Medical marijuana has grown increasingly legal over the last decade (now claiming 20 states plus the District of Columbia), and recreational marijuana usage was passed in Colorado and Washington State last year. Colorado sold over $5 million in recreational marijuana in the first week of legality, starting January 1, 2014, and the industry is expected to bring in $2.34 billion in 2014 (up from $1.44 billion in 2013).
What does this mean for landlords and real estate investors? Is there money to be made, or should landlords ban marijuana on their premises?
As mentioned in Part I of this two-part series, there is still some legal question as to how restrictive landlords can be, regarding marijuana usage on their rental properties. State laws and federal laws currently contradict in many places, and while the Department of Justice has declared that it will not prosecute marijuana usage or cultivation where it complies with state laws, some patients with prescriptions for medical marijuana have objected loudly to efforts to prohibit their prescribed medication.
While the case law remains scant on this subject, ezLandlordForms does offer a Marijuana Addendum for Rental Units which landlords can include in their rental packages, which prohibits the growing and recreational usage of marijuana, and places liability on the tenant if they engage in either. Whether landlords and property managers wish to include an exception for prescribed marijuana usage is up to them (the addendum is editable).
Being an astute real estate investor, however, requires more than merely reacting defensively to changing conditions. Sharp rental investors in states where marijuana is legal should consider whether there is an opportunity for them amidst this expanding industry. One niche opportunity is a 100% cannabis-free apartment complex, to create a family-friendly tenant community and use this policy to attract new tenants.
Alternatively, if an apartment community is more oriented toward college students or other young adults, perhaps it could brand itself as pot-friendly, through a community cannabis garden, or a semi-annual “space cake social” where tenants get together with their favorite edibles. The surprise factor alone could generate press for the apartment complex.
Managers of senior communities could brainstorm novel ideas as well. Imagine a medical marijuana support group or other social activity, for tenant-patients with prescriptions to consume cannabis together for bonding and support. While it may have been unthinkable ten years ago, as baby boomers (who, once upon a time, were the generation that made marijuana mainstream) reach retirement and their senior years, there may be opportunities here for community-building among older tenants with prescriptions.
For investors considering undeveloped land or commercial space, there may be opportunities to lease to licensed growers. Given the unique climate needs of the marijuana plant, investors may be able to spot inexpensive buildings that are well-suited to growing the plant, and snatch them up at low prices before other investors catch on. Abundant electrical outlets and power supply, availability of water pipe access, floor drains, building security and reliable humidity and temperature controls are all critical to successfully growing marijuana. And, some tenant fittings and improvements to the property may remain even if the tenants move to a larger space.
Investors should beware however; different states and municipalities have different licensing requirements for different types of marijuana-related activities.
Landlords should also be careful to prevent illegal grow-ops, and understand how damaging they can be to rental properties. The damage can be catastrophic, and even when a commercial property is licensed legally and outfitted properly, there are security risks given the high value, portability and current cash-only status of the industry (due to federal banking regulations).
But the federal obstacles are slowly eroding; President Obama famously commented to The New Yorker last year that "I don’t think it is more dangerous than alcohol,”and a few days later on January 23, 2014, Attorney General Eric Holder announced that the Justice Department would not "prioritize" investigations of banks transacting business with marijuana companies. It remains to be seen whether the IRS will make an exception to allow marijuana-related businesses to deduct expenses (companies cannot deduct as an expense any activity that violates federal law).
The industry, while young, is showing a great deal of promise, and has led some economists to even refer to the currently industry boom as the “green rush”. There is money to be made, not only by growers and dispensaries, but by auxiliary suppliers who provide necessary equipment, testing products, safety devices, etc. And, perhaps, by savvy real estate investors and landlords.