Medical marijuana, now legal in 28 states and the District of Columbia, officially entered the New York Stock Exchange in Dec, 2016. Innovative Industrial Properties (IIP), a San Diego-based real estate investment trust (REIT) is leading the cannabis charge with the purchase of a 37-acre production property in Orange, New York from PharmaCann.
PharmaCann, one of only five companies granted a N.Y. medical marijuana grower license, will remain on the property as lessee under a triple net leaseback agreement. Given the state’s blessing on this arrangement, IIP plans to continue this trajectory, pledging to work exclusively with state licensed medical growers with an emphasis on leaseback agreements.
However, others are reluctant to take on the non-traditional risk associated with legal cannabis, primarily because marijuana is still listed as an illegal Schedule I drug under federal law, alongside ecstasy and heroin. Vivien Azer, a cannabis analyst at the New York-based market research firm Cowen Group, suspects that large investors such as Goldman Sachs and Phillip Morris will only enter the cannabis market after full federal legalization.
It is still unknown how the incoming Trump administration will approach the marijuana conundrum. Since much of the Trump campaign rhetoric focused on upholding state’s rights, many cannabis proponents hope that Congress will introduce legislation to remove marijuana from its Schedule I classification and place it on a regulatory path similar to that of alcohol and tobacco.
Despite the reluctance of Wall Street to participate in the current market, the march towards national legalization is only growing stronger. Pew Research reports that 57% of U.S. adults favor legalization and 37% disapprove, a stark contrast to a decade ago when just 32% approved and 60% were opposed. Accordingly, seven of the eight marijuana ballot initiatives proposed in 2016 passed. Legal marijuana sales are expected to grow from $7.1 billion in 2016 to a staggering $22.8 billion in 2020, per the analysts at ArcView Market Research.
The hesitancy of institutional investment firms to participate may present a rare opportunity for smaller investors who are ready to jump on the “Green Rush” to land a windfall of profits. Some states that recently decriminalized the recreational use of marijuana, wrote stipulations into their law that prevents the big banks and corporations from participating in the market for a period of five years. This opens the door for entrepreneurs and private investors to capture a percentage of market share for the first several years.
Innovative’s principals, who have previously raised more than a combined $30 billion for traditional REITs, are following the trend and betting that medical marijuana-focused REITs will also succeed. Innovative’s stock (IIPR) opened at $19 a share on Jan 26, 2017, with an IPO of 3.35 million shares. Whether IIP’s leadership in the medicinal marijuana market will yield substantial results remains to be seen, but surely the company is counting on the old axiom: fortune favors the bold.
