In many legal cannabis markets, the first wave of aggressive growth and expansion has passed. Now—according to some analysts—we’re seeing a period of consolidation as partnerships and acquisitions (and the inevitable closures) lead to a reshuffling of the deck. One of the key factors in determining who stays and who goes will be the cost of leasing dispensary space.
Why should renting a space for your dispensary be any different than any other type of business? Plenty of reasons, it turns out. From potentially interminable permitting processes to hidden buildout costs to legislative red tape—and don’t even get us started on COVID-19—there are all sorts of pitfalls you need to be aware of.
Obviously, some of these factors are out of your control. But if you’re considering signing a lease on a new dispensary space, here are four key considerations to keep in mind:
- Understand the Landscape
- Know Your Rent-to-Revenue Ratio
- Be Realistic About Licensing
- Trust Your Gut
Ready? Let’s dive into each one in-depth.
Leasing Dispensary Space: Understanding the Landscape
First things first: When you’re evaluating a potential space to lease, does it have the basic physical features a dispensary needs? Consult your dispensary business plan for a refresher; these features should include:
- Secure warehouse or storage space
- Ample floor space for a welcoming and natural customer flow
- Inviting bathroom space for customers
- Processing/packaging space
- Shipping and receiving area
- Functional utilities, including high-speed internet
On a related note: Does the location meet all the legal criteria in terms of distance from schools, parks, or other neighborhood features? Do the location’s accessibility and traffic patterns support a successful dispensary?
Then there are the legal and social landscapes to consider. Are there serious challenges to cannabis access in your municipality? In California, for instance, some two-thirds of municipalities ban the sale of cannabis. Are the city (and neighborhood) cannabis-friendly? Are there steps you can take to sway locals’ opinion in favor of cannabis, or is that too much of a reach?
Leasing Dispensary Space: Understanding Target Rent-to-Revenue Ratio
If you’re considering a commercial space to lease, you know there are a number of formulas to keep in mind. One of the most important is what’s called the “rent-to-revenue” ratio: The portion of your total revenue that goes towards property-related costs, including your base rent and expenses related to upkeep or other “triple net” charges. Triple net (NNN) leases, of course, including all property taxes, building insurance, and maintenance costs. Do the math and don’t leave any of these costs out.
While every industry has a target rent-to-revenue range, the final number is dependent upon a number of highly specific factors such as local tax rates, employee costs, and so on. In the cannabis industry, a figure of 15% or below is considered “healthy.” Creep much higher than this and you might find there’s no way for you to meet your profitability targets.
What’s more, you’ve got to be looking ahead: Because commercial leases often include built-in price increases, you’ll want to factor these in as well. The more you can do to reduce your downside risk—your liability in case of losses—the better shape you’ll find yourself in when the inevitable financial challenges arise.
Leasing Dispensary Space: Licensing Time Frames? Assume the Worst
With all the energy and excitement around the legal cannabis market, it’s natural that many entrepreneurs have stars in their eyes when it comes to the licensing process. But don’t fool yourself: As many would-be players in the world’s largest legal cannabis market found out the hard way, sometimes the process doesn’t work out as intended. Add to that legal challenges from anti-cannabis activists (or even allies seeking to improve the licensing process) and what looked like a clear path to opening day can suddenly seem far more torturous.
Fortunately, there are things you can do to protect yourself. Engaging with a potential landlord about the potential for delays can help you negotiate a longer pre-opening period; one solution is to add additional months to the back end of a lease to make up for those early months paid at the reduced pre-open rate.
And some commercial real-estate contracts include a “kick-out clause.” These allow a tenant to break the lease in the event of major delays like licensing snags. Conversely, though, these allow a renter to evict a tenant for non-profitability, hence the name.
Make no mistake: Even if you’re allowed to bail out of an unwinnable situation, you’ll still be on the hook to some extent. But having a contingency plan in place can really save your hide in the event a worst-case scenario comes to pass.
Leasing Dispensary Space: Keeping Your Cool (and Your Money)
We’ll close with a piece of advice that’s applicable to any life challenge, not just leasing dispensary space. Sometimes, in the words of someone or other, you just got to know when to fold ‘em.
Make no mistake: The thrill and the promise of opening a dispensary are real, and—despite the aforementioned consolidation happening in many markets—there are still plenty of incredible opportunities to be had in the cannabis realm. But that doesn’t mean that all deals are meant to happen. If you feel yourself hesitating because “the ideal location” comes with a number of logistical (or, worse still, legal) challenges, it pays to go with your gut.
We know that the search for a great dispensary location can be long, hard, and frustrating. But if a deal just isn’t right for one reason or another—like if a potential landlord isn’t willing to collaborate in a mutually beneficial way, for instance—having the power and the self-knowledge to say “No” is, ultimately, the single best tool you can have at your disposal as a potential renter.