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Cannabis Rescheduling's Potential Impact on Commercial Real Estate

The Drug Enforcement Administration’s plan to reschedule cannabis from Schedule I to Schedule III under the Controlled Substances Act is expected to impact many aspects of the cannabis industry, such as advertising, taxes, research, and shipping. However its impact on the cannabis real estate sector could be particularly pronounced.

As a result of the rescheduling, research centers and foundations, as well as health institutions like hospitals and universities should now have more straightforward paths to conduct research on cannabis. Researchers of Schedule III-controlled substances generally have less regulatory and administrative hurdles, lower barriers and fees related to sourcing materials, and more potential fundraising sources.

Easing these hurdles could spark a wave of cannabis research, generating increased demand for research spaces at existing health and educational institutions as well as life science facilities. Existing research facilities for Schedule III substances provide a glimpse of what this burgeoning market could look like; these institutions already exist and are working with substances such as ketamine, steroids, and other codeine products. There are reasons to temper expectations though - the number of existing Schedule III-controlled substance research facilities in the United States appears limited. For that reason, it remains unclear whether an increase in the number of health and research institutions looking to open facilities to study the drug would actually spur a significant spike in demand for research facilities.

Another potential impact is what, if any, role the Food and Drug Administration (FDA) will have in regulating cannabis products under the new classification. Specifically, it remains to be seen whether the FDA, which already regulates certain cannabis products under the Federal Food, Drug, and Cosmetic Act, would gain additional authority to further regulate cannabis manufacturing facilities, potentially adding another layer of costs that manufacturers would have to grapple with. Manufacturers will certainly be mindful of any potential operating cost increases when they are negotiating commercial leases. We anticipate that if the FDA becomes more involved in regulating cannabis products and as a result operators need to consider potential cost increases, demand for manufacturing space could be impacted and future rental rates affected.

Finally section 280E applies specifically to Schedule I and II substances so when cannabis is moved to Schedule III, 280E should no longer apply however it is still unclear how the new regulations will apply to recreational cannabis. Under that assumption, moving cannabis from Schedule I to Schedule III should allow cannabis businesses to deduct business expenses on federal tax filings, according to industry expert Renata Serban, CPA, CMA of the cannabis accounting firm, Highly Elevated. Presuming that this is the case, there could be significant savings for cannabis companies. There could potentially be more of a windfall if certain lawsuits that are underway result in the IRS being forced to return cannabis company tax payments made in prior years under 280E, although this is still highly speculative.

If that does happen, we expect that many existing cannabis businesses will use the proceeds from tax savings or retroactive refunds to “go vertical”, pursuing other license classes in their markets in order to better control their supply chain. This influx of capital, which the industry desperately needs, should result in stronger demand for quality properties that are viable for use as cannabis facilities; this bodes well for industrial properties with high ceiling heights and ample incoming power as well as retail properties in cannabis-friendly municipalities and zones.

In summary, while the industry still awaits further regulatory clarity related to the rescheduling, we believe that the rescheduling has the potential to positively impact the commercial real estate market. The potential tailwinds created by any increased demand for new research facilities along with the increased flow of capital from existing cannabis companies that are looking to reinvest tax-savings into real estate should outweigh the possible headwind of higher costs to manufacturers if the FDA becomes more involved in regulating the manufacture of cannabis products.

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