Locating the Perfect Real Estate for your Cannabis Business

Matt Chapeldaine, founder of Herb Front

Matt Chapdelaine is the founder of HerbFront.com. HerbFront.com looks to help cannabis cultivators and retail dispensary owners find real estate in desirable locations where landlords and ordinances are friendly or at least tolerant of cannabis businesses.

Learn More at:  http://www.herbfront.com

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Key Takeaways:
[3:32] – Environment of the Merchandise Mart
[4:13] – What is Herb Front
[5:16] – How cannabis real estate is unique
[8:38] – Matt talks about the response to Herb Front
[9:43] –  Are there abundant lease opportunities?
[10:27] – The number of properties listed on Herb Front
[11:02] – Matt talks about how he got into the cannabis real estate space
[12:19] – Matt discusses Herb Front’s business model
[13:13] – Where are most of the properties located
[14:45] – Matt gives a walkthrough of the workflow of Herb Front
[17:00] – Matt talks about problems getting loans for business build outs
[19:07] – Matt discusses common questions he receives
[20:14] – Matt talks about signage regulations
[21:14] – What’s the typical size space that potential customers looking for
[22:56] – Contact details for Herb Front

Read Full Transcript

Matthew: Hi, I’m Matthew Kind. Every Monday look for a fresh new episode where I’ll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at www.cannainsider.com. That’s www.cannainsider.com. Are you an accredited investor looking to get access to the best cannabis investing opportunities? Join me at the next ArcView Group event. The ArcView Group is the premier angel investor network focused exclusively on the cannabis industry. There is simply no other place where you can find this quality and diversity of cannabis industry investment opportunities months or even years before the general public. If that’s not enough, you will also be networking with the top investors, entrepreneurs and thought leaders in the cannabis space. I have personally made many of my best connections and lifelong friendships at ArcView events. If you are an accredited investor and would like to join me as an ArcView member, please email me at feedback@cannainsider.com to get started.

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It’s right to celebrate when you win a cannabis cultivation or dispensary license, but shortly after the celebration it becomes evident that there are many difficult tasks ahead. One is finding real estate for your dispensary or cultivation facility that is properly zoned in a good location with a landlord that welcomes cannabis tenants. Today we’re going to learn how Herb Front solves these problems. I am pleased to welcome Matt Chapdelaine founder of Herb Front to CannaInsider today. Welcome Matt.

Matt: Hey Matt it’s good to be here. Thank you.

Matthew: Matt to give us a sense of geography where are you in the world today?

Matt: Today I am in Chicago in our home office here in the Merchandise Mart. We are located within 1871 which is a real estate, sorry, technology accelerator based right on the river in downtown Chicago.

Matthew: Yes and what a massive facility that is. You could probably see it from outer space. It’s just so immense. Now the Kennedys owned that for many years. Is that owned by them, do you know?

Matt: In some levels yes. To your first point it’s the largest office building in the world after the Pentagon, that one point was so big it had its own zip code. And you’re right, the Kennedys did own it. They eventually sold. A couple of years ago they sold their interests to the Vornado Real Estate Trust, but they took shares in that company. So while they don’t own it directly anymore they’re large shareholders in the entity that does own this building and it never ceases to… I never cease to miss the irony that this building was entirely built on bootlegging alcohol and here we are revolutionizing, at least the real estate portion, of the cannabis industry.

Matthew: Right. Now before we jump into Herb Front, you’re kind of an interesting technology accelerator environment there in the Merchandise Mart. And we always hear about California and even sometimes here in Boulder and places like Boston, but maybe you could just give us a high level overview of what kind of environment you’re there in the Merchandise Mart.

Matt: Sure. Sure. We were 1871 which is the working space that we’re in is filled with about 500 different technology companies from around the country. It’s a massive facility. And then within 1871 we’re part of an accelerator called, sorry, an incubator called Elm Spring. And what Elm Spring does is they’re the premier real estate technology company, sorry, accelerator in the country. And that’s where we got our start about six months ago, and it has really helped us grow our business over the last six months.

Matthew: So let’s get into it. What is Herb Front exactly and how should we think about it?

