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Competition for limited marijuana retail space could be shaping up

November 4, 2024 |By Katie Tabeling

Delaware commercial brokers are preparing for the unique business climate set for upcoming marijuana retail licenses. | PHOTO COURTESY OF JEFF W/UNSPLASH.COM

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WILMINGTON — As local governments are sorting through the zoning regulations on where retail marijuana businesses can open, commercial brokers are left in a gray area on how to serve this new client book. By the end of the year, Delaware will have selected its 15 cannabis retailer license holders out of 325 applicants through a lottery, while local government officials finalize where they can open shop. The First State does not require applicants to hold property in order to maximize the chance for small business owners to win a license in the lottery — but it may be setting up an arms race for the properties that are available in the small pool of commercial sites on the market. “Only certain locations are going to work for these businesses and all the licensees are going to target those locations,” said Matthew Cooper, the senior vice president of MSC University, an arm of national commercial retail and restaurant brokerage MSC Retail. “From a tenant standpoint, it’s all about finding a location because you have to navigate three sets of regulations to make sure your site is approved: local, county and state.” Since the regulations established by the Office of the Marijuana Commissioner left it up to local governments to decide which zoning districts would allow budding new cannabis businesses, there have been several local bodies across the state working to set regulations. If county or city officials don’t outline where cannabis retail, manufacturing and cultivation businesses can go by the end of the year, they could open shop anywhere in that jurisdiction. “I have not seen a mad rush for retail space yet, but I’m sure it’ll come once things have progressed a bit further with the legalization process,” Dann Gladnick of DSM Commercial told the Delaware Business Times. “We are seeing prospective operators poke their heads around the market a little bit.” Sussex County, the largest county by land mass, which has seen its population steadily grow over the years, has restricted retail cannabis stores to heavy commercial districts and at least three miles from churches, colleges, schools, substance abuse treatment facilities, another marijuana retail store or a municipality boundary. That effectively pushes the possible retailers out to rural parts of the county. Several beach towns have already banned it. New Castle County is proposing to keep retail cannabis stores in commercial regional and industrial zones with limited review. The Wilmington City Council is set to pass a moratorium on retail use, as city officials have yet to decide on the buffers for potential shops. Middletown has also banned it, while Newark has restricted cannabis dispensaries to small slivers of the city. Kent County, as it stands, has no regulations, although Dover and Milford are considering similar buffers for daycares and schools. Cooper told DBT that the zoning regulations are going to drive a lot of the demand for where cannabis dispensaries can open. Those limited spaces that do fit the narrow criteria set by the state and local jurisdictions could be leased out at a premium, causing landlords to do all they can to retain their advantage in a high-demand market. “What we’ve seen is a lot of dispensaries open in unanchored spots, so they’re standalone buildings or in a locally owned building where a landlord does not have any debt. It may be a small strip mall with three or four stores with ample parking,” he said. “These facilities want access and visibility to the market, and that’s really where these regulations come into play.” Since marijuana is still classified as a schedule I substance, many landlords may struggle to land cannabis retailers if they hold loans from banks backed by Federal Deposit Insurance Corporation. While Gov. John Carney signed the Safe Harbor banking bill into law, many national banks fear criminal liability for doing business with cannabis businesses, no matter how far removed they are from the actual substance. That requires some creative thinking when it comes to drafting mortgages and leases for those interested in buying or renting out land, according to Gladnick. “Mortgage loan covenants and restrictive clauses in already existing leases will play a factor in which sites these businesses will be able to consider at first,” Gladnick told DBT. Landlords could also consider asking tenants to pay a holding fee or a deposit, that possibly not many tenants would want to consider until they have the absolute right to operate out of that storefront.