INDIVA trying to manage risk through conditional leases
Would-be Ontario retailers need to be proactive
Bidding wars breaking out for scarce properties
As would-be cannabis retailers race to lock up property in Ontario, waiting for more clarity from the provincial government before signing leases isn’t an option, according to one licensed producer that publicly entered the real estate race on Monday.
Prime retail locations across the province are already the object of aggressive bidding wars, driving prices up to two or three times the going commercial rental rates, said Koby Smutylo, chief operating officer of INDIVA Ltd. It’s also likely that companies will need to have leases signed in order to apply for retail licenses, which is leading to something of a land-grab, he added.
INDIVA, an LP based in London, Ont., announced Monday that it has signed two leases for dispensaries, one in London and one in Ottawa. It plans to sign a further eight leases in the coming months.
The move is proactive, but also risky.
It remains unclear how Ontario’s retail regime will shape up: what municipalities will opt-out; how far dispensaries will need to be from schools or liquor stores; whether licenses will be awarded on a first-come, first-served basis or through a lottery system; and whether there will be a cap on the number of retail locations a company can own, as in Alberta.
"We believe the benefit to being positioned with leases... outweighs the uncertainty of not knowing exactly what the rules will be," Mr. Smutylo said.
To manage the risk, INDIVA is trying to negotiate conditional leases, giving the company a grace period to receive provincial approval before being locked into rental agreements. For the London property, the company has 120 days to obtain the necessary cannabis retail permitting from the province.
“Failing [to sign conditional leases] we're looking for spaces that are in desirable locations that potentially have alternative uses,” said Mr. Smutylo. "Our objective is to pay as close to market as possible, so in the unlikely event we do have to sublease, we can do that and minimize the carrying cost."
Getting close to non-cannabis market prices, however, is proving a challenge for most companies.
“The trends are similar to what we saw in Alberta, and what we’ve experienced in B.C. so far,” said Nick Kuzyk, chief strategy officer of High Tide Ventures Inc., which owns cannabis accessory retail chain Smoker’s Corner and is aiming to run a national dispensary chain. “Lease rates are definitely two or three times normal when cannabis retail is mentioned."
The prices Ontario landlords are demanding, and receiving, is a “function of what people have learned from other jurisdictions and municipalities regarding zoning and distances,” Mr. Kuzyk said.
Because cannabis retailers will have to be a certain distance from schools and liquor stores, perhaps even hospitals and payday loan locations, sites that will be permitted to host dispensaries are assumed to relatively scarce, particularly in dense urban centres such as Toronto.
Add to that the fact that numerous landlords are still on the fence about renting to cannabis companies, and there is an imbalance in supply and demand, favourable to landlords.
Calgary-based High Tide hasn’t announced any leases in Ontario, but it has retained Cushman & Wakefield to help secure locations. That said, Mr. Kuzyk said there’s a price ceiling over which they’re not willing to go.
“Controlling your costs is critical to success in retail, so although we would like to establish strong locations in Ontario, it’s important to have a budget and a strategy that’s sound,” he said.