Growing market

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Six months ago, James Lavallee signed a two-year, $1,000-a-month lease in Hallowell where he hopes to open a recreational marijuana retail store on bucolic, antiques-happy Water Street. It’ll have an old-fashioned theme and a staff of bow tie-wearing employees.

If he can get a retailer license next year.

If he can’t, he just blew $24,000.

The Augusta chiropractor’s eyes are open to the risks.

“Location, location, location,” said Lavallee, who leased the still-shuttered pizza shop. “It’s a gamble: I could be paying $24,000 for nothing.”

In Wilton, Gil Reed is fielding calls “from all over” from marijuana growers who want to lease space in his former Bass Shoe shop. He said yes to one, in an unattached building, and no to others “because the smell is so bad”; he doesn’t want to bother other tenants.

“I sold some of my personal property to pot growers,” said Reed, head of Western Maine Development Group. “There’s a huge demand. I just sold 250 acres and that’s what they’re doing. It’s crazy — money doesn’t seem to be an object. I don’t understand it.”

Across Maine, the real estate market is white hot as buyers and lessees snatch up properties in the hopes of growing or selling legal recreational marijuana in 2018.

Lawmakers are still hashing out what that lucrative market will look like and who’ll get a piece of it.

This week, the Marijuana Legalization Implementation Committee of the Legislature recommended spiking part of the new voter-approved law that capped recreational marijuana cultivation at 800,000 square feet for the entire state — square footage that industry insiders believed has already been snapped up, and then some.

“I think if we create a cap, we’re in the position of creating the winners and the losers,” said state Rep. Teresa S. Pierce, D-Falmouth, committee co-chairwoman.

It’s a market, so let the market decide, she said.

Cities and towns will still have final say: You can grow here or you can’t. Or you’re severely restricted — maybe even after you’ve bought 250 acres or signed a two-year lease.

It’s all speculation. With hundreds of millions of dollars in the balance, it’s game on.

‘Phase 1’

Justin Lamontagne, a broker and partner at NAI The Dunham Group in Portland, “vividly” remembers interest starting at a trickle six years ago.

“We took these calls with a little bit of cynicism,” Lamontagne said last month at the Maine Real Estate & Development Association’s second conference this year devoted to commercial real estate and marijuana. “We kind of chuckled, ‘Oh, really, weed?’ thinking it was a bunch of potheads.”

There’s no more chuckling: Lamontagne estimated that in 2016, medical marijuana secured as much as 350,000 square feet of real estate in southern Maine for $15 million to $20 million. Most of that was before the controversial referendum legalizing recreational marijuana in Maine narrowly passed in November.

“There is a big boom,” he said. “A lot of people are building facilities right now, renting facilities right now, putting in lights. To me, it’s risky because we don’t know exactly where it’s going. I’m coaching them to think if this doesn’t work out, what’s going to be next?”

Brett Messer, owner of Brigid Farm in Saco, is both a medical marijuana caregiver licensed by the state to grow for others and a consultant to those setting up operations, so far only medicinal ones. He’s also recently moved into sub-leasing properties for growers.

Would-be growers need 200 to 1,200 amps of three-phase power, he said. At least 1,000 gallons of water a day. Steel doors. A commercial kitchen. A horticultural supply shop nearby.

“Where you really start to spend a lot of money is when you go into the commercial, industrial spaces, the warehouse-type stuff: 3,000, 4,000, 5,000 square feet,” Messer said. “It’s very typical to see a $100,000 investment go into those projects.”

Locally, Kevin Dean and Emile Clavet grabbed the 130,000-square-foot former Cascade Auburn Fiber in February for $2 million after it had been on the market only two weeks.

They were silent on the investment at the time. In May, the facility received a city permit for $100,000 of work described as “renovations for grow facility, Phase 1.”

Bangor company bought the former Town & Country Foods in Greene in May after it had been for sale for just three days, planning to grow medical marijuana for now and hoping to convert to recreational in that 13,340-square-foot space.

The sale was made even as Greene weighs whether to impose ordinances that limit marijuana in town — and that’s the crux of most of the current risk.

