Could This Marijuana REIT Make Millions, or Are They Just High?

Investing in real estate just got waaay more interesting, dudes! That’s because amid all that stuffy stock-market buzz, a wacky new REIT (real estate investment trust) has just filed to go public—and it’s the first in the country to focus on funding marijuana growers.

REITs, for you rookies out there, are funds that specialize in real estate. So, they use their investors’ money to build shopping malls, hotels, and condo complexes with the hope that their value will rise over time. This new pot-friendly REIT, owned by San Diego investment firm Innovative Industrial Properties (IIP), works exactly the same way, only by investing in facilities that grow, store, and distribute cannabis.

Granted, IIP is concentrating exclusively on medicinal marijuana facilities—so no one’s getting high for fun off investor money.

Nonetheless, this REIT could provide a much-needed infusion of capital for marijuana growers. Currently, although cannabis is legal for medicinal purposes in 24 states and for recreational use in four (which could rise to nine after Election Day), under federal law, marijuana is still illegal—and that keeps most banks from loaning these companies money.

REITs, however, aren’t bound by the same strict principles as big banks. So, IIP can shower ganja growers with cash—and could stand to make huge piles of money for its investors, right?

It could … but this whole scheme could also implode in a funky cloud of smoke.

“With limited information due to the newness of cannabis legalization, there’s not much of a track record or history to determine a cannabis REIT’s future performance,” says real estate and economic advisor Jack McCabe of McCabe Research & Consulting. McCabe also concedes that he hasn’t scrutinized this particular firm’s investment criteria, methodology, or fees.

“The early results show a new and flourishing industry,” McCabe says. “My opinion is that marijuana REITs and investors could see triple-digit profits and growth that could be historic and surpass profits generated by most all established industries.”

Whoa, triple-digit returns! That’s pretty impressive performance for any investment.

“A typical REIT provides a recurring yield and thus competes with fixed-income instruments, such as bonds,” says Paul Habibi, a real estate entrepreneur and professor at UCLA. “The range of REIT dividends can vary widely, but is commonly in the mid-single digits, say 4 to 6%.”

But there’s another caveat: No one knows how the federal government might decide to deal with semilegal cannabis down the road.

“Given medical-use marijuana is illegal under federal law, how could that play out with federal regulation of IIP?” points out David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com.

The IIP (which could not comment), admits that much is still unknown in one of its SEC filings:

“Although the federal government currently has a relaxed enforcement position as it relates to states that have legalized medical-use cannabis, it remains illegal under federal law, and therefore, strict enforcement of federal laws regarding medical-use cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans.”

This murkiness may become even more hazy in the light of the upcoming election.

“My recommendation is: At least wait until the election is over before you invest in something like this,” says William Aronin, a real estate agent and law partner at New York-based Perry & Aronin. “And even in that case, this isn’t the kind of thing where you should invest by opening an ETrade account. This is for a more sophisticated investor who could stand to lose that money in the worst-case scenario.”

“The rewards could be excessive, but until the U.S. federal government decriminalizes marijuana possession and use, the risks are also considerable,” agrees McCabe. “Marijuana presents significant obstacles from a business standpoint, and potential for future prosecution, unlike investing in other REITs. Currently, it’s my opinion it is a high-risk, high-reward investment.”

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