As the calendar flips over from one decade to another, Illinois finds itself in a new era with the 2020 legalization of recreational cannabis. The particulars of this new law, combined with upcoming demand, have created unique opportunities for cultivators, landlords and investors in the industrial arena.
Illinois has limited the number of licenses not only for marijuana dispensaries but also cultivation facilities, with more licenses becoming available as demand warrants. This is rather prudent considering the Oregon Liquor Control Commission recently assessed that state’s cannabis oversupply at more than six years of demand.
Marijuana is still highly regulated at the federal level, which means growers can’t ship their product over state lines. Because of this, the imminent explosion in demand for the drug in Illinois will have a chokepoint as all supply will have to have been cultivated here.
Cresco Labs has been growing cannabis in the state since 2015, when Illinois deregulated the drug for medicinal users. Just as the market is about to expand here to recreational use, the company recently sold its three Illinois cultivation facilities.
In September, San Diego-based Innovative Industrial Properties (IIP) acquired Cresco’s Joliet and Kankakee properties for approximately $46.3 million, which in aggregate represent approximately 100,000 square feet of industrial space. In December, GreenAcreage Real Estate Corp. acquired the 224,000-square-foot Lincoln, Illinois facility for $50 million. Both deals were sale-leasebacks with Cresco signing 15-year, triple-net leases to continue operations in the three plants.
“We had to build a lot of these buildings and put all of our money in because, quite frankly, we couldn’t find landlords willing to lease to cannabis tenants back when we started,” said Joe Caltabiano, Cresco co-founder and president. “I would much rather have found a good landlord early on that that was comfortable within this space.”
Cresco is the only operator in Illinois with three cultivation facilities, the maximum allowed under state law, and currently enjoys an approximate 25 percent market share. In addition to the number of sites, organizations are also capped at an aggregate total of 630,000 square feet for marijuana cultivation.
Based in Chicago, Cresco has a presence in seven states, both on the cultivation and retail side. This includes 23 total production facilities and more than 30 retail licenses. From early on, normalizing and professionalizing cannabis as a legitimate real estate use has been one of the firm’s goals.
Both GreenAcreage and IIP, the two buyers of Cresco’s Illinois cultivation facilities, specialize in marijuana-related properties. Since the drug remains regulated as a controlled substance at the federal level—and state-level deregulation is both relatively new and imbalanced state to state—institutional buyers like large pension funds continue to display some hesitancy to enter the space. That may soon change.
“The pool is getting larger,” said Caltabiano. “There are more and more people investing both in the business side as well as the real estate side. We hope to educate and get people more comfortable with this industry, but it’s still relatively slow developing.”
Though relatively straight forward, there are a number of aspects of a grow site that are particular to marijuana operations, contrasted with traditional indoor farming and other commercial agriculture facilities. For one, these sites must be set back 2,500 feet from anything zoned residential. There’s another catch: Illinois doesn’t want organizations squatting on and reselling licenses, so once the state grants a grow license to an operator, they have six months to begin operations.
The buildings also have a very high level of security. Cameras cover every inch of the property, typically with 20 percent overlap. Biometrics and access control vestibules handle individual admittance to the buildings while trucks are highly monitored at the gates as well as en route via GPS and other methods.
At maturity, adult-use cannabis legalization is projected to bring between $2 billion to $4 billion in annual sales to Illinois. Since operators in Oregon, or any other state for that matter, can’t ship their surplus here, all of that product is going to have to come from within the state. This means there is a lucrative—albeit limited, at the moment—opportunity for landlords to get outsized returns by leasing to marijuana cultivators.