Is Leasing to Medical Marijuana Tenants Legal?

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 2010, two have been publicly and proudly announced, and one is a little more underground, but buzzing:

• 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?