Matt: Sure. Herb Front is a technology company first and foremost that has also built a national network of commercial real estate brokers that handle and specialize in the cannabis real estate transaction. When you buy a home you probably want to find the best deal online on a site like Zillow or Trulia, and then you want a good real estate agent to help you find the property and give you a smooth and seamless transaction. We thought why not do the same with cannabis real estate. There’s some very different protocols involved which is where our technology comes in, but in its simplest form that’s what we are.

Matthew: So what are the big challenges? I mean in other ways with real estate a tenant or a prospective buyer and seller meet and they go through a number of different variables or different talking points to try to understand if they’re a match. How is that different in the cannabis space?

Matt: Sure well the human component is obviously a big piece of this industry. There are some owners and landlords and sellers that are more than comfortable to sell within this industry and there’s some that are not which is why we built this national network of brokerages, of brokerage companies that actually specialize in this transaction and have experience in this transaction. So there is the human element which is why our human network is so important to what we do, but beyond that there’s certain technical components that our technology solves that go into making a property compliant or non. And there’s really three main areas, technical areas that the transaction is focused on that can make a property good or bad.

The first is zoning. The second is the sensitive uses that are near it, and then the third is the debt that may incumber a property whether it’s FDIC insured, and I will go through each one of those kind of step-by-step. Each state and each municipality has their own zoning requirements. So on the most basic level you have to find a property that is zoning compliant, and our software takes care of that. The second piece you’re going to have to look at is the sensitive uses that are around that specific property. They vary state to state and municipality to municipality. You know in Illinois, I will give you an example because it’s the one that I’ve dealt with the most at this point personally, is the distance between your property and a school and the distance between your property and a daycare. Schools are a little bit easier to identify, but home daycare centers can exist in someone’s home and you may not even see them.

So you could get down the road very far in a transaction only to find out that there’s three or four children being babysat in a daycare, a registered daycare facility across the street or down the street and you know that property all of a sudden becomes noncompliant. And then the third piece we had talked about lending. If you choose to lease for your dispensary or your edibles manufacturing, you’re in cultivation, a property that is incumbered by FDIC debt, like say Bank of America has the mortgage on the property. They can call that loan and while your state may say hey listen this dispensary is legal the Federal Deposit Insurance Corporation of America might not see it that way. So it can put the dispensary and the landlord in a very tricky position.

So just all of those technical pieces we developed our technology which we call Predictive Mapping, and it takes all those data points and it’s displayed in a very interactive map that shows in any community across the country which properties are compliant and which properties are not. And they’re less than one percent of the properties in any market we found are actually compliant for this industry.

Matthew: Wow.

Matt: So it’s really like finding a needle in a haystack and it can be very time consuming and very inefficient without our technology.

Matthew: What’s the response been so far?

Matt: It’s been fantastic. You know we launched here in Illinois at the same time that the licenses were being issued. So applications had already been submitted, the review process had gone through. So we didn’t think that there would be any need for us Illinois. We immediately started looking at other markets, and about six or seven dispensaries were given their license and told hey here’s your license but you have to find a new compliant property and you’ve only got a few months to figure it out. It took them a year the first time and now they have a couple of months to figure it out. The most common response is where were you guys six months ago? We really could have used you, but you know we were able to help the people that were in distress here in Illinois and now we’re working on (9.27 unclear) with brokerages and dispensaries throughout the country.

Matthew: Do you see more properties being offered for lease to cannabis cultivators and dispensaries or is it mostly to buy outright?

Matt: It’s a mix. If I had to make a lean in one direction, I would say most of the cultivation centers are purchased if only because the TI, the Tenor Improvements and additional costs that go into the location are so intense. They’re much higher than the dispensary. So those properties tend to be purchased. On the dispensary side they’re primarily leased, but those are… I’m more leaning in one direction. It’s a mix across the board.

Matthew: Okay. And how many properties are currently listed on Herb Front today?

Matt: At this point we have about a dozen of properties that are just verified zoning compliant. We’ve had more than that, but there’s been a pretty brisk rush. Once we put a property online and we make people aware of it, those properties have been put under contract pretty quickly. So at the current moment we have about a dozen opportunities.

Matthew: So give us a little more detail about your back here because you obviously know a lot about real estate and now cannabis and real estate. What was kind of the opening you saw as being a real estate professional where you kind of had a light bulb moment?

