Legalized marijuana and the effect on the market

21 Replies

I live in Colorado Springs, and we have dispensaries all over town. And I know that as well as store fronts that sell, there are a huge number of indoor grow operations that operate in industrial areas, as we as in residential neighborhoods. So my question is, taking the ethical stance out of the equation, and the social ramification argument, what have you all seen as to the impact that this industry has had on the real estate market in the areas that have adopted some legal form of marijuana. Love to hear your thoughts!

I'm no expert on this topic, BUT, I know in Oregon the law is written so that the only legal place to smoke is in a private home, which could obviously have an impact on a rental property. I'd be sure to include very specific language regarding smoking marijuana in my leases. 

I live in Denver - Ruby Hill Neighborhood along the Platte River.  We have the greatest concentration of commercial grows in the state.  I've seen a VERY large demand in smaller warehouses (5,000 - 10,000 sq ft).  I've also seen various nurseries bought out (Dardano's on Evans is now a grow facility).  Zoning generally prohibits legal grows in residential areas (aside from personal use).  With relation to economic changes - locksmiths around town are benefiting from a higher demand in safes.  You can still find gun safes around town but a commercial safe with shelves that will hold cash and coin are harder to find since retailers and grows can't use the banking system.  Naturally, there is a benefit to HVAC and Electrical contractors.

@Bryan Cork

Interesting question. I like hearing the perspective of @Ed E. This isn't exactly what you asked, but I see a big demand for Airbnb/short-term rental properties in Denver and Colorado Springs in which you can smoke pot. Almost all hotels prohibit marijuana smoking, and there is a huge influx of tourists coming here for that specific purpose. When my wife and I were running multiple Airbnbs in Denver, we allowed pot smoking but not cigarette smoking, and the amount of weed left behind -- since they can't fly back with it -- was enough to create our own dispensary. So that's one way I see it impacting the market. 

states that legalize marijuana earliest are going to experience economic booms because of it. They already are.

There are some inconsistencies in the law, and policy currently but that will get worked out.

It's booming here in Vegas, and they are starting to make it tourist friendly as well. The city was sold out for days after legalization. Will be good for everyone.

Having worked with both Landlords, Sellers, Buyers and Tenants in the Marijuana industry I love the question. Setting aside any personal biases towards the product the only people who negatively impacted by the industry (from a RE perspective) are traditional tenants competing for industrial space who are repeatedly priced out of space. Having done deals in the industry in multiple states I can say the net effect of pot is a reduced vacancy rate among second/third generation industrial properties nearing (or already) functional obsolescence. In Denver for example the Montbello sub-market which is typified by low clear, poorly loaded undesirable properties experienced a resurgence after amendment 64 was past. As an example there is/was an estimated 3,000,000 SF of industrial space occupied by marijuana users in Denver out of 300,000,000 SF total. 

In fact, throughout the Denver Metro area I could pick out 5 - 10 submarkets / neighborhoods / pockets of commercial space completely revitalized by the industry. Ruby Hill is one example as pointed out by @Ed E. . Again, these are areas not normally targeted by your modern industrial users so the market disruption in reality was minimal. As with anything there are exemptions (100,000+ SF, class A cultivation facilities exist) but generally speaking this holds true. 

On top of the direct impact to sale prices, vacancy rates and lease rates the industry added thousands of jobs and MILLIONS in tax dollars to the county, city and state. This only scratches the surface on the downstream effect on service providers (electrical, construction, HVAC, security etc.) as pointed out by @Ed E.

This is not to say there arent negatives, which there are plenty. For example growing pot is incredibly hard on buildings and properties with grow operations in them likely wont come back into circulation; more importantly until the banking issues are resolved and the industry is not forced to operate on a cash basis crime will always be an issue. 

Not to mention the fact that marijuana use in teens, DUIs, violent crimes and armed robbery have all declined in states that have legalized pot in some form or another...... not that were discussing the social ramifications.

I could continue to rattle off talking points but the TLDR is: depending on who you speak to the marijuana industry gets a bad wrap, in my humble opinion its nothing short of a windfall for states that have embraced it.... I'm very interested to see BP's thoughts on the subject. 

