NEW YORK (MainStreet) — A year into the legalization of recreational marijuana, 2015 may have what it takes to launch the nation’s first reefer Real Estate Investment Trust (REIT).

“A marijuana-related REIT will come together as more real estate experts enter the playing field,” Scott Greiper, CEO with Viridian Capital & Research in Manhattan. “But as of yet the amount of capital required to build out a REIT has yet to come to market.”

That's because marijuana is still classified a Schedule 1 drug under the Controlled Substances Act (CSA).

“When grow facilities are in a zone for marijuana, it’s triple the price,” Greiper told MainStreet. “But larger investors that have the amount of capital to build out these facilities are still concerned about federal illegality.”
Similar to a corporation, REITs are required by the IRS to pay out at least 90% of their incomes to investors who hold units much like shareholders who own stock in a company. This tax stipulation has warded off real estate investors, such as MJ Holdings in Miami, from launching a pot REIT.

“It’s the inability to draw on conventional financing for leverage to increase returns that has prevented such a REIT from launching,” said Adam Laufer, co-CEO of MJ Holdings. “We don't want to have to distribute 90% of our revenue under IRS rules. We'd rather retain earnings to grow the business in different verticals.”

REITs are a collection of properties and mortgages offered as a unit investment trust, representing a fraction of ownership.

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“The challenge would be putting a team together that had real estate experience, including former REIT operators who know the complexities of the cannabis real estate market, in order to structure the REIT vehicle in a way that secures the most benefit for shareholders,” said Leslie Bocskor, managing partner with Electrum, a a boutique consulting firm focused on medical marijuana. “To do it right would require a significant time and monetary investment.”

Providing higher yields for its holders, REITs tend to be less volatile than traditional stocks, because they correlate with the real estate market and not the stock market but yield would be on a smaller scale for pot.
“Dollar figures on marijuana properties are small compared to properties most REITS buy, which are office buildings and shopping malls, for example, and transaction costs are high relative to purchase prices for a pure play REIT,” Laufer told MainStreet.

While the federal law prohibiting the distribution and use of marijuana is not a barrier in and of itself to establishing a marijuana-related REIT, varying state laws could be.

“It takes time to line up the structure, paperwork and opportunities necessary to launch a successful REIT,” Bocskor told MainStreet. “Since each state has a different regulatory framework, a REIT would have to be nimble and heavy on due diligence and local representation.”

It’s the structure itself that poses a problem.

"The lack of flexibility in a REIT was concerning to us,” said Jack Schrader, co-founder of Articulated Investors, which is leasing a $600,000 warehouse in Rifle, Colo. to the L.E.A.F. Aspen dispensary. “We decided to sacrifice the REIT's tax advantage because we didn't want to be bound by the prescriptions of being a REIT. We felt an LLC was a better structure for us for the flexibility it affords."

Despite the legalities and structural limitations, a REIT is bound to happen soon enough.

“The law is not preventing a cannabis REIT from coming together,” Bocskor said. “It’s more likely that the adjusting risk/reward ratio has been changing to make it more palatable.”

-Written for MainStreet by Juliette Fairley