Matt: Yeah, you know it was two-fold. The first one was I had a property that was for sale or for lease out in the suburbs of Chicago. This was during the licensing period and we had a potential dispensary come to us and really offer us way more than frankly anybody else was and really frankly what the property was worth. But when I asked them why they were willing to pay that premium they just said listen this is one of the few zoning compliant properties that we would be interested in this licensing area. And I didn’t really think much of it at the time. The owner of the property was an older landlord. She didn’t want to be involved in this industry and so we ended up passing on the opportunity. And so I never really thought much of it.

And then about six months down the road someone else started talking about it. This was a person who I have known for a long time. I really respected them, and when they said yeah there’s a huge disconnect in this industry. Why don’t you take a second look at it? It was then that I kind of thought oh okay, there’s something here and that’s kind of where our journey began.

Matthew: What’s Herb Front’s business model? How do you make money?

Matt: Yeah, we essentially, we act very much in a brokerage capacity. So we have our national network of brokers. Only brokers who are part of our network who we’ve verified on a couple of different levels as part of our due diligence process are given access to our technology and our maps in any area. So Matt if you are in Colorado and you pass kind of our background check and you’ve established yourself as a leader in this industry in your area, we’ll give you these maps actually for free. But then in return what we do is we take a percentage of your commission revenue for the transaction.

Matthew: What are the top cities and states where you have listings? Is it pretty much Illinois right now and then where do you see the most growth?

Matt: No, we only have one in Illinois right and there’s not a lot of growth here in Illinois. There’s on desirable license still left to be awarded and that’s frankly where our listing is. I don’t know if it’s under contract yet, but it should be soon. You know the growth is two-fold. On the East Coast there’s emerging markets that state legislatures are approving medical marijuana. So there’s certainly a lot of growth there, but then there’s a lot of growth in the western states that had established medical and recreational marijuana for a while. Municipalities are frankly reining in a lot of the dispensaries that are already there and they giving them stricter guidelines on where they can be and what the zoning requirements are. So we see a lot of movement in the established markets. So the opportunity is both in the established markets and the emerging markets at this point.

Matthew: I imagine California is a big, fat, juicy opportunity for you here hopefully in the next year or two.

Matt: We are getting more calls there than we know what to do with right now.

Matthew: Wow. Well let’s walk us through how it typically works so we can visualize and internalize what it’s like to be on Herb Front. I just won a cultivation license let’s say and I’m looking for a property. How does it all go from beginning to end? What’s the typical workflow?

Matt: Sure it’s one of two ways. In the perfect workflow it’s you’ve just won your dispensary license. You would logon to Herb Front’s listing site, and from there you would be able to search the zoning verified properties that we have. And right now we’ve got a pretty small inventory because we’re still kind of getting ramped up here. But if you found something that you liked, you would then be able to reach out to that broker who controls that listing. Let’s say it’s not a perfect scenario and we don’t have any actual listings in that area. We probably have a broker that has access to that map, at least in that area. And what we would do is we would put you in touch with a broker who’s part of our network in that area and we would give them the map so you could begin going out to find properties that are not listed at this point and finding off market opportunities. And that’s frankly where a lot of the transactions are getting done. A lot of the best properties are not even on market right now because the owners don’t know that they’re positioned well. So yeah if we don’t have a property listed in the area that you’re interested in, we will put you in touch with a broker who has access to the properties that comply.

Matthew: Now I want to kind of circle back to loans a little bit because obviously if you’re doing a build out, particularly if you’re a cultivator, you need a loan or a lot of businesses do. Maybe they have capital they’ve raised and they don’t need a loan, but loans are an important aspect to building out a business. And you know we’ve moved away from banks holding loans like they did yesteryear. Now they’re more transactional and they are more fee collectors, toll keepers on the way for loans going to Fannie Mae and Freddie Mac, those type of things. Do you see any problems occurring? We talked about the FDIC piece a little bit, but if the bank doesn’t hold the loan and then gets pushed off to one of these government agencies, have you heard of any problems with that at all or they seem okay with it?

Matt: No, no, we’ve heard a lot of problems with it which is why we actually have something that we call Herb Front Capital. It’s a syndicate of lenders who will lend on the real estate piece only. That’s what they’ll lend on, and they’re not Fannie, Freddie secured. You’re not going to find the same rates that you would find at say a Bank of America, but they’re also not the same terms you’re going to find in a hard money loan where you have very short term and very high interest rates. So we’re actually putting that together and which should be launched probably in the next week or so. That will give dispensaries or cultivation centers the ability to access capital as it pertains to the real estate.

