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The Coming of the Industrial Cannabis Lease

Article by Veronica Law

The cannabis plant produces two products – marijuana and hemp. This article focuses on the importance of real estate to the business of the production, sale and use of legalized marijuana. The seed to sale process involves cultivators, processors and retailers who are producing, manufacturing and selling marijuana and marijuana-infused products. They all need real estate — a lot of it.

Consider what’s going on in Colorado, where the sale and use of medical and adult-use (recreational) marijuana is legal. The business has reinvigorated all types of commercial real estate, particularly in the industrial warehouse sector. Previously vacant, underutilized and dilapidated warehouse facilities are now hot properties. Marijuana cultivators are demanding class B and class C industrial warehouse space that can be retrofitted to be greenhouses or climate controlled spaces for use as grow facilities. In Denver, the average size of grow facilities is 10,000 to 14,000 square feet! Further down the supply chain, the companies that are processing the marijuana to create baked goods, edibles and extracts are seeking flex and small manufacturing spaces. At the retail end, the sellers are hunting for commercial retail space for dispensaries in areas that are populated, easily accessible and with high visibility, but away from churches and schools.

The landlords that have been willing to lease to these budding entrepreneurs have fared well from an economic perspective. They typically secure rental rates at up to three times the market rate. The average triple net rates exceed $14 per square foot in the Denver market. But, such prosperity comes with increased risk and cost. Marijuana is still classified as a Schedule 1 controlled substance under federal law, so its use and sale remains illegal at the federal level. As a result, most banks won’t provide banking services to marijuana related businesses, leaving them no other choice but to manage large amounts of cash on their own. This of course leads to safety and security concerns  for landlords and tenants. Furthermore, there is still an ongoing concern that property could be seized if the federal government takes the position that the leased space is an instrument of crime. And last but not least, knowledgeable real estate attorneys will have to be hired to craft lease agreements that address the risks and implement protections for both the landlord and the tenant.

So what about Texas? Although the state laws of Texas have remained almost entirely opposed to any legal use and sale of marijuana, there is broad public support in Texas for reform. 83% of Texans support legalizing marijuana in some form and 53% of Texans support full legalization. Currently, the only legal form of a cannabis related product is pursuant to the Texas Compassionate Use Act passed in 2015. This legislation authorizes the production and dispensation of cannabidiol, which is low-THC cannabis used to treat seizures associated with intractable epilepsy.

Texas has always proudly marketed itself as a state with a plethora of economic opportunities relatively free from over-burdensome governmental regulation. Imagine that what has happened in Colorado can happen in Texas. Colorado’s legal marijuana market sales during the 2016 calendar year totaled about $1.3 billion and resulted in nearly $200 million in tax revenue to the state. A conservative estimate puts the total addressable market for medical and adult-use retail and wholesale marijuana sales in the United States at close to $20 Billion by 2019. Since Texas is five times more populous than Colorado, the potential market in Texas could exceed $6 billion in sales and likely over 1 billion in tax revenue if it were to legalize the use and sale of marijuana.

From a dirt, bricks and sticks perspective, Texas has nearly perfect conditions for this real estate intensive business. There is an abundance of underutilized industrial warehouse space for cultivators, plenty of flex and small manufacturing locations for processors, available retail locations victimized by internet sales and more than enough entrepreneurial spirit (and attorneys). Could the Texas real estate industry be buzzing with cannabis-related activity soon? The next legislative session is in 2019 and preparations are being made to advocate for reform. My (conservative) estimate is that if the lobbyist are heard in 2019, within three to five years, the landlords, real estate brokers and attorneys could be mile high in new business.