Six months ago, Messer said, he considered Saco marijuana-friendly. Now, not so much. This spring the city flirted with banning the sale and cultivation of recreational marijuana.

“I would put them at the bottom (on a list) of friendliness at this time,” he said. “There’s just so many unknowns with municipal regulation. You have to really be careful what you advise a client to invest in.”

Among NAI The Dunham Group’s new listings sent out in a marketing email Thursday: 14,000 square feet in Bridgton touted as a “cannabis building for lease.”

Last month, Bridgton enacted a moratorium on social clubs and recreational retail sites but hasn’t weighed in on grows.

Talking fears

Landlords in 2017 may be more comfortable leasing spaces to growers — and reaping the benefits of charging higher rents — but it’s not without challenges.

“I say they’re good tenants, and they are, but they’re not great neighbors, per se,” Lamontagne said.

Think smell, as Reed discovered.

Farmington, which J. Stevens Kaiser, head of code enforcement and planning, estimates has three medical marijuana growing operations, is in the middle of drafting an odor ordinance and eyeing zoning changes for recreational marijuana.

The largest operation in his town is the 51,877-square-foot former Farmington Shoe Shop. Kaiser has toured inside. He said it’s half growing space, half associated use, including labs, divvied up for multiple caregivers.

“There’s odor and it’s being worked on,” he said. “In this particular case, it’s going to range from $40,000 to $80,000 to install (a fix).”

Another hitch in this booming market: Marijuana, federally, is still illegal.

“It’s been a challenge in Maine and all around the country for banking, financing,” said Jacques Santucci, co-founder of Wellness Connection, which supplies all four of its medicinal marijuana dispensaries out of a 40,000-square-foot operation in Auburn.

“There is no equity,” he said. “When you raise money, you cannot give equity. It’s difficult. If you’re looking for a loan and they’re looking for collateral, you cannot use the product as collateral.”

Landlords who still hold a formal mortgage on their property are also arguably at risk if their risk-adverse lender finds out.

“If they have a loan on that real estate, they need to understand, if you notify the bank, they will not be happy,” Lamontagne said. “That’s where we’ve run into some serious issues where somebody just runs 1,000 mph (and) does one of these caregiver deals and then all of a sudden the bank is very upset. In theory, you could be put on default on your loan.”

Sometimes lenders put two and two together on their own, according to Eaton Peabody’s Gretchen Jones.

“What happens, I have a financial institution client call me and say, ‘I know that this customer is running a marijuana business because their electric bill has skyrocketed in the last six months. What do I do?'” Jones said. “The financial institutions have to file suspicious activity reports to financial regulators. Even though it’s legal under state law, it’s still illegal; it’s a crime. The banks and the credit unions are so heavily regulated and so under scrutiny at all times that many of them just simply don’t want to take the risk.”

No Maine credit union has yet had its books examined by law enforcement, “but that’s one of their biggest fears,” said Elise Baldacci, assistant vice president of governmental affairs at the Maine Credit Union League. Right now, a small number are willing to take deposits and help with payroll, but none are making loans in the industry.

“We really need more clarity at the federal level,” said MCUL President and CEO Todd Mason. “With the change in administration, they’ve signaled that they may start going after marijuana business owners. It just puts more unsureness in the marketplace and the marketplace needs to be sure.”

‘My friend told me I could take $10,000 and do this … ‘

Just who’s taking the risk?

A little bit of everyone.

Santucci suspects most of the money to buy properties outright is coming in from out of state. Wellness Connection wants in on the recreational market. As rules are set and approvals handed out, he’s hoping established companies like his own have an edge.

Even with patient numbers and prices dropping in the medicinal marijuana market, he sees room for both.

“Recreational is a little like going to buy a six-pack with friends on a Saturday night,” said Santucci said. “Medical has a life of its own because it’s different quality. Towns are calling us to see if we’ll open a dispensary there; we’re just waiting. We’re working with the state to get good rules.”

Legal marijuana, both types, is projected to be a $290 million market by 2020, he said.

Catherine Lewis, chairwoman of Medical Marijuana Caregivers of Maine, said the state has close to 4,200 registered caregivers, people approved to grow plants for up to five patients at a time.

She estimates one-third are looking to grow recreational marijuana.