Matthew: Okay. So there’s a huge gap between. Let’s say, a lot of mortgages are based off the 10 year on. So that’s around let’s just say 2.4 percent right now. And then hard money lenders are clearly in the double digits, sometimes high. So that’s a huge kind of chasm. Where do you typically see this interest rate falling then for someone that wants Herb Front Capital?

Matt: It’s really on a case-by-case basis, but it’s fair to say that it’s halfway in between. If Bank of America is going to give you let’s say 3.5 to 4 points on your home over a 20 year or 30 year amortization and on the other extreme you have hard money that’s a year or two at probably 20 percent, you know, our capital structure is on average somewhere very close to the middle between. So high single digits, probably very low double digits with some term that gives you some breathing room.

Matthew: Now is there any questions you get over and over again that you might be able to answer here on the show?

Matt: Well for the first one, you know, the one I get often and all the time is that first piece. What are the things I need to be aware of? It’s one, it’s finding that human component that is willing to be a part of this industry. Two, what zoning issues do I have to worry about? Three, what sensitive uses are there in my area that affect a property and how far away do I have to be? And then the fourth piece is the lending piece that some people have and some people don’t. It depends on the capital structure of the entity that’s involved. Those are the big questions yeah.

Matthew: Have you seen regulations in terms of signage? I notice when I go down to Denver some of the dispensaries there have signs you can see from a mile away. Do you see that in terms of, you know, Chicago is pretty famous for ordinances and aldermen and people regulating every little piece of everything. Do you see a lot of that like how dispensaries should look from the outside in terms of how it can say it’s a dispensary?

Matt: We have not had any exposure to that. It’s not part of what we do. So you know as much as I would love to comment on it, we haven’t come across it and it’s not something that we’ve…

Matthew: Sure, it’s a post sale issue right?

Matt: It’s a post sale. It’s more, you know, there’s some really good consultants out there that handle the internal security, the external security. You know there’s different pieces to this process and we’re very much focused on identifying real estate that complies for the community in which it’s in. We help the community and we help the dispensary.

Matthew: Okay. Now in terms of the size of the real estate that’s desired by most dispensary owners, new dispensary owners and new cultivators, I’m sure there’s a wide spectrum, but can you give us some ballpark guidance in terms of how big a space they’re typically looking for?

Matt: Yeah on the cultivation side it really varies all over the board. There’s some enormous ones out there and there’s some relatively small ones that have used stacking plans inside to make a very small place produce a lot of product. So cultivation centers it’s really all over the board. When it comes to dispensaries you know 2,000 square feet with parking is kind of the ideal. Some have gone down to 1,500 square feet and some have been a few thousand square feet more than that, but for the most part that’s really where we’ve been. We represent Café Serendipity who is one of the largest if not the largest franchiser of dispensaries in the country on a lot of their transactions, and that’s really what they’re looking for in terms of ideal space plan and it really falls in line with what a lot of other dispensaries are looking at.

Matthew: Sure and I encourage listeners to go back and listen to the episode with Megan Stone who is a dispensary designer that talks about making sure that your customers don’t feel like criminals because there is a lot of dispensaries that are not welcoming because they really haven’t thought out the layout that much, and it’s really helpful to have ample parking. You know when you walk in a place where you can kind of normalize and look at the dispensary instead of kind of being shuffled off somewhere. So I encourage you to listen to that episode. But Matt, as we close how can listeners learn more about Herb Front and what you do?

Matt: If listeners want to learn more about Herb Front I would strongly encourage you to go to www.herbfront.com, that’s www.herbfront.com like a store front but Herb Front or www.herbfrontcapital.com which we will be launching here in the next coming weeks.

Matthew: Great. Matt, thanks so much for being on CannaInsider today we really appreciate it. If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher or whatever app you might be using to listen to the show. Every five star review helps us to bring the best guests to you. Learn more at www.cannainsider.com/itunes. What are the five major trends that will impact the cannabis industry in the next five years? Find out with your free report at www.cannainsider.com/trends. Have a suggestion for an awesome guest on www.cannainsider.com, simply send us an email at feedback at cannainsider.com. We would love to hear from you.

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