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Report on Business Cannabis Professional 'There was all kinds of frenzy going on.’ Q&A with RioCan’s Ed Sonshine

Dozens of aspiring cannabis retailers in Ontario will have a “big decision” to make by the end of April, according to Ed Sonshine. In a conversation with Cannabis Professional, the CEO of RioCan Real Estate Investment Trust disclosed the commercial landlord had signed about 25 leases with companies hoping to sell recreational cannabis in Canada’s largest province. Most agreed to pay six months of rent, which Mr. Sonshine said was “well above” what the company was hoping to charge for those spaces, in advance. They have a one-time option to cancel their leases as of May 1, otherwise they must to commit to a full five-year term. Yet with virtually all of those spaces being held by entities that did not win the right to apply for just 25 pot store permits Ontario plans to issue this year, Mr. Sonshine expects some will be forced to continue paying rent on empty stores. The full conversation, lightly edited for length and clarity, is reproduced below.

Cannabis Professional: When was RioCan first approached by cannabis retailers about space in your Ontario properties?

Ed Sonshine: Some of the guys who have been active out west, and that company that is actually trying to by Aphria, Green Growth Brands. They want to have stores here in Canada and are backed by some pretty interesting retail people, the Schottensteins who are serious retail people. I never would have thought of the Schottensteins in the cannabis business but they certainly know how to run a retail store. Here in Ontario all of this really got going right after the [June 2018] election after [Doug] Ford got elected and said they were going to privatize it, that the LCBO can stick to the booze business but they are going to leave cannabis to private enterprise.

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CP: Was there just a flood of phone calls coming in after Ford said Ontario would privatize?

ES: Oh yeah. We really did. We are a fairly large company, we have a lot of properties all over the place here in Ontario and we tried to add some structure to it. At first we were just fielding calls and telling people ‘yeah come in and show us what you want and what you have in mind’ and I saw the guys had all these kinds of spreadsheets about who wants to be where and tried to make some order of it. I think it was in the fall [of 2018], it wasn’t until October or November, we basically started pushing people off and then we said ‘OK, here is the format we are prepared to go forward with.’

CP: It is unusual for a commercial landlord to have so much leverage isn’t it?

ES: It is very rare when a landlord is in a position to do that, but we got to say ‘this is the format’ and ‘line up here on the right’ type of thing. We said you need to give us the offers for stores, here is what we are going to have available because happily, notwithstanding all the stories about the retail apocalypse, there isn’t a lot of empty space in our properties.

CP: Does that mean bidding wars?

ES: Yeah, but we didn’t want to get into auctions because it gets a little sloppy and the losers always resent you. We sort of took the process of, ‘give us your indication of what you’re prepared to pay’ and then we could pick based on covenant, on track record. We gave everybody back a term sheet, saying ‘here is the deal, fill in the range you’re prepared to pay’ and then we just went with whomever we thought was best.

CP: How many cannabis retailers ended up doing deals with you in Ontario on that basis?

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ES: On that basis we ended up doing about 25 deals. They were province-wide, but we just didn’t have that much space. It also wasn’t clear, though we didn’t end up waiting for this, but it wasn’t clear at the time which municipalities would allow it. As it turned out quite a few said no.

CP: How many municipalities where you already had deals in place ended up opting out?

ES: Not too many actually, we did get kind of lucky. Of the 25 we did, maybe four were in municipalities that said no.

CP: Of those 25 deals, I assume there were not with 25 individual companies?

ES: That would have been nine or ten companies. Most of them were multiples. A big surprise was that the producers that weren’t allowed to open stores because we had the guys from [Canopy Growth subsidiary] Tokyo Smoke originally all over us, and then suddenly they said ‘we don’t think so’. Suddenly they disappeared, even though [Canopy] paid a lot of money for that retail brand so I don’t know if they have figured out what they’re going to do with that, but it isn’t my problem. [EDS NOTE: Canopy agreed to pay nearly $270-million for Tokyo Smoke parent company Hiku Brands in July 2018]

CP: What can you tell me about the structure of those deals?

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ES: The basic deal we told everybody was, because we didn’t want to kill people and we wanted to be reasonable, so we said they need to pay six months rent up front and we did all those deals over the course of October and November and the rents for us were very handsome rents. I don’t want to get too specific but they were above our budget for those spaces, well above them. What ended up happening of course was that the [Ontario] government, and I still cannot believe they did this, said there was a real supply problem so we are only going to allow 25 stores to open and we are going to have a lottery with 17,000 people.

CP: Did you get any panicked calls from cannabis companies that held your leases after the lottery was announced?

ES: No, interestingly, we didn’t get a lot of frantic calls, other than we just heard some noise that a lot of the successful proponents for our spaces were just trying to buy out the lottery winners. There was all kinds of frenzy going on. Someone at one point said winning the lottery was worth $10-million and I know they put a lot of rules in place to prevent that but there is ingenuity among lawyers. It really was like winning the lottery, which I do not think the government intended.

CP: Why do you imagine they opted for a lottery process to begin with then?

ES: Well, if there really is a supply problem, I don’t know why you have to make that the government’s problem. They could have just said come apply for licenses, supply is your problem. Any retailer, it is their problem to worry about supply. If I’m going to open a toy store but I can’t get any toys, that is not the government’s problem.

CP: Have you heard anything from your cannabis retailer lease holders since the lottery winners were announced last month?

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ES: Basically, all our leases, because many started in November. They have all pre-paid until May 1. So we haven’t really heard anything from them. They essentially own those premises. None of them are doing anything right now but they have paid rent through the end of April. They will have a one-time right by May first to say that they have either been unable to get a license or the municipality vetoed it, to terminate at the end of that six months. I suspect some of them were terminate and some of them will say, ‘you know what, more licenses could come in December’ and they are happy enough with their location, aren’t going to take the risk of terminating and then not having a location. I suspect some of them will just keep paying on an empty store.

CP: Did you ever think you’d be in a position where you’d have tenants willing to pay above-market rent on empty stores?

ES: The one that blows my mind is on Bloor Street, I think it is Fire and Flower, right across from Harry Rosen’s. It is a beautiful storefront, but I know what the rents are there and they are just paying even though they clearly do not have a license.

CP: Is there a deadline to let RioCan know whether they are staying or going? And do the leases go month-to-month after May 1st or are they set terms?

ES: They have until May first to let us know if they are going to terminate and if they do not terminate the lease just continues. I think we signed five-year terms, so they have to make a big decision. So it is going to be interesting.

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