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August 28th, 2015

The Only Thing Higher Than the Rents Are the Tenants’ Customers: Marijuana and Commercial Real Estate

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By: Michael Singer

Edited By: Sigalle Barness

Impact on real estate probably doesn’t spring to mind when you think about the trend toward decriminalization and legalization of marijuana. That would change if you gave Seena Samimi (Best Best & Krieger LLP) an hour of your time. You come away from Medical Marijuana and Commercial Real Estate in California and Beyond wondering how you had never considered all the implications of pot legalization on property owners. These can range from accounting for increased costs in leases and dealing with the conundrum posed by the fact that marijuana remains illegal under federal law.

In fact, Samimi spent a good portion of his recent visit to Lawline urging lawyers to make sure they understand the interplay between the federal prohibition on marijuana (medical or otherwise) and the state and local laws legalizing it. If you picked up a Bay Area, California newspaper around the third week of August, you’d understand why. Under California’s Medical Marijuana Program Act, the Harborside Health Center in Oakland is a law-abiding business. Under federal law, it’s a conduit for a Schedule I Controlled Substance, meaning it serves no useful purpose, medical or otherwise. The federal government used its prerogative to shut Harborside down. The city of Oakland joined with Harborside to fight the feds. Well, both the United States Court of Appeals for the 9th Circuit and the California Court of Appeals just sided with the federal government. So, there’s a landlord out there that might not be receiving next month’s rent, unless the possibility of shutdown had been foreseen and somehow accounted for in the drafting of the lease.

Medical Marijuana Dispensary, Ypsilanti, Mi

Generally, the federal Department of Justice has stayed its hand in states where marijuana is legal, focusing on eight specific enforcement areas, ranging from preventing distribution to minors to preventing possession and use on federal lands. Then again, just because the DOJ stays out doesn’t mean that states, counties and municipalities will as well. Samimi emphasizes that even in states with liberalized marijuana laws, there are local differences in law that lawyers must be acquainted with to save real estate clients time, money and problems. In Colorado, for example, each county decides to what level marijuana will be tolerated, and many have continued the ban on marijuana cultivation and distribution. Even in counties allowing such usage, municipalities may use zoning laws to further restrict the burgeoning industry. Your clients need to know where they can and cannot lease to a marijuana-related business.

The impact on real estate doesn’t stop with zoning. If you think about this movement, each landlord, whether of an apartment or office building, has additional issues to deal with. For example, a commercial landlord has to be very clear and even restrictive with lease provisions prohibiting smoking on premises, as well as provisions prohibiting use of the premises for illegal purposes—what is illegal when marijuana is legal under state and local law, but not under federal law? Creative and specific drafting of leases is critical in marijuana jurisdictions.

For industrial tenants, the utility costs associated with indoor cultivation are vastly higher than for other tenants (hydroponic systems, increased access to electricity and water, ventilation etc.). Industrial buildings can be left with mold issues. Other issues stem from the fact that distillation of oils from marijuana (used to make alternative products, like food additives) leaves an odor that can be difficult to mitigate. This makes subsequent renting more difficult. The oils can also result in hazardous situations, leading to explosions. This is in addition to security concerns that result from having a business that is still considered illegal under federal law. The answer, according to Samimi: landlords charge a premium of 20%-40% per square foot for marijuana tenants.

There is an upside to all this for property owners, at least in jurisdictions (like Colorado) that allow counties to determine whether to allow the industry in. Where the marijuana industry is permitted, a supply/demand imbalance is created. Thus, real estate values get as high, or even higher than the tenant’s customers.

Sigalle Barness

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