Washington + Cannabis + Landlords

7 Replies

I'm not sure if this is of any interest to the community here, but from where I sit it's getting to be downright fascinating.

With recreational cannabis legal in WA and CO - and momentum toward legalization elsewhere - we can assume there will be more and more people wanting to rent space for sanctioned, licensed growing operations.

My experience and knowledge is specific to WA and is focused on the insurance aspect. (It would be interesting to hear commentary from CO, as well as other professional perspectives.) That narrow view notwithstanding, there are a few things I'm seeing that I feel commercial landlords should be aware of.

First, leasing to a cannabis-related company will almost certainly impact your Lessor's Risk policy on a commercial property. Our preferred markets don't want to insure buildings that have cannabis-related businesses in them, and that can mean a sometimes significant rate change. That's worth investigating before agreeing to lease terms with a tenant.

Second, although the CO market seems to be going great guns, here in WA regulatory factors are creating significant obstacles for aspiring cannabis entrepreneurs. A significant number of the people I've worked with have had great plans, but they have not had sufficient capital to realistically realize them. I would encourage commercial landlords to take a good hard look at a prospective tenant's capitalization and business plan before taking on the risk of leasing space.

Third, the costs of doing business in the cannabis industry are crazy. It's not just that they're high. It's that they're hard to predict. In the insurance sphere, we're seeing huge spreads (by two and three multiples of the premium) on the quotes rated from a single application. When you lease to a cannabis business, you should be prepared to inherit some of that craziness.

Fourth, because costs are high a significant portion of the growers I've spoken with want to carry the absolute minimum coverage required by law in order to keep their costs down. That means that commercial property owners should take a closer than normal look at their tenants' coverage to make sure there aren't any gaps that could present a problem in the event of a loss.

On the other hand, these issues, as well as the regulations, do create a shortage of space, which can mean premium rents.

Food for thought!

I am in Colorado and I have talked to my lender about this. One thing to consider is it is illegal on a federal level. If a bank is regulated by the federal government they are not going to loan on any property that is breaking federal law. If you have a loan on a property that is known to be a grow business then the bank could pull the loan at any time and will not loan on that property.

It's been my experience that anyone overly concerned about the basement of a home could be looking for grow space. Grow rooms are hell on a building. Mold growth is bad, and here in Colorado it's really hard to have mold problems. These home grow rooms also over tax the electrical system of many homes and will cause problems. There is also the Federal problem that Mark mentioned. Most of my property is free and clear and I have to believe that makes it tasty for the Fed's when it comes to forfeiture. Even though it's semi legal here in Colorado, there is still a thriving black market that like to use SF Houses as grow space. There are lot's of rip off's and robbery's that go unreported due to the nature of the enterprise. It's always the landlord that is left holding the bag. I've been meaning to talk to my attorney about a new clause in my lease banning pot cultivation on premises. (note to self!) I specialize in low end rental homes and have been down this road a time or two.

I do know an investor in Denver making very good money with an Industrial building that is being used as a grow facility. All I can think is policies change quickly. Real estate is the long game for me.

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In addition to the issues mentioned by @James Bell , I have dealt with several insurance claims (as an attorney) that resulted from growers attempting to do DIY electrical panels and other shenanigans that resulted in fires that burned the houses to the ground. Of course these are always rentals, the growers are never doing this in their own home.

@Adrian Tilley Ive heard the same thing, that the amount of fires caused by faulty electrical work from growers is staggering.

@Eric Belgau In Denver you'd be surprised at how much commercial warehouse space is leased for grow operations. Growers typically are willing to pay the extra premium to rent space, because of the limited amount of Landlords that are willing to rent to MMJ. The State vs Federal Laws can be scary, but from what Ive heard the feds are more interested in watching the growers not the landords. The worry is that an MMJ tenant is not crossing their I's and dotting their T's. There is a lot of legal oversight that has to be approved to complete a certificate of occupancy for a legal operation- that includes city inspectors, Fire department and others. I think the key is to really know, very well who you are renting to, and make sure they are real "business" men that are serious about doing things right. or you could come back to your space and find it empty after the fed's have seized everything but the building.

@Adrian Tilley Yes, the electrical problems can be huge, especially when the grow space is outside the regulated sphere. There has also been a significant uptick in explosions caused by people extracting hash oil using butane or other solvents. (The industrial processors are required to use closed-loop systems here, which makes it safer.)

That does open up the larger issue. However regulated it is supposed to be, it appears that a lot of people have taken legalization as carte blanch to grow. @James Bell I would strongly suggest that you add that clause, and other residential landlords should as well.

Also, legal (or semi-legal) MMJ has made the marketplace a lot more sophisticated. That means more sophisticated production. And when people ape those production methods in their kitchens and basements bad things are much more likely to happen. As the prevailing cultural wind blows more smoke our direction, it makes sense to pad ourselves with protection so we can still see straight.

House has been putting it in motion that banks can soon enter the picture.  Chase and Wells Fargo are big in Denver, and i wanna say that even they are trying to pass a bill that the federal gov can't use tax payers money to go after states rights.  A banking system and no federal problems makes this the gold boom for rents.  The rents even in the mountains in a double wide (finished nicely, ie: tile, bamboo engineered flooring, french doors, large windows, some sky lights) will fetch 1700 to 2000 rents.  

Buy some land in the mountains, drill wells, septic and some solar panels.  Put a double wide manufactured every half acre and build a greenhouse.  Rent them for 2600, including the greenhouse :)