Proposition 64 and Beyond

June 22nd, 2017

LOS ANGELES, CA – With the passing of Proposition 64 in late 2016, recreational marijuana is now officially legalized along with medical marijuana, enabling any California resident over 21 to grow and possess marijuana immediately. However, another, perhaps unintended, benefit of this new law has been a sudden increase in value for some commercial real estate properties. Due to a new pool of eager tenants and buyers interested in securing buildings and cashing in on this emerging and seemingly profitable business, properties in certain cities and zones have suddenly increased in value. This increase in demand is prompting questions from landlords about how much their buildings are now worth and the risks associated with getting involved in this growing industry.

There seems to be no shortage of interested buyers and tenants searching for functional buildings for dispensing, cultivating, manufacturing and distributing cannabis. Many cities and industrial real estate owners have remained wary of marijuana, while others have acted quickly to capitalize on premium pricing for their buildings. The State has until Jan. 1, 2018 to begin issuing licenses; however, part of the law allows cities the right to restrict commercial uses and implement taxation. This has caused local governments in California’s 58 counties to begin scrambling in an attempt to update and establish policies focused on cannabis related business and pass local measures to ensure its regulation prior to the initiative going into full affect at the state level. In these cases, cannabis businesses eager to get up and running in these proactive cities will be required to obtain a local permit, as well as a state permit once those permits become available next year.

While some cities have taken preemptive steps towards passing local measures, others have just started the discussion, while others will remain neutral until the new state law goes into effect next year. For example, the City of Los Angeles passed Measure M in March, 2017 which, “paves the way for regulation of Cannabis businesses and heavily focuses on taxation and enforcement, while leaving the licensing and regulatory framework to public hearings and debates”, according to the city’s website. Other cities, like Redondo Beach and Paramount, have only begun the conversation as to how they’d like to handle the new legalized drug and continue to hold out on issuing business licenses to prospective users.

The City of Long Beach has become known for its proactive steps towards passing local measures, which has caused many marijuana groups to flock to the city, driving up the price of its industrial real estate within the cities approved “buffer zones”. Though leasing, as opposed to selling, seems to be less favored by landlord, rates have nearly quadrupled to $2.50-$3.00/sf for buildings with adequate parking, power and clear height, while sale prices are approaching $250-$300 and, in some cases, up to $400/sf. Even with these once unprecedented lease rates, many landlords remain uninterested in leasing to these types of tenants for reasons such as moral objections, negative past experiences, or uncertainty of the industry’s future in the eyes of the federal law where it remains illegal. Other building owners still wishing to take advantage of the situation while limiting their future risk have opted towards selling and cashing out while the market allows.

There may be benefits to leasing or selling a property suitable for this type of use and landlords should remain prudent when moving forward with any prospective cannabis user. Each city has reacted to the passing of Prop 64 differently and is working to establish its own rules and regulations for where these businesses will be allowed, what restrictions will be enforced, and what requirements applications will include. The City of Long Beach, for example, requires applicants to secure a building, with the owner’s consent, prior to applying for a cultivation license. They can then begin a rigorous application process which includes building out the necessary improvements with permits and inspections before obtaining a license. Many landlords negotiating leases are requiring enhanced security deposits and termination options to mitigate any risk, while some sellers are demanding non-refundable deposits and quick contingency periods in escrow. Cannabis tenants and buyers seem to understand the push-back that many property owners still express, and are willing to agree to these heavy terms in an effort to establish their business in an environment that now legally marijuana.

While there continues to be many questions surrounding this emerging industry, the legalization of medical and recreational marijuana has arrived and, in many respects, created un-found value for many property owners. Conservative building owners uninterested in involving themselves in an uncertain and once illegal industry aren’t struggling to fill their buildings as the current South Bay market continues to attract an abundance of well qualified conventional users. With a proper understanding of the local municipalities, a good attorney, cautious enthusiasm and guidance from an informed broker, this type of use may be a great option to consider.

Tyler Rollema