Academic journal article Journal of Real Estate Portfolio Management

Using a Cannabis Real Estate Investment Trust to Capitalize a Marijuana Business

Academic journal article Journal of Real Estate Portfolio Management

Using a Cannabis Real Estate Investment Trust to Capitalize a Marijuana Business

Article excerpt

With the rapid rise of the marijuana industry in the states where its sale and use have been allowed,1 and with the substantial profits enjoyed by businesses engaged in the industry, it is not surprising that more and more investors are interested in participating. Despite significant risks, small groups of investors have pooled resources to finance these businesses and to provide facilities for their operation, but some are looking to expand the scope of their operations by forming or converting to real estate investment trusts (REITs). The purposes of this paper are to describe the rise of the industry, discuss the potential rewards and risks of investing in these businesses, and identify the potential opportunities that exist for those who wish to use REITs to participate in this industry.

REIT Fundamentals

A REIT, according to the National Association of Real Estate Investment Trusts (NAREIT),2 is a company that owns or finances income -producing real estate. Similar to mutual funds, REITs provide investors potential regular income streams, diversification within the real estate asset class and across other asset classes, and long-term capital appreciation. They typically pay out all of their taxable income as dividends to shareholders, who then pay taxes on those dividends.

There are REITs in every state for nearly all property types, including multifamily apartments, hotels and motels, industrial properties, nursing homes, hospitals and other medical uses, office buildings, shopping centers, storage facilities, university student housing, specialty properties (e.g., outdoor advertising), and even timberlands. The NAREIT finds that stock exchange listed U.S. REITs own nearly $3 trillion in gross assets in the U.S., comprised of over 190,000 properties.

To qualify as such a trust, NAREIT states that a company must invest at least 75% of its total assets in real estate, derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property and/or from sales of real estate, and pay at least 90% of its taxable income in the form of shareholder dividends each year. In 2014, REITs paid more than $81 billion in dividend income. As well, the firm must be an entity that is taxable as a corporation that is managed by a board of directors or by trustees, have at least 100 shareholders, and have no more than 50% of its shares held by five or fewer individuals.

The benefits to REIT investors include diversification, inflation protection, and liquidity. Equity REIT returns, long term, have a relatively low correlation with stock market returns, thereby increasing expected returns per unit of risk. Historical compound annual total returns have generally outperformed large- and small-cap U.S. stocks, as well as U.S. bonds. Returns have consistently outpaced the Consumer Price Index, so REITs are an inflation hedge, as well. And being that there are more than 200 publicly traded REITs that are traded like other equities, they overcome the illiquidity problem inherent in investing in real estate as a title holder.

As noted above, REITs have been used to own and manage a variety of different real estate properties, and as the use of marijuana in some capacity has recently become allowed by more and more states, some investors have wondered about the possibility of using such an entity to invest in the cannabis industry.

Rise of the Marijuana Industry

As of 2016, more than 25 states and the District of Columbia allow marijuana to be used for medical purposes, while four of these states (Alaska, Colorado, Oregon, and Washington) also allow it for recreational purposes.3 As a result in these states, business opportunities have arisen in this industry like never before. These opportunities should only expand as more states decide to allow the sale and use of marijuana.

For example, in Colorado, which elected to allow the sale and use of marijuana for medical use in 2000 and recreational use in 2014, licensed stores earned more than $699 million in 2014 and $996 million in 2015 from the sale of marijuana for both recreational and medical purposes (Huddleston (2016a), an increase of almost 42% in one year. …

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