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— Property Management Quarterly — July 2016
M
arijuana businesses
are growing, demand is
through the roof and sup-
ply cannot keep up. Retail
spaces and industrial
warehouses are quickly snatched up
for use in the industry and the trend
does not seem to be slowing. Many
commercial property owners want
their share of this booming business
and some actively seek marijuana
businesses to occupy their spaces;
for others, the opportunity often
presents itself as a too-good-to-be-
true option. The advantages of such
tenants seem never ending – higher
rents, greater likelihood of on-time
payments and the generation of
greater foot traffic to retail centers
in which a marijuana retail store is
located. So, what’s the problem?
While the recreational use of mari-
juana was decriminalized in Colo-
rado with the passage of Amend-
ment 64 in 2012, marijuana still
is considered illegal under federal
law. It is listed as a Schedule 1 con-
trolled substance, categorized with
the most-restricted drugs because
of its supposed high potential for
abuse and no currently accepted
medical treatment usage in the U.S.
This means the federal government
may prosecute anyone in possession
of the drug or anyone growing the
drug, indoors or out.
Most people are aware of these
facts, but many property owners and
managers are unaware that they
also may be prosecuted for know-
ingly leasing, renting or maintain-
ing any place as a marijuana-grow
operation or retail store. They may
be prosecuted as a direct actor in
the crime or as an
accessory, both
punishable by
prison and/or large
fines.
Furthermore,
under federal stat-
ute, the owner may
be required to for-
feit any property
used to commit or
facilitate the com-
mission of a crime,
such as a violation
of the Controlled
Substances Act.
The owner of any real estate seized
by the feds operating as a marijuana
retail shop or grow operation would
not be entitled to any compensation
for the loss of the property.
This statute does not require any
person to be charged with a crime
in order to enact the remedy of civil
forfeiture – the property may be
seized even if criminal charges have
not been brought against the owner
or tenant.
Cases stemming from California,
Arizona, Colorado and other states
have proven the feds are willing and
able to enforce the law by resort-
ing to criminal charges, forfeiture or
both.
• Potential defenses.
An owner may
attempt to assert an innocent-owner
defense to prevent his property from
being sold by the feds. An innocent
owner must have no actual knowl-
edge of the illegal operation. How-
ever, a lease specifically authorizing
the property to be used as a mari-
juana-grow operation or as a retail
storefront to sell marijuana would
make this defense
highly unlikely to
succeed.
The owner may
assert the forfei-
ture of the prop-
erty constitutes
a violation of the
Eighth Amend-
ment’s prohibition
on excessive fines.
This defense, like-
wise, is unlikely
to succeed unless
the property in
question is more
valuable than the
potential fines that may be imposed
under federal law, up to $2.5 million
for a first offense.
While the criminal and civil pen-
alties may be of most concern to
many property owners, there also
are negative impacts to consider
outside of the judicial system.
• Insurance coverage.
Many insur-
ance companies won’t pay for
damages stemming from activities
that are out of the normal realm of
operation. Last year, on the residen-
tial side, the Court of Appeals for
the Sixth Circuit ruled in favor of an
insurance company that refused to
pay for the destruction of a home
due to the owner’s carelessness in
operating a marijuana-grow opera-
tion in the basement. Could some-
thing similar happen in commercial
real estate?
One way to avoid this pitfall is
to inform the insurance carrier at
the time the policy is written of the
intention to grow or sell marijuana
on the property and have the insur-
ance carrier provide its acceptance
in writing. If the insurance carrier
agrees to continue its coverage of
the property, contract law binds the
carrier to uphold its commitment.
• Resale and loan recourse.
An addi-
tional issue to consider is the resale
value of the property. First, indoor
grow operations have the potential
to produce widespread mold due to
the moist environment. Mold can
be hazardous to human health and
may damage structures. A buyer
likely will not purchase a property
unless the mold is removed or will
take a big chunk off the price they
are willing to pay.
A buyer may have trouble getting
financing to purchase a property
housing a marijuana retail shop
or grow operation. Because of the
federal implications discussed, lend-
ers often will refuse loans on such
a property. Also, by allowing illegal
activity, a landlord may be in default
of his current loan agreements, and
the lender may call the loan due.
Obtaining tenants operating mari-
juana businesses may seem like
winning the tenant lottery, but there
are many risks to consider before
signing a lease with a marijuana
tenant. Being an informed property
owner is paramount and can save
an owner from a seemingly never-
ending headache and the loss of
his investment and, potentially, his
freedom. While this article does not
provide a complete list of all the
risks property owners face in leasing
to marijuana tenants, it provides a
starting place for the consideration
of the risk to value proposition of
such leases.
s
Legal
Donald “Corky”
Eby
Attorney, Robinson
and Henry PC,
Castle Rock
Rachel Glass
Law clerk,
Robinson and
Henry, and
law student,
University of Denver
