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The Canna-Real Estate Boom

Rocky Mountain High Part II

Written by Luke Burgess
Posted February 3, 2016

This is a continuation of Rocky Mountain High Part 1: "Touch vs. No Touch Cannabis Companies."

Talking with taxi and Uber drivers, people I ran into smoking cigarettes, bartenders, waiters and waitresses, and other random people I met in Denver, I asked what they saw as the biggest change in Denver since recreational marijuana became available in 2014.

I was expecting most to say that the biggest change was people walking around high all day.

But what I wasn't expecting was, “Well, the value of my house went up.”

Believe it or not, the appeal of recreational marijuana use has actually prompted many to move to Colorado.

The state's population growth rate is actually double the national average right now.

This has caused real estate to boom. One lady happily told me that her house went from being worth $150k to $250k right after Colorado legalized recreational use. Others lament to tell me that the rent in Denver has soared.

But aside from residential, the space available for marijuana production is perhaps the most valuable commercial real estate in the city.

Commercial Canna-Real Estate

Between 2009 and 2014, the cannabis industry's appetite for real estate was voracious. New grow setups grabbed nearly 36% of all industrial space leased in Denver during that five-year period. And for lower-quality warehouse space, lease rates jumped 56% in the same time.

Today the cannabis industry occupies at least 3.7 million square feet of industrial space in Denver, clustered in areas of older warehouse stock.

But that's still not enough to support the demand.

While I was out in Denver last week, several different growers told me that there wasn't a single square foot of available commercial space to grow in the city.

That's because Denver has very strict regulations on exactly where cannabis production facilities can be located.

In Denver, marijuana cultivation is typically permitted only in areas zoned for light and heavy industrial uses. That's only about 3% of Denver's land mass.

Meanwhile, there are still many property owners who won't consider leasing to marijuana growers because of loan constraints and the conflict with federal law.

And to add to all this, the cost of the often extensive electrical and HVAC upgrades required for marijuana cultivation can also be a deterrent.

In short, the locations available for commercial cannabis cultivation are in limited supply. And here's the real kicker...

These locations are quickly being bought up and held by real estate acquisition, rehabilitation, and leasing firms.

And this is where I personally believe serious money is to be made from the legal recreational cannabis industry.

Companies like Commercial Marijuana Real Estate (private) and HMTF Cannabis Holdings Inc., a subsidiary of Home Treasure Finders Inc. (OTCBB: HMTF), are acquiring large free-standing buildings, land parcels, and greenhouses to hold, rehab, and lease to Colorado's commercial marijuana real estate market.

**I have to stop and give an investor warning about HMTF. Regardless of how good the idea of buying and holding commercial real estate available for cannabis production sounds, HMTF is a $0.04 stock with no volume... Oh, I'm sorry, the average three-month daily volume is 413. I wouldn't own this stock in my wildest, most reckless dream.**

The point is, I believe that a significant amount of money can be made in the next state that legalizes marijuana for recreational use through private holdings of commercial real estate that will be available (but limited) for growing cannabis.

What state will legalize recreational use of marijuana?

I assure you, I wish that I knew.

But in considering an investment into holdings of commercial “canna-real estate,” states with advanced medical marijuana programs that are smaller in size (to intrinsically restrict available real estate overall) would perhaps be the best places to begin looking. These would include states like Maine, Rhode Island, Connecticut, and Vermont.

Of course, state and local regulations are ultimately going to determine where cannabis production facilities can be located. And those regulations outside of Colorado and Washington State aren't written yet.

Canna-Conclusion

My conclusion is that — aside from the fact that you can basically add the prefix “canna-” to practically anything — there are many lower-risk opportunities on the “no touch” side of the cannabis industry.

I believe that the federal government hasn't completely made up its mind yet over whether recreational use of marijuana is harmful, beneficial, or simply neutral.

My assumption is that the Colorado and Washington State recreational laws are being allowed by the federal government so they can be analyzed as “test markets” of sorts for the cannabis product and industry.

That said, however, I don't believe there to be any conspiracy theory there. It's just good common sense to analyze data relevant to long-standing questions, such as examining the use of harder drugs, in order to better understand marijuana's “gateway” label.

I would also assume that the federal government is watching the number of “medical” users who allow their licenses to expire. There no doubt were (and still are) thousands of marijuana users who claimed a medical use yet only sought recreational intoxication.

The number of “medical” users who allow their licenses to expire will help the federal government better understand how many people are actually seeking to use the drug for medical purposes and how many just want to get stoned.

And the federal government can get all this really important information by essentially doing nothing at all.

In my personal general estimation, I would say recreational use of marijuana is largely harmless overall. And I do believe that the federal government will agree one day — although I do not expect federal legalization anytime soon.

And I am mildly confident that the federal government will keep out of Colorado and Washington State's legal cannabis industries for the time being — although a change in the presidential administration can also be seen as a potential threat to the industry.

However, at the end of the day, I personally feel safer investing in the “no touch” side of the cannabis industry.

And I believe there is big money to be made with holdings of commercial “canna-real estate” in states that next legalize the plant for recreational use. It's a business model that's been proven to work time and time again...

  1. Control the supply.
  2. Limit the supply.
  3. Leverage the deficit.

Good Investing,

luke signature

Luke Burgess
Energy and Capital

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