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Amendment 20 Economic Impact in Denver

Medical marijuana might seem like an odd topic for a real estate blog, but bear with me and I will explain. There are three interesting social trends happening in Denver in 2009, two have been publicly and proudly announced, and one is a little more underground, but buzzing:

A Growth Industry:

• Solar and “green” movement
• Exercise and “health” movement
• Medical Marijuana “growth” movement

Growing the Green Movement

Seems from the headlines that Denver Colorado is becoming quite enlightened!  New “green” service and construction businesses are prolific, and yoga studios are popping up everywhere. These businesses are having a positive affect on the small commercial real estate market locally. But would you believe that the medical marijuana movement in Denver is also having an interesting and tremendous impact on real estate owners, landlords and the legal community?

Property owners and managers advertising rental property are receiving multiple requests for leases on everything from single family houses, all classes of retail centers and even some industrial buildings. These tenant applications are from a new “growth industry.” Namely from well financed entrepreneurs seeking to open medical marijuana growing facilities and retail dispensaries.

The Landlord’s Legal Problem

Despite being offered premium rents by qualified (financially) and permitted use businesses by the City of Denver, most property owners are being advised by their attorney’s to not lease to them. The reason is that while state law allows for this type of use under Amendment 20, Federal law still prohibits the controlled substance. The risk to owners (as explained to me by our attorney) is that Federal seizure of the property is possible.

Consequently, this phenomenon has also been a boon for specialists in the legal community. I know several sophisticated property owners who are spending tens of thousands on lawyers trying to find ways to minimize the risk of signing leases with these business owners. Their fear is having their properties “go dark” during any Federal legal issues that may arise.

The economic risks are interesting to calculate. One dispensary owner I talked with plans to reserve 15% of gross proceeds for legal representation. The question we are trying to answer is how much should a property owner reserve, and how significant is the rent premium for leasing to this type of user?

The Foreclosure Factor

The calculation becomes more interesting when you factor in the distressed condition of many properties and loans in the commercial real estate sector.  If an owner has significant equity in the property and is in no danger of foreclosure or financial distress,  then leasing to a medical marijuana grow facility or retail dispensary may not be worth the risk.  But to the growing number of distressed property owners who are having trouble finding tenants and making mortgage payments, the risk reward calculation changes. If an owner is teetering on losing a commercial property to the bank in foreclosure, perhaps he or she will be more interested in signing a premium priced lease?

My Interview with a Special Investigator

I was having a pretty normal day at the office, comping properties, checking on email etc.  Until a pleasant looking woman arrived unannounced just after lunch and handed me her card:  Special Investigator for the Denver District Attorney. Ouch.  She asked me if I had a few minutes?  What else could I say, but “c’mon in…”

I asked what it was about, and learned that a certain property that we purchased and then resold last year was under a fraud investigation.  A fraud, apparently, that is becoming more and more prevalent in today’s real estate market and investors need to be aware:  people selling property that does not belong to them.   She asked me to pull the file for the property and then asked for copies of several of the documents.   Lots of weird questions ensued:  Please describe the seller’s, height, weight, distinguishing features?  She then showed me some pictures.  What do you remember about the ex-wife?  Excuse me?  What ex-wife?  I remember the son and the mom from closing, that’s it.  And they did not look anything like the people in the pictures!

Interesting thing was that we DID receive a call to the office earlier in the year from a person who complained that someone had sold her house without her permission.  But she sounded kind of crazy and we get calls from weirdos a lot in this business, so none of us really thought much about it.  But remembering that call, all of a sudden I felt like I was starring on the TV show Law and Order, so I had to ask:  “Should I be calling my attorney?” She sweetly replied that is was not necessary at this point (right), and informed me she is “a cop, not an attorney.”  (whew?)

So the story goes, apparently the “seller’s” of this particular house may not have had the right to sell the property.  This was a mild case compared to the blatant fraud that is happening with other deals, according to the investigator.  In this instance the husband “allegedly” removed the ex-wife from the deed with a Quit Claim deed without her permission and then sold the property and kept all the proceeds.  In my head the question kept coming up:  Am I in any way responsible for this?

After a pretty long cop-like conversation, I’m pretty sure I convinced her that our office and business had nothing to do with the Quit Claim deed and alleged fraud.  Although she admitted there were some red flags.  The organized groups that commit this type of fraud use a team of investors and agents, have in-house notary and use small private title companies to close the transactions.  We have that in common with the criminals.  Thankfully, we do keep impeccable records of our transactions and we were able to provide all documents she requested.  And the dates confirmed that our affiliated people or companies were not involved with the forged signature on the deed.  She also made phone calls to the title company and all the employees who were involved in the transaction and all our “stories matched.”

The investigator suggested that we make some procedural changes to our buying system which I would like to pass them along to other investors:  Ask for and get a copy of the driver’s license of the person who is signing the purchase contract at the time of signing. Make sure the driver’s license matches the title work, and be watchful of strange title occurances (like Quit Claim deed, power of attorney, etc).  We have previously left this type of identity checking to the title closer and never paid much attention during escrow if the title work came back clean.  In all my years of investing, this has never happened to me before, and hopefull will never happen again based on the new procedure.  Investors, keep a sharp eye out for this type of fraud!

Will it Happen Again?

Due to increasing requests about using IRA funds to purchase investment real estate, our team has created new preferred relationships for clients that streamline this process.  We now offer programs for direct IRA purchases of turn-key rental properties without or with leverage up to 65% non-recourse loans.  We can also organize purchases for LLC’s that own investment properties and private lending notes and first deeds of trust for our clients.  Continue reading…