By Opportunity Zone Magazine Staff

On a dusty side-street a stone’s throw from Los Angeles’ bustling Fashion District, beneath a blue sky criss-crossed with towering palm trees and tangled electrical wires, stands a former textiles plant. There’s little to distinguish the low-slung brick building from the graffiti-daubed zipper factories and paper supplies warehouses that crowd the neighborhood — but Jack Boyajian, CEO of development company Basecanna, dreams of turning the run-down facility into a state-of-the-art cannabis manufacturing and distribution hub that will generate 100 jobs and $38 million in annual revenues.

That’s possible, Boyajian says, because the factory lies in one of California’s 879 designated Opportunity Zones, making it far easier for Basecanna to raise capital. Repurposing the facility will cost about $8 million, of which Boyajian aims to raise $5 million through a dedicated Opportunity Fund. Already, OZ investors have poured more than $1 million into the project, and Basecanna is eyeing similar projects in 11 other Opportunity Zones around the country.

“It’s a fantastic advantage,” Boyajian says. “It’s adding a small but significant incremental benefit that’s helping us to attract capital.”

THE SYMBIOSIS OF CANNABIS AND OZs

Cannabis and OZs might not seem an obvious pairing, but experts say they’re potentially a match made in heaven, offering a big upside for investors and substantial financial and strategic benefits for cannabis entrepreneurs. That’s partly because the cannabis industry is booming: with most states now allowing medical marijuana, and 10 states and the District of Columbia allowing recreational use, the market is expected to grow to $24.1 billion by 2025, according to New Frontier Data. The specific need for Opportunity Zone dollars, however, stems from the fact that cannabis remains federally illegal, so banks and institutional investors are giving the sector a wide berth.

“The reason this is an opportunity for private investment right now is because it’s illegal,” explains Pete Asmus, CEO of GreenZone 360. “If we got approved federally, we could get FDIC loans for construction — but this puts us in a position where we have to go to private investors.”

Such constraints mean that cannabis companies typically pay a two- to threefold premium when renting commercial property — an attractive proposition for Opportunity Zone investors with an eye for real estate, says Nathan Whigham, president of EN Capital.

“The guys that are doing it smartly are making really outsides returns,” he says.

And the benefits flow both ways. Besides providing an injection of capital, the Opportunity Zone program can help cannabis firms to document the benefits they’ll bring to distressed communities, says Michael Mayes, CEO of cannabis consultancy Quantum 9. That’s important in areas where cannabis licenses are hard to come by, since points-based licensing regimes give significant weight to projects’ social and economic impact.

“Opportunity Zones are a huge deal, because it’s a game of inches — the winners are decided by only a few points,” Mayes says. “It’s one of the first things I discuss with a client.”

THE BENEFITS CAN COME WITH CHALLENGES

But there are risks, too. Opportunity Zone investors are barred by statute from bankrolling a range of so-called “sin businesses” including liquor stores, golf clubs, and massage parlors — but marijuana isn’t on the list, which was drawn up long before anyone contemplated the creation of a legal cannabis industry. Many industry-watchers believe that because cannabis isn’t explicitly branded a “sin business,” it’s fair game for Opportunity Zone investors.

“Cannabis is excluded, and we can infer from that that it’s okay,” says James Mann, a partner at Greenspoon Marder. “There’s a strong case that people investing in cannabis businesses in Opportunity Zones are entitled to the tax benefits of the regime.”

Not everyone is so optimistic, however.

“It isn’t a slam dunk,” says Lisa Zarlenga, partner and co-chair of the Tax Group at Steptoe & Johnson. “It’s easy to say ‘They list the sin businesses, and cannabis isn’t listed, so it’s okay.’ But you have this overriding concern that it’s still considered illegal for federal purposes.”

For better or worse, she notes, clarification could be coming: in March, Treasury Secretary Steven Mnuchin indicated to the Senate that he would review the applicability of the “sin business” rule to cannabis firms. Zarlenga says she expects an official ruling to be handed down at some point, though perhaps not in the next round of regulatory guidance. “It might go into a later round, and we’ll be stuck with the uncertainty in the interim,” Zarlenga says.

Cannabis entrepreneurs freely admit that it takes a strong stomach to invest in a sector that’s founded upon processing and selling a federally illegal drug. Still, many believe that federal deregulation is coming sooner or later, and that investors who climb aboard now will be better placed to make bank when the sector becomes fully legal.

“All the smart guys who’re investing in cannabis from the real estate side or the operations side are coming in now, because they want to get ahead of that curve,” says Whigham, the EN Capital president. “Once it’s federally rescheduled, the world changes.”

That should give pause to smaller-scale OZ investors, warns Lisa Bernard-Kuhn, editor of Marijuana Business Daily Investor Intelligence. If cannabis were fully legalized, a wave of institutional capital would break over the sector, and some small-scale investors might get washed away.

“The real winners here will be whoever can lay claim to a national brand,” Bernard-Kuhn says. “Smaller operations will either need to position themselves to be an attractive takeover target or find some incredibly differentiated approach that allows them to continue to compete with what could be the Coca-Cola of cannabis.”

For now, though, OZ investors and developers like Basecanna CEO Jack Boyajian say they’re excited to be getting in on the ground floor. Certainly, the industry will change dramatically in coming years, Boyajian says, but OZ investors who invest in solid, well-managed cannabis operations will be well-placed to secure a lucrative buyout in the event that big corporations start muscling their way into the industry.

“Our investors would have a very significant payday for themselves if that ever happened,” Boyajian says. “It would be a wonderful exit strategy.”