CREJ - Property Management Quarterly - July 2016
Marijuana businesses are growing, demand is through the roof and supply 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 marijuana was decriminalized in Colorado with the passage of Amendment 64 in 2012, marijuana still is considered illegal under federal law. It is listed as a Schedule 1 controlled 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 knowingly leasing, renting or maintaining 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 statute, the owner may be required to forfeit any property used to commit or facilitate the commission 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 eds are willing and able to enforce the law by resorting 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 knowledge of the illegal operation. However, a lease specifically authorizing the property to be used as a marijuana-grow operation or as a retail storefront to sell marijuana would make this defense highly unlikely to succeed. The owner may assert the forfeiture of the property constitutes a violation of the Eighth Amendment’s prohibition on excessive fines. This defense, likewise, 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 penalties may be of most concern to many property owners, there also are negative impacts to consider outside of the judicial system. • Insurance coverage. Many insurance companies won’t pay for damages stemming from activities that are out of the normal realm of operation. Last year, on the residential 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 operation in the basement. Could something 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 insurance 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 additional 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, lenders 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 marijuana 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.