The Legalization of Cannabis and Real Estate

July 20, 2018

The new green norm of legalized marijuana has already spread across 23 states. This includes the District of Columbia, where legislation has been passed for the use of medical marijuana to a certain degree. The federal government, however, still considers cannabis to be illegal, and this has created a legal gray area. The industry is only growing bigger with sales of legal cannabis reaching $6.7 billion last year, and these are still considered to be early days. How has this affected the real estate industry, and what lies ahead?

Real Estate Connected to Cannabis

There is a lot of movement and opportunism currently being taken advantage of when it comes to real estate connected to cannabis. This is despite the societal impact and challenges faced when working with banks and trying to attain a mortgage for such projects. The institutions are not seeing eye to eye with the entrepreneurial trendsetters who are operating to grow and create commercial projects in states where marijuana has been legalized for medical and recreational purposes.

Industrial real estate assets, such as warehouses, storage facilities and former factories, have been renovated for the purpose of cultivating and processing cannabis and cannabis-based products. Since 2015, 200 marijuana storefronts in Denver have been selling everything from bags of marijuana, cannabis edibles and smoking accessories. Between 2009-2014, 36% of the new industrial tenants in Denver were associated with the cannabis trade, according to CBRE research. We have been witnessing a surge in space utilized for cultivation as of 2015, with 3% of the city’s warehouse space, or four million square feet, being allocated to this growing trend.

Legal Hurdles to Be Considered

There are many hurdles of a legal nature that real estate professionals need to be aware of, including on the front of leasing properties to tenants in different jurisdictions.  Is smoking allowed or prohibited on the property? What is considered self-use for medical purposes and what is considered recreational? Is the tenant legally allowed to grow marijuana on the property?

From a landlord’s perspective, there are currently 16 states that permit individuals to grow cannabis for personal use. The requirements for growing hydroponically will surely increase utility costs, which include water and electricity. Tenants who plan on growing marijuana will also potentially consider making renovations to add ventilation, air conditioning, ducts and fans. These plants need 16-20 hours of light a day and a specific temperature span between 75 to 85 degrees Fahrenheit. Such activity needs to be taken into account ahead of time so that the landlord does not discover a gutted apartment full of mold at a later date.

Demand for such rentals in the state of Colorado has soared. This is because residents can grow their own plants, and both medical and recreational smoking is permitted. Each state has its own laws regarding how many plants an individual can grow.

In relation to retail space, there are specific laws and licenses required to open brick-and-mortar dispensaries. When leasing a property to a licensed dispensary, the landlord should take into account the impact the business will have on the neighborhood and the local population. The landlord should also definitely consider the municipal zoning laws and federal civil asset forfeiture laws.

Real Estate’s Newest Trend

This is a huge trend that should not be underestimated or overlooked by real estate investors and landlords. The change is occurring swiftly in many locations. This new industry is creating a renaissance in real estate development; areas that were once idle are now experiencing soaring property prices. As an example, in Denver, warehouse space pricing has leaped 50% between the years 2010-2015. Once upon a time, we used to count how many McDonalds, Starbucks and Subways a city had, and today the number of marijuana dispensaries is the new kid popping up on every block.

A recent CBS poll stated that over 60% of Americans are pro-legalization, and it seems that this trend is bound to grow at a staggering rate. The economics and tax revenue along with the amount of jobs being created all correlate to an overall vote of support. The forecasts for 2021 foresee a vibrant $20 billion industry. It is going to be hard to halt the spread of all this weed. As an investor, whether you are for or against, the dollar signs point in the direction of joining the cannabis real estate game sooner rather than later.


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