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HOW THE MAD DASH FOR HOST COMMUNITY AGREEMENTS IS A WINDFALL FOR LANDLORDS (AT THE EXPENSE OF LOCAL ECONOMIC PROGRESS)

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SOMERVILLE LICENSING COMMISSION DISCUSSES CANNABIS DISPENSARIES IN 2019

 

BY DAVID RABINOVITZ AND GEORGE W. HIGHTOWER

 

Over the last three years, few issues have been as universally controversial in Massachusetts municipal government as the marijuana host community agreement (HCA). The enabling legislation shifted material control over the decision-making process from the state level to the local municipality and was meant to give the local community control over what happens within its borders.

 

However, the deep regulatory expertise was centered in the Cannabis Control Commission, a state agency, leaving most municipalities on their own to find their way through the hazy maze of HCAs. This means understanding a relatively new and complex industry to respond with community-appropriate regulations and ordinances that manage these businesses operating within municipal borders.

 

Aside from traffic concerns that percolated out of the first few stores that opened in November 2018, the one ongoing subject in the press has been tensions between applicants and municipalities over the HCA process. The town of Maynard has recently been in the news for its novel approach toward granting local HCA approval; at the request of an applicant, the town agreed to provide an HCA before a site location was selected. This is the opposite of how other municipalities approach HCAs, and on the surface, it might appear that the town ceded control. However, the contract used by Maynard firmly preserves oversight with the Select Board and is a thoughtful process that attempts to avoid several disruptions to the overall local economic progress experienced in communities throughout the Commonwealth.

 

The Maynard applicant, having demonstrated their financial and operational viability, now has six months to find a suitable location or the host community agreement expires. Once they find a location, the applicant must return to the Select Board for location approval before being released to pursue approval through the planning board and all other municipal departments. This allowed the Select Board to maintain control over all stages of the selection process. Most importantly, it afforded the board the ability to consider all applicants and select the best operator for the town, not simply the one with the deepest pockets who could secure and hold a location indefinitely.

 

It has been argued that landlords are selecting the winners, not municipal boards, and the Maynard approach tips that concern on its head. Maynard maintains complete control while widening the field of applicants to consider.

 

In a typical community, once zoning rules are promulgated and the total possible number of companies the municipality will host is announced, a mad dash of real estate speculation begins.  Cannabis wannabes descend upon every possible landlord, bid up prices, and seek to lock in space in order to eventually apply for a coveted HCA. Some will win, but many more will lose, and soon much of that space that was initially under contract returns to the market. But in the interim, noncannabis businesses are locked out of the market and rents artificially increase, which translates into towns being deprived of revenue for months while storefronts sit idle.

 

Most municipalities require applicants to first secure space before initiating the HCA interview process. When numerous applicants descend upon a community, any available real estate is locked up by prospective applicants in preparation for the local approval process. While seemingly innocuous, empty storefronts—even if held with down payments to the landlord—do not create immediate or sustained economic activity. Empty storefronts do not employ staff or generate tax revenue for the town, leaving a void in purchases of lunch, snacks, coffee, and gas from other local merchants. Plus, the unoccupied space cannot be leased to noncannabis businesses that may be ready to hire new employees and contribute to local economic activity. A likely outcome is that potential tenants seek space elsewhere, which is a “win” for the neighboring community but a clear loss for the host community.

 

A second issue is price gouging. Marijuana applicants are often desperate to lock up space, willing to bid up rates well over market value in order to price out a rival. For example, a landlord in one community had space advertised for $8.50 per square foot. As soon as marijuana entered the conversation, the rate immediately jumped to $11.50. Less than 500 feet away in a comparable building, the owner was courting prospective marijuana applicants at a rate that exceeded $27 a square foot. A third landlord publicly advertised their retail spaces at $14 to $17; however, prospective marijuana applicants were advised to bid at least $25 to be seriously considered. In another town, a shuttered Papa Gino’s valued at $1.1 million was offered for $1.5 million without contingencies. The landlord was aware the property was in the tightly zoned marijuana overlay and demanded a 38% premium. When landlords smell competition in the highly constricted cannabis-friendly zones, rates tend to increase for the entire community.

 

Occasionally, overly aggressive landlords end up undermining themselves. In another Massachusetts town, a building owner offered to evict three small established tenants to sweeten the deal for a higher-paying prospective marijuana operator. Another building owner saw his property bid up temporarily to $500,000. When the hysteria finally cleared and the frantic suitors left, his asking price was reduced, first by 10%, then by 20%.

 

While marijuana entrepreneurs believe they can afford the higher rents based on projected future sales, many smaller conventional businesses cannot. The small operators who compose the fabric and lifeblood of a community can easily be squeezed out during the greenrush for warehouse and retail space. Approving operators without first requiring a defined location avoids many of these issues and can lead to a more rational selection process. 

 

Considering the recent investigation into the matter by US Attorney for the District of Massachusetts Andrew Lelling, the Maynard approach is likely the most well thought and legally sustainable way to address HCAs going forward.

DAVID RABINOVITZ

DAVID RABINOVITZ

David Rabinovitz is the CEO of NewCann Group. He has been involved in the marijuana industry since 2010, is the treasurer of MassCann/NORML, and is a trainer for the Massachusetts Cannabis Control Commission Social Equity program. He also provides consulting and guidance to Social Equity and Economic Empowerment candidates. He is presently raising capital for a Massachusetts marijuana consumer distribution business. Connect with David on LinkedIn.
GEORGE W. HIGHTOWER

GEORGE W. HIGHTOWER

Editor George Washington Hightower has worked in luxury organic cannabis for over 10 years, advising small to medium-sized businesses across the US and internationally. He is general manager of operations for Full Spectrum Botanicals, which holds a patent for combining maple syrup and cannabis into a crystalline powder, and is also co-founder of Stalk & Beans, a Massachusetts-based e-commerce/transport platform.