@Bryan Cork I'm down here in San Diego and there's some chatter about if the local nurseries will be able to grow.  Last time I saw an article cities were looking for proposals around it but security was a huge factor.  Furthering that issue not all of these nurseries are in the industrial/light industrial areas where you'd think they would be.  I'd buy a home that's next to a nursery growing random flowers but never next to a weed grow-house.  I can't imagine that it would have a positive impact on residential real estate that abuts those nurseries.  So right now there's no observable impact for me but I'll go out on a limb and guess that it residential family areas you'll have NIMBYs and lawsuits that echo through the courts for a while...

Being in the marijuana business, or renting facilities to those that are seems to be an incredibly risky business plan when we have an Attorney General who is vehemently anti-marijuana.  While it may be legal under state law, it is not under federal law, and the federal government can seize your property under civil forfeiture laws.  

Hi @Bryan Cork

Here's what has been happening in California real estate. The market has been boom-bust-boom again. Initially, few counties were allowing cannabis businesses. Those that were experienced booms where, for example, real estate that was worth maybe $100,000, such as a polluted automotive junk yard, went on  sale for over $2 million because it was zoned "Industrial" allowing use of volatile solvents for manufacturing (one type of cannabis distillation).  Then as more and more counties saw the masses of  $$ flowing, they allowed cannabis businesses. Then prices dropped as all sorts of middle-of-nowhere places have allowed these businesses into their industrial areas. Investors started noticing and thinking "why should I pay $2 million in one nowhere place when I can buy in a slightly farther nowhere and save $1 million." Now, there are hundreds of growers looking for investors and investors are sitting on their money watching the prices drop. It's all a very interesting study in supply and demand. California is a huge state. There is a lot of real estate. I've been a part of some of these deal and the psychology of everyone involved is fascinating. 
Once the property is developed, and becomes a business with demonstrable cash flow, the value goes up again. But people dont trust one another because the P&L's are unverified because its all cash and the taxes are sketchy. So rather than just buying/selling, people form partnerships (LLCs) which solves some problems and creates other problems. It's an interesting time to be a lawyer, for sure.

Jen

Originally posted by @James Carlson :

@Bryan Cork

Interesting question. I like hearing the perspective of @Ed E. This isn't exactly what you asked, but I see a big demand for Airbnb/short-term rental properties in Denver and Colorado Springs in which you can smoke pot. Almost all hotels prohibit marijuana smoking, and there is a huge influx of tourists coming here for that specific purpose. When my wife and I were running multiple Airbnbs in Denver, we allowed pot smoking but not cigarette smoking, and the amount of weed left behind -- since they can't fly back with it -- was enough to create our own dispensary. So that's one way I see it impacting the market. 

 @James Carlson - Interesting idea! Did you advertise being marijuana friendly and do you think it attracted or detracted certain types of renters? Seems like a good play for an Airbnb in Denver as you need to stand out among the crowd.

@Clark Thornhill

Being 420-friendly wasn't the thrust of our marketing, but we did put it in the listing for sure. Our selling point was always the city life. Living a local's life in the heart of Capitol Hill ... that type of thing. The ability to enjoy Denver's newly legal marijuana environment was a perk.

About the clientele it attracted or discouraged ... We mostly had late 20s, early 30s couples in our places. At the time, we were leasing apartments in Capitol Hill in Denver and re-listing them on Airbnb. They were small studios or 1-bedroom units, which tended to attract a younger crowd in general. I think you play to the strengths of your place. If you've got an old 5br Victorian house that would attract families, you might not advertise being pot-friendly. But the demographic that would naturally be inclined to stay at our small places seem to dovetail with allowing marijuana.

Originally posted by @Russell Brazil :

Being in the marijuana business, or renting facilities to those that are seems to be an incredibly risky business plan when we have an Attorney General who is vehemently anti-marijuana.  While it may be legal under state law, it is not under federal law, and the federal can seize your property under civil forfeiture laws.  

This, in my opinion, is a false narrative and this industry is here to stay. In this country we now have more states than not embracing medicinal and/or recreational marijuana. Again, trying to set aside personal opinions/beliefs nobody with even a semi-objective bone in the body would deny the benefits medicinally but more importantly there inst a state in our union that wouldn't welcome $200,000,000.00 a year in additional tax revenue (see Colorado 2016); total tax revenue from marijuana is expected to top $1B by 2020 in CO. Simply put there is too much money at stake. 

Leaders in Washington can wish and hope to turn the tide all they want but the train has left the station, personally I believe the we will revert back to Obama era policies of non-interference for law abiding business. Just an opinion. 

