Legal cannabis is good news for Opportunity Zone investors
By Opportunity Zone Expo Staff
Medical and recreational cannabis industries are fair game for OZ investors, with developers looking to Opportunity Zone capital to fund a dramatic expansion in coming years.
“There’s tremendous overlap between the two,” says Eric Kodesch, a taxation attorney with Lane Powell. “If you look at the maps, the Opportunity Zones are in rural areas that could be excellent for cannabis growth operations, and urban areas that would be excellent for retail sales and dispensaries.”
However, Opportunity Zone investors are barred from investing in “businesses of sin” such as liquor stores, massage parlors, hot-tub manufacturers, and even country clubs — but the bad-business list referenced by the OZ statute was drawn up in 1986 and makes no mention of America’s burgeoning cannabis industry.
“Cannabis wasn’t on the radar back then,” explains Kodesch.
Some investors and funds might be wary of cannabis projects, Kodesch adds. Still, with the North American legal-cannabis market expected to boom from $9.2 billion in 2017 to $47.3 billion by 2027, significant injections of OZ capital are all but inevitable.
“There will probably be people who specifically set up OZ funds to invest only in the cannabis business,” he predicts.
Opportunity Zone investors are free to pour capital into cannabis-related businesses in states with legal marijuana, even if they themselves are based in jurisdictions where cannabis remains illegal, says James Mann, a partner and cannabis tax-law expert at Greenspoon Marder.
“What’s illegal under federal law is trafficking, but if you invest in a cannabis business you aren’t trafficking,” he explains. “Many of our investors in cannabis reside in states where cannabis is illegal.”
In fact, existing federal laws against cannabis are actually stoking demand for private-sector investments administered through Opportunity Zones, says Pete Asmus, a California real-estate developer who focuses on the cannabis sector.
“Because it’s federally illegal, no banks are lending,” Asmus explains. “Because of that, the private investment market is blowing up in the cannabis industry.”
Cannabis opportunities will be spread across states like Michigan and New Jersey, where the marijuana industry is in its infancy, and more developed markets such as Colorado and the West Coast. Besides growth and retail operations, support services such as warehouse facilities and testing laboratories will also attract significant capital, Asmus predicts.
“When the goldrush happened, the people making money weren’t the ones looking for gold — they were the ones selling the shovels,” Asmus notes. “In this industry, the shovels are real estate and testing labs.”
Investing in a changing industry, with federal and state regulations in flux, does bring a degree of risk, especially over the envisioned 10-year timeline for OZ investments. Many in the sector expect a wave of consolidation and corporate acquisitions if the drug is legalized federally in coming years.
That might mean cannabis investors face a bumpier ride than those backing more conventional projects. Still, Asmus says, the opportunities are huge, and OZ investors can look forward to netting big profits in years to come.
“The cannabis boom is happening,” Asmus says. “There’s no putting the genie back in the bottle.”