Early Cannabis Legalization in Retail: Real Estate Lessons Learned the Hard Way
The early days of cannabis legalization in retail were marked by excitement, high expectations, and the promise of unprecedented profits. However, the journey of many cannabis retailers also includes hard-earned lessons, particularly when it comes to lease agreements, location decisions, and the evolving nature of the industry. In this blog post, we'll explore these valuable lessons and shed light on the importance of protecting your business from the pitfalls that can arise in the world of cannabis retail.
The Perils of Unprotected Leases
One of the most critical lessons from the early days of cannabis legalization is the importance of a protected lease. Three common protections can help:
Municipal Zoning: Municipal regulations typically develop rules around zoning cannabis retail, laying out how close you can be to a park or a school, and more importantly to you, how close you can be to other cannabis dispensaries. Use this zoning to your advantage and create a protected pocket.
Federal Regulations: Similar to municipal zoning, oftentimes federal regulations contribute to ways you can protect your permit from too much competition. Understand your federal retail cannabis regulations inside and out to learn how to protect your location as best as possible.
Permit Limitations: Permit protections can be your best friend or your worst enemy so be careful. Lot’s of states or cities limit the number of permits they allow. When this happens small monopolies are often created and they can be great for business! Someone can’t move in next door if they can’t get a permit. But be careful, if you’re not protected by one of the other zoning limitations above, they can alway approve more permits and what was once a monopoly becomes an over saturated market.
The Queen Street Debacle
The Queen Street cannabis retail scene in Toronto, Canada serves as a cautionary tale. Many entrepreneurs rushed to open shops on this iconic street, expecting a gold mine. However, the concentration of cannabis retailers soon exceeded demand, resulting in intense competition and declining profits for all.
Go Where the People Are Looking for Convenience
Strategic location decisions are vital for cannabis retail success. Consider these factors:
Retail Patterns: Analyze local retail patterns to identify areas with high foot traffic and customer convenience.
Adjacent Businesses: Surrounding your store with complementary businesses like liquor stores, drug stores, bars, restaurants, money marts, and fast-food establishments can drive more traffic to your location.
Accessibility: Ensure your location is easily accessible to your target customer base, considering factors like parking and public transportation.
Beware of the "Cannabis Tax" Lease
Landlords often see cannabis retailers as a potential cash cow, leading to predatory lease agreements. These "cannabis tax" leases may include revenue-sharing clauses that can become problematic as the market evolves.
Boom Times vs. Market Maturity: While revenue-sharing may seem acceptable during boom times, it may not be sustainable as the market matures and competition increases.
Negotiate Wisely: Be prepared to negotiate lease terms that align with your business's long-term financial health, rather than committing to onerous revenue-sharing agreements.
Protecting Your Cannabis Retail Investment with Real Estate Fundamentals
The early days of cannabis legalization in retail were filled with promise and potential. However, the lessons learned have been invaluable for those who have persevered. Protecting your business from unforeseen challenges related to lease agreements, selecting strategic locations, and negotiating leases wisely are all critical steps in building a successful cannabis retail operation. As the industry continues to evolve, adaptability, careful planning, and a focus on long-term sustainability will be essential for cannabis retailers to thrive in an increasingly competitive market.
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