We, as RE professionals can limit exposure for ourselves and our clients by implementing prudent due diligence on tenants; by ensuring our tenants are properly licensed, operating within the law and keeping their operations to code the changes of the DEA / DOJ seizing assets is (in my opinion) next to zero. This is idea holds water when you consider that, like any industry, there are folks who are going to break the law and those operators will garner the attention of law enforcement. 

Obviously in terms of risk profile leasing to a marijuana tenant ranks relatively high, but is it any worse than the liability exposure if you have a tenant polluting your property for example? 

Originally posted by @Jenifer Levini :

Hi @Bryan Cork

Here's what has been happening in California real estate. The market has been boom-bust-boom again. Initially, few counties were allowing cannabis businesses. Those that were experienced booms where, for example, real estate that was worth maybe $100,000, such as a polluted automotive junk yard, went on  sale for over $2 million because it was zoned "Industrial" allowing use of volatile solvents for manufacturing (one type of cannabis distillation).  Then as more and more counties saw the masses of  $$ flowing, they allowed cannabis businesses. Then prices dropped as all sorts of middle-of-nowhere places have allowed these businesses into their industrial areas. Investors started noticing and thinking "why should I pay $2 million in one nowhere place when I can buy in a slightly farther nowhere and save $1 million." Now, there are hundreds of growers looking for investors and investors are sitting on their money watching the prices drop. It's all a very interesting study in supply and demand. California is a huge state. There is a lot of real estate. I've been a part of some of these deal and the psychology of everyone involved is fascinating. 
Once the property is developed, and becomes a business with demonstrable cash flow, the value goes up again. But people dont trust one another because the P&L's are unverified because its all cash and the taxes are sketchy. So rather than just buying/selling, people form partnerships (LLCs) which solves some problems and creates other problems. It's an interesting time to be a lawyer, for sure.

Jen

 Jen you raise some great points, the industry is going through the same growth curve as any other emergent industry. The first through the door blazed a path but set the market on price and saw increased higher margins but as the industry matured and more and more people entered the space competition is became rampant, production efficiency increased and price competition is now prevalent. 

In 2013 the whole sale price per pound of marijuana was $3,000 where as today its closer to $1,200. 

You all might be interested in this real estate website which specializes in listing cannabis properties across the country. There are probably others too.
https://www.420property.com/

I am based in the greater Denver market and work with several clients looking to acquire commercial space for marijuana related businesses, clients looking to acquire similar space to what a marijuana related business would be competing against as well as clients that own or are looking to own commercial investment properties with a marijuana related business.

First, dispel the notion that the US AG will start seizing property for state-licensed marijuana related businesses. The Cole Memo from 2011 indicates that regardless of local laws, the Feds may enforce Federal law but the Cole Memo also outlines the Feds resources are limited and indicates they should be directed towards "illegal" activities that fund organized crime. Once a huge economy like California comes online with MJ there will be no stopping it by the Feds. Also, the idea that the marijuana industry is entirely on a cash basis. Banks are now able to accept marijuana business deposits but just need to document the deposits. Loans to marijuana related businesses and/or space occupied by marijuana related businesses are still generally avoided by banks.

From my experience the legalization of marijuana and the impact on the Colorado real estate market has been mostly limited. I have worked with a number of CRE-space competing businesses such as a wine/liquor distributor who have found it more difficult to find commercial space since the MJ community has aggressively snatched up most of the competing space. Certain markets just outside of the Denver metro area have benefited by these businesses being displaced to those markets. Since MJ occupied commercial space is generally not able to be financed through conventional means, the cost to rent MJ space has gone up to account for the higher financing costs. This upward pressure on commercial space means rents in general have gone up.

A couple of other minor observations. I have spoken with a number of MJ operators and they are finding it harder and harder to find employees. One of the reasons being is that the employees cannot generally document their income. This means the employees cannot qualify for loans/mortgages. There is only so much of an employee discount on merchandise that you can give out :)

@Dan Wallace   Did you miss the last Presidential election?  Do you think the current executive branch is held to any executive action from the Obama administration?

I would also point out civil asset forfeiture is more likely because it really does pay for itself.

You might also want to follow the many cases where people are challenging prosecution by claiming equal protection violations.

@Russell Brazil   Thanks for your comments.  I sure see the potential for many investors to be crying when they have their property taken.  

