One of the most prominent challenges of the cannabis space within commercial real estate is the regulatory side of the business. Typically, cannabis production and dispensary facilities must be located at least 100 feet from residential neighborhoods and 1,000 feet from places frequented by children or minors. This includes city parks, schools, churches, childcare centers, playgrounds, libraries and residential care facilities.
For investors looking to enter this specialized market, location is a crucial factor in success, as it is for any asset category. “Where these buildings and properties are allowed to be operated is either like finding a needle in a haystack, or it’s open season and the market is too saturated,” said Bryan McLaren, chairman & CEO, Zoned Properties.
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A commercial real estate investment can provide many benefits including income, capital gains, favorable tax treatment, portfolio diversification, and inflation protection. Most of these benefits are fairly straightforward, but the last one—a hedge against inflation—is commonly misunderstood and often overlooked. In order to understand what it is and why it can be powerful, it is first important to understand the concept of inflation itself.
Inflation is the general rise in the price of goods and services over time, resulting in a sustained drop in the purchasing power of money. In other words, a dollar today is worth more than a dollar in the future due to its loss of purchasing power.
With any type of investment, inflation is an important concept because returns need to be measured both in absolute terms and in relative terms. For example, an individual could allocate money to an investment that pays an interest rate of 3% annually (the absolute return), but if inflation causes consumer prices to rise by 3% in that same year, the relative return on the investment is 0% because the purchasing power of that capital remains unchanged. In that way, it is important for an investment to earn a return, but it is more important that the return outpaces inflation to ensure that purchasing power increases over time.
While inflation can seem scary, many experts and economists actually consider a small amount of it to be a sign of a healthy economy. This is because it encourages consumers to spend money today rather than save it and watch its purchasing power erode over time. In fact, the United States Federal Reserve (as well as other central banks around the world) monitors inflation closely using the “Consumer Price Index” or “CPI” to ensure that it stays within a desired range of 2% – 3% annually. If the economy heats up with prices rising too quickly, the Fed will raise interest rates to slow it down. Conversely, if economic growth is contracting, the Fed will decrease interest rates to encourage economic activity.
Given the known effects of inflation, it is only natural for investors to ask which asset classes or investment types perform well in an inflationary environment. In other words, which investments can best serve as an inflation hedge?
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