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Part of cannabis and small business and retail

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

Recreational cannabis retailers are rushing to sign deals for prime real estate locations ahead of the April launch of legal marijuana stores in Ontario, even before the province’s rules for the outlets are clear.

The province is expected in the next several weeks to finalize details of regulations that will clarify which cannabis companies can operate stores, how many outlets each can run and where they can be located. Ontario has said there won’t be a limit on the number of stores over all in the province.

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Because of the uncertainty over the regulatory landscape, some of the deals being negotiated would require the retailers to pay penalties that can run into the hundreds of thousands of dollars if the rules ultimately prevent them from setting up shop at their planned sites, according to industry insiders. Bidding wars have even erupted for some coveted leases, driving up prices by up to 50 per cent of market values, they said.

“Cannabis retailers are not waiting – they are acting now,” said real estate broker Dave Marino of Marino Locations Ltd. His client, cannabis retailer Spiritleaf, has signed binding offers to lease about 20 stores in Ontario. Spiritleaf has teamed with producer Newstrike Brands Ltd., which is backed by the Tragically Hip.

“They’re essentially placing their bets on what real estate will qualify under the rules,” he said. “Spiritleaf intends to open as many stores as the limits and legislation will allow … It’s definitely a lot of uncertainty.”

Cannabis companies are borrowing from the playbook in Alberta and other provinces, which last year started on the tangled, often confusing and costly path to private-sector retailing ahead of countrywide legalization on Oct. 17.

However, the stakes are higher in Ontario because key regulatory guidelines have yet to be nailed down after the new Ford government announced in August that it would switch to private from public cannabis retailing.

Questions remain about whether there will be limits to how many stores each entity can run and restrictions on how far dispensaries should be from schools, churches, playgrounds, daycare centres and other cannabis shops. Also in doubt is which “affiliates” of cannabis producers can have stores. The regulations say growers and their “affiliates” can operate just one store on their production premises, but don’t define affiliate. (Marijuana is currently only available online through the province’s Ontario Cannabis Store.)

Still, companies are charging ahead.

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“We do anticipate putting in applications very, very quickly and aggressively,” said Trevor Fencott, chief executive officer of cannabis retailer Fire & Flower. It has signed offers to lease store space at between 50 and 100 sites in Ontario and will apply to the province for the maximum number of outlets that one entity will be allowed, he said recently. “It’s risk capital.”

Arlin Markowitz, senior vice-president of urban retail at real estate broker CBRE, which represents cannabis retailers and landlords, said some merchants have a Plan B if they don’t qualify to get pot retail licences, in which case they could be stuck paying hundreds of thousands of dollars in penalties.

If they are disqualified, some retailers plan alternative uses for the stores, such as coffee shops that sell cannabis paraphernalia and other merchandise, and re-applying for a licence in the future, Mr. Markowitz said. “Because there’s so much capital behind these marijuana brands, they’re offering landlords significant compensation,” he added. “There’s a mass rush now.”

Landlords are pleased with the competitive activity after having endured a tough few years of losing retail tenants to bankruptcies and other store closings, he said.

“It’s going to be another version of what happened in Alberta but on steroids,” said Kate Camenzuli, a CBRE associate vice-president. She represents retailer Tokyo Smoke, whose parent is owned by cannabis producer Canopy Growth. “It’s a free-for-all.”

In Alberta, which like other provinces except Ontario, launched its first cannabis stores on Oct. 17, the race for real estate was intense. It prompted bidding wars and leases that cost as much as twice the usual rates before the operators had been approved to sell a gram of cannabis.

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Alan Gertner, CEO of Tokyo Smoke, said his chain is looking for the best store locations in every province that allows private cannabis retailing. “We’re quite far along in the process,” he said, without explaining how Canopy-owned Tokyo Smoke will get around Ontario regulations that limit growers and their “affiliates” to running a single store at their plant. While the province has yet to define “affiliate,” sources said Ontario is looking to restrict producers’ affiliates from owning more than 10 per cent of a weed retailer, which could disqualify Canopy.

Tokyo Smoke already has opened three pot dispensaries in Winnipeg and runs six coffee shops with pot accessories – but no cannabis – in Ontario and Alberta.

Mr. Marino said Spiritleaf complies with the Ontario rules because its stores are franchised, with each one being owned by a different operator. And producer Newstrike owns less than 10 per cent of Spiritleaf’s parent, he noted.

But retailers face another wrinkle: Ontario municipalities have until Jan. 22 to opt out of allowing cannabis stores, potentially putting in jeopardy store leases already signed in those markets.

Mark Goliger, CEO of retailer National Access Cannabis (NAC), which opened its first dispensaries in Manitoba and Alberta – with more on the way − said it has signed a number of deals for good Ontario locations. But without knowing the final rules in that province, “we definitely have risk at every single site.”

NAC also has teamed up with Second Cup to convert some of its struggling cafés to cannabis stores. But the chain faces resistance from a number of landlords who want to keep the cafés in their malls and lease vacant space to a pot dispensary, thus generating more rent, Mr. Goliger said.

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