Does anyone know if E&O insurance will pay if an agent or broker is crazy enough to list a property for marijuana use?

@Michael Biggs I am reminded of a story about a certain little chicken who kept claiming the sky was falling. You may want to try and find any cases since the last election that involved any state-certified MJ related business being seized by the Feds. Let me save you the Google time, zero. 

This has nothing to do with Obama but the simple reality that legalization is spreading rapidly across the US and the Feds are limited to what they can and will do. Here in Colorado we have already proven MJ legalization and the boogie man does not exist. Even Utah is putting medical MJ on the ballot which is the first step to legalizing recreational.

What I find interesting is that drug laws have stayed on the books as long as they have. If ever there was an unconstitutional law, there it is. Life, liberty and the pursuit of happiness is all anyone who takes a drink or smokes a joint has ever tried to do. I dunno...I suppose I am no constitutional scholar, but it just seems very wrong.

Prohibition and the current "Drug War" have taught us and continue to teach us that making these things illegal creates more problems than they cure. And it is funny to say the word cure, because almost no one who wants to do drugs has ever obeyed the laws against them so, what's the point?

And, what ever happened to being penalized according to the severity of the crime? You can go to jail for life in MI for possession of cocaine. Uhmm.....wow. In contrast, you can be instrumental in bringing down the world economy and not even get indicted. Hmm.... 

I say legalize it all and let survival of the fittest do its job.

"...listen son, said the man with the gun, there's room for you inside..."

O right, this thread is about real estate and not civil rights. I would say that for now, it is still illegal in all states under federal law, who have jurisdiction in all states so, being involved is not without at least some risk. How much risk? I don't know. I would say its up to each person to decide that for themselves. I personally would not lease to a professional grow as I would then be an accomplice under federal law. I just don't have the lawyers to fight that fight and so I would not pick it.

Originally posted by @Michael Biggs :

@Dan Wallace   Did you miss the last Presidential election?  Do you think the current executive branch is held to any executive action from the Obama administration?

I would also point out civil asset forfeiture is more likely because it really does pay for itself.

You might also want to follow the many cases where people are challenging prosecution by claiming equal protection violations.

@Russell Brazil   Thanks for your comments.  I sure see the potential for many investors to be crying when they have their property taken.  

Does anyone know if E&O insurance will pay if an agent or broker is crazy enough to list a property for marijuana use?

 I don't know the answers to those questions. I did see Keller Williams in Colorado featuring MJ grow warehouses for sale front and center on their websites 3-4 years ago. It was impossible to miss. Maybe they know more about the extra liabilities. 

I am sure if Sessions can he will disrupt. Not sure if the powers that be are encouraging any of those efforts yet. Anythings possible but as more states favor taxation the feds anti efforts seem less likely each day. 

Originally posted by @Michael Biggs :

@Dan Wallace   Did you miss the last Presidential election?  Do you think the current executive branch is held to any executive action from the Obama administration?

I would also point out civil asset forfeiture is more likely because it really does pay for itself.

You might also want to follow the many cases where people are challenging prosecution by claiming equal protection violations.

@Russell Brazil   Thanks for your comments.  I sure see the potential for many investors to be crying when they have their property taken.  

Does anyone know if E&O insurance will pay if an agent or broker is crazy enough to list a property for marijuana use?

 No different than selling a building to a manufacturer. You as a listing agent represent a Seller, who may or may not have a building suitably zoned for plant husbandry (which varies greatly state-to-state); if you source a ready, willing and able Buyer who happens to grow or otherwise manufacture marijuana products what where are you exposed from a legal standpoint? so long as the Buyer is legally licensed under state, county and city guidelines you are fine. The "sticky" area from an insurance standpoint, if one exists, would only be present in a scenario where you the broker represents a Buyer or Tenant. 

What am I missing?

@Dan Wallace   You really know very little about this.  Read this...

http://cannabusinesslaw.com/2017/08/civil-asset-fo...

You should also know federal investigations almost always run more than a year.  There is almost no limit of how long the federal government can wait before they seize the property.

You act as if I believe forfeiture will absolutely happen.  I don't think I ever said that.  On the other hand we are talking about a potential 100% percent loss.

Most people on biggerpockets would never hold a long term investment without fire insurance because they cannot afford a total loss.  Do you think the odds of Civil Asset Forfeiture are more or less likely than the building having a total loss from a fire?  

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