CREJ

November 2021 — Retail Properties Quarterly — Page 15 www.crej.com T he demand for cannabis extraction, distribution and retail dispensaries across the country has provided a new opportunity for real estate owners and operators with empty retail and industrial space due to the pandemic. Even prior to the pandemic, in states where medical and recre- ational cannabis had been legal- ized, there was a 42% increase in demand for warehouses, a 27% increase for storefronts and 21% increase in land for construction of cannabis facilities. Locally, Denver warehouse space for marijuana cultivation has rented for two to three times more than the average warehouse lease rate. After a devastating blow from the COVID-19 pandemic, it can be easy to equate the positive influence of cannabis operations as the saving grace of the real estate industry. But repurposing property for can- nabis businesses raises novel risk and insurance issues every prop- erty owner leaning toward change should consider. n Zoning codes. Each city, district or county will have rules when it comes to where cannabis facilities can be located. When your jurisdic- tion does not have a specific canna- bis zoning type, these facilities typi- cally will fall under liquor zoning rules. For example, both cannabis and liquor facilities are not allowed within a certain distance of schools and religious institutions. Renova- tion projects may incur a change in use, which may require rezoning or necessary municipal approvals. n Repurposing a space for cannabis retail. As cannabis licenses are loca- tion specific and difficult to obtain, and businesses cannot easily move their license once settled, it’s essen- tial that property owners and rent- ers ensure the building systems meet the requirements of the busi- ness. Cannabis-related businesses may be focused on one or more aspects of the business – growing, processing or selling – and each one requires unique facility consider- ations. For retail property owners looking to repurpose their space, there is a good chance some of the build- ing system’s infrastructure will need to be redesigned – inclusive of mechanical, electrical, plumbing, and fire and life safety systems. Cannabis cultivation and pro- cessing facilities require specific utility infrastructure, providing a considerable amount of power for lighting, dehumidification and cool- ing requirements. Required power can range from 25 to 35 watts per square foot, an amount not sup- ported by all types of building infrastructure. Sites that already have enough power for cannabis cultivation or extraction will save a significant amount on design and construction, and those where local utilities cannot provide the neces- sary power will need to invest more in site-generated power. Cannabis grow and extraction sites also require irrigation systems, eyewash stations and emergency showers due to the hazardous materi- als present in the process. Installing this equipment often is more cost- ly and complicated than expected as these specialized systems require water meters, supply mains, water heating equipment and electrical systems with higher capacities to accommodate the added water sup- ply load. While the plants themselves are not very combustible, the hazard- ous materials present at extrac- tion and cultivation sites require proper sprinkler systems. Building code requirements may necessitate updating and installing new sprin- kler systems, and depending on the site and its configuration, additional fire and life safety upgrades may be necessary as well. n Insurance implications with increased risk. Changing the use of a property changes its risk profile. Cannabis-related businesses share the same general liability and other risks of agricultural and manufac- turing businesses – such as work- place accidents and property dam- age – but they come with additional risk due to their increased exposure to theft, use of hazardous materials and the still relatively controversial nature of the business. A change in risk profile may or may not require a new coverage policy, but it could require additional limits and exten- sions. The insurance industry’s appetite for cannabis risk is low due to the high level of uncertainty still sur- rounding the industry under federal law, and it’s important to note that most property policies exclude loss- es as a result of cannabis. Even in states like Colorado where cannabis is legal, an insurer still may not be responsible for resulting damages under the insured’s policy. Policyholders engaging in what is considered a “dishonest or criminal act” may find that it bars coverage for a loss or damage resulting from that activity. In one case, the U.S. Court of Appeals for the 6th Circuit ruled a landlord’s insurance policy did not cover the damage caused by commercial tenants who grew marijuana in rental units because of its “dishonest or criminal acts” exclusion. The more property and canna- bis business owners can minimize their risk, the more likely carriers will provide coverage. This is where appropriate planning and construc- tion makes the biggest impact. To obtain broader coverage and mini- mize exclusions, owners can install the appropriate utility and life safe- ty systems and institute industry- known best practices for high-risk manufacturing processes. s jay.virdi@hubinternational.com lindsay.shapiro@hubinternational.com Considerations before a cannabis tenant moves in Regulations Jay Virdi Chief sales officer, Hub International Lindsay Shapiro Risk consultant, Hub International