“I do have many people that we’re hearing from from out of state that are moving to Maine specifically for that reason,” Lewis said. “We’ve actually had a couple that have moved from California. I’ve had some from Colorado. It’s funny that they’re coming from states that already have programs, but they think Maine’s laws are better and the market is not saturated. (Others) think that they have technology and ideas that they can just bring here and be ahead of the game.”

Half the people Messer’s hearing from are Maine caregivers who want to scale up, 20 percent are from out of state and 30 percent are Maine people with zero past experience. 

“It’s really a very wide demographic: It’s young people, it’s old people, it’s people looking for a career change, ‘My friend told me I could take $10,000 and do this … ‘” he said. “People are talking about investing their life savings. There’s some anticipation of a reward at the end of the tunnel, whether that’s vast riches or just a comfortable lifestyle.”

It could be close to a year before investors find out whether those gambles in the market are paying off.

State Rep. Pierce said the Marijuana Legalization Implementation Committee is right now drafting a bill that would bring clarity and, in some cases, undo parts of the referendum, such as the square-footage cap.

That bill will have public hearings and a vote by the full Legislature. If it passes, it heads off to rule-making, which can take several months.

“Once all that’s signed off on, then the market can open,” Pierce said.

Asked if that might be deep into 2018, she said, “I hope not, but probably.”

Lavallee, who signed the lease on Water Street in Hallowell, jumped on that open storefront hoping to get in on retail’s ground floor.

“It gives you a huge potential for growth, but also, I think it’s going to be a sustained market,” Lavallee said. “People are going to have job security, business security. I work in health care as a chiropractor. Health care is crumbling; I’m making significantly less than I did five years ago. Everybody’s got a $6,000 deductible so they don’t come in, is what happens, or they don’t pay their bills.”

Lavallee, who’s also a caregiver, has experience in the marijuana industry with a store in Newport selling growing supplies. He’d like to add retail there, if he can get a license.

“I hear everything,” he said. “Some of these guys are gobbling up large — I mean large — areas for grow houses and I don’t know how they’re even doing that. What are you going to do with an 8,000-square-foot warehouse? It’s not recreational yet. I’m hoping it’ll create a big boom.”

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“It’s a gamble — I could be paying $24,000 for nothing.” James Lavallee, Augusta chiropractor who’s signed a two-year lease for a storefront on the hopes he can sell recreational marijuana there next year.

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“It’s crazy — money doesn’t seem to be an object. I don’t understand it.” Gil Reed, head of Western Maine Development Group, who recently sold 250 acres to a company planning to grow marijuana on the property.

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“A lot of people are building facilities right now, renting facilities right now, putting in lights. To me, it’s risky because we don’t know exactly where (the recreational marijuana market) is going. I’m coaching them to think if this doesn’t work out, what’s going to be next?” Justin Lamontagne, broker and partner at NAI The Dunham Group

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“With the change in administration, they’ve signaled that they may start going after marijuana business owners. It just puts more unsureness in the marketplace and the marketplace needs to be sure.” Maine Credit Union League President and CEO Todd Mason

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“People are talking about investing their life savings. There’s some anticipation of a reward at the end of the tunnel, whether that’s vast riches or just a comfortable lifestyle.” Brett Messer, medicinal marijuana caregiver, consultant and owner of Brigid Farm in Saco

James Lavallee, an Augusta chiropractor, has signed a two-year, $24,000 lease for the former Hallowell House of Pizza at 108 Water St., background, hoping to get a license and open a retail shop there next year; right now, it’s all on spec and hope.
Real estate broker Justin Lamontagne, left, attorney Gretchen Jones from Eaton Peabody, grower and consultant Brett Messer from Brigid Farm, attorney Dan Walker from Preti Flaherty and Jacques Santucci, consultant and co-founder of the Wellness Connection, at the Maine Real Estate & Development Association’s “Darkness Into Light: Cannabis and its impact on commercial real estate in the post-prohibition era” conference in Bangor last month.
The former Town & Country Foods business in Greene was purchased in May by a Bangor company looking to grow medicinal marijuana there now and expand to recreational marijuana next year, another example of the state’s hot real estate market around cannabis.

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