Cannabis real estate investor Gateway Property Group makes 3rd Santa Rosa buy

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A commercial real estate group that is looking to create homes the newly legal cannabis industry has completed its third property deal in Santa Rosa.

Gateway Property Group sold the 21,700-square-foot building at 3440 Airway Drive on March 23 for a recorded value of $6.85 million, or $315 a square foot, according to public records. The group found the building in 2016 amid the heating up of the market from cannabis-related buyers, purchasing the property in 2017.

Partner Lucien Lidji said they got the building to positive cash flow with tenants, bringing up the property value, but the goal of getting a mix of cannabis-related tenants in there didn’t work out. So the investors wanted to redeploy the value elsewhere.

“We want to create a portfolio of assets,” he said.

So in a tax-deferred exchange on the Airway sale, Gateway purchased 3005 Wiljan Court on July 12 for a recorded value of $5.25 million, or $219 a square foot, according to records and Lidji. The Airway property purchase was financed by Presidio Mortgage Holdings and Terra Verde Holdings, and Wiljan also by Presidio, documents showed.

Gateway so far has repositioned three Santa Rosa properties to get to the cannabis market, and has another industrial property near Sacramento, Lidji said. While Gateway has scouted potential properties throughout California, it has come back to Santa Rosa, he said.

"It's at the base of the Emerald Triangle. It's among the hottest place to live and work in the country. The city administration is the most progressive and is open for business. They understand what operators need to succeed and welcome them. If you go 45 minutes south, there are jurisdictions that make decisions that clearly are not in the best interest of operators," Lidji said.

Marin County supervisors last month approved the first two licenses for cannabis delivery, and three companies are competing for the second license, the Business Journal reported at the time.

The relatively high prices being paid by cannabis industry operators in the Santa Rosa area a year ago for industrial properties has moderated further, according to Stephen Skinner, a Santa Rosa-based agent with commercial real estate brokerage Keegan & Coppin who has been working with a number of properties targeted at the cannabis industry. Those include properties involved in Gateway’s deals.

“Quality property is still maintaining high values,” Skinner said. “We’re seeing a bit of a dip off in properties that need more work. The cannabis side of the market is still willing to pay premiums for buildings that are turnkey or very close to it.”

That means the buildings don’t require the cost and time required for significant tenant improvement or city approvals to make them ready to move in and get operational, he said.

Since the legal framework for the cannabis industry started taking shape in California in the past few years, leading up to recreational use becoming allowed on a jurisdictional-by-jurisdiction basis in January 2018. That led to a real estate rush to buy or lease properties that could cater to the industry.

For example, Skinner is listing an 11,000-square-foot building at 460 Timothy Road, where a cannabis venture tried to get started. Instead of fetching over $200 a square foot that buildings of that size were getting before the cannabis real estate market boom, it’s now likely to get close to $120 a square foot. A key factor there is the building needs extensive upgrades to electrical service a number of cannabis operations call for, he said.

But one type of cannabis operation doesn’t seem to be recoiling from sticker shock.

“Retail dispensaries seem to be the only groups that are overpaying for poor-quality product,” Skinner said. “And mostly because there are very specific setbacks and guidelines associated with where you can operate a retail dispensary. Therefore, those properties are few and far between.”

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