Marijuana Dispensaries Are Here and Now—This Is How the Real Estate Is Playing Out
New York is slowly but surely getting into a California state of mind with ground-level retail marijuana dispensaries beginning to pop up across Manhattan. So far only a small handful of companies have been licensed by the New York State Health Department to sell medical marijuana in New York since Gov. Andrew Cuomo signed a 2014 bill legalizing medical cannabis (New York’s medical marijuana program launched in January 2016). And only three dispensaries have opened thus far, but experts say more are on their way.
“The addition of these registered organizations will make it easier for patients across the state to obtain medical marijuana, improve the affordability of medical marijuana products through the introduction of new competition and increase the variety of medical marijuana products available to patients,” New York Health Commissioner Dr. Howard Zucker said in a press release this summer after the announcement that five more dispensaries would open in Manhattan and Brooklyn over the next year.
That means both landlords and real estate brokers are having to take a crash course on the logistics of hosting a tenant that deals in medical marijuana and the byzantine regulations surrounding a dispensary, including high levels of security and accessibility for extremely ill customers.
“At the moment, it is very much a novelty; people are not quite sure what to expect,” said Timothy King, a managing partner at CPEX Real Estate. “So while it might not be fair to paint a medical marijuana dispensary with the same brush as say a methadone clinic, it is possible that is seen as a noxious use in the minds of many landlords. But I think you will start to see that change as the concept of medical marijuana is less new to the New York area and people see what it is all about and what the clientele looks like. Perception frequently trumps reality.”
The latest landlord to embrace the new face of pot is Telepro Realty—owned by Kent Charugundla, the founder and chief executive officer of Eagle Teleconferencing Services. Telepro Realty leased a roughly 2,200-square-foot ground-level retail space at 142 East 39th Street between Lexington and Third Avenues to Etain,a women-owned medical marijuana dispensary, in the second quarter of this year. Asking rent was $25,000 per month, but all of the parties involved declined to comment on the true value of the several-years-long lease. The dispensary began taking appointments in July, and a few so-so Yelp reviews, which complain of the high prices yet praise the convenience, are already in.
“It was an unconventional deal because of the use, but rentwise, it would be competitive to what any other tenant would have paid for the space,” said Jake Velazquez of Compass, who represented the tenant. Michael Azarian, the director of retail services at Cushman & Wakefield, represented the landlord.
Both brokers said that it was a unique and, at times, difficult deal to negotiate.
“I get blow back on restaurants, so you can only imagine the blow back I got from landlords on this,” Velazquez said of his experience hunting for space. “Usually, they would just say, ‘Ownership won’t take that use,’ and we’d have to move on. It’s a new industry with a lot of regulation, so everyone is sensitive about it. A lot of landlords don’t want to be early adopters of something like this. I got crazy questions about what kinds of smells it would produce.”
However, since the dispensary is not allowed to sell any marijuana flower and will only deal in oils intended mostly for pain management, smell isn’t a particular issue at the moment, according to Azarian. Generally speaking, landlords, he added, were more concerned about consumption on site, liability and security.
“It highly regulated and highly controlled. This isn’t going to be a place where people will be hanging out,” he said.
Velazquez added that it was also a challenge to find a space in the city that met both state and federal regulations and was extremely accessible for patients. The East Side of Manhattan was selected because of its proximity to city hospitals. Also, like liquor stores, dispensaries are not allowed near schools and churches. Unlike liquor stores, multiple state agencies have to approve the location—a frustratingly tedious process.
High Times reported that the state’s program failed to receive even 1,000 patients in its first year. That is partially because the state only licensed five dispensaries and only allows them to sell expensive, pharmaceutical-like products. They have since approved chronic pain and PTSD as qualified conditions, but businesses say they have been unable to turn a profit since they opened nearly two years ago.
“I believe this to be a true statement, which is no registered organization has made even a penny in profits since day one,” Ari Hoffnung, CEO of Queens-based Vireo Health of New York, told USA Today.
Velazquez focused his search near transportation hubs like Union Square and Grand Central Terminal. He said that, while Etain wasn’t initially looking for ground-floor retail, it quickly became the best option.
“For one, a retail storefront comes with a certain level of signage,” he said. “It is sort of a first for a dispensary in New York to have pedestrians seeing a dispensary as they walk by.”
Azarian said that the deal was able to come together with relative ease because the landlord in this case is an independent owner with no partners and not an institution.
“He was able to make the sole decision as to whether he would accept the use or not,” Azarian said. “He is also in the tech world, so I think he has a very different outlook than your typical New York landlord. He has a futuristic and visionary perspective and thought that this could be a cool thing to be a part of, considering that [Etain] is a grassroots operation in New York.”
The nature of the deal, however, necessarily differed from your standard retail lease, according to Azarian. For one, the duration of lease had to be shortened to reflect the maximum licensing period and renewal process for a dispensary. The final lease came with “option periods,” he said.
“One thing we learned is patience,” Azarian said. “Once the tenant was able to commit to the space and the landlord was able to commit to the transaction, there are regulator procedures that have to play out and that takes time. It’s not a ‘one, two, three’ thing.”
“I think it takes some one who has an open mind and understands that this is going to become more common in our state and city,” he added. “There is still a stigma to overcome, but now that these tenants are highly funded and backed by venture capital, they are becoming more and more attractive to landlords.”