January 19, 2018

A Mixed Bag: Medical Marijuana & Commercial Real Estate

by Kerry T. Boyle, Isaac Wiles Burkholder & Teetor LLC

In September 2016, Ohio established the Medical Marijuana Control Program by the passage of House Bill 523 (HB 523).

The legalization of medical marijuana affects many property owners. The passage of HB 523 places specific demands on property owners for authorized spaces to cultivate, process and dispense medical marijuana.

Ohio’s legislation initially authorized a maximum of 336,000 square feet for the cultivation of marijuana. By comparison, Denver, Colorado has 4.2 million square feet of cultivation area, including the cultivation of marijuana for recreational use. Although Ohio’s authorized use of marijuana is only for medicinal purposes, it appears if the initial cultivation area in Ohio will need to be expanded to accommodate Ohio’s medical marijuana market.

I have received several calls from property owners asking, “should I lease space in my shopping center to a dispensary?” As with many legal issues, that answer depends on the circumstances.

In a discussion with a property owner on this topic, the property owner struggled with the stigma of marijuana dispensaries and the effect such businesses would have on other tenants in the shopping center. In this scenario, I would classify the shopping center as “Class B” space. In this particular shopping center, there is an insurance agency, restaurants and a “mix bag” of other retail/office use in the shopping center. Some of the issues we discussed included:

  1. Increased traffic within the center and associated parking demands;
  2. Tenant’s payment of rent in cash, as banks are not currently providing banking accounts for businesses involved in cultivating, processing and dispensing marijuana because marijuana is illegal under Federal law;
  3. Because marijuana is illegal under Federal law, it is subject to forfeiture and seizure and exposes the property owner not just the tenant to potential liability;
  4. The costs of tenant improvements to build-out the tenant’s space in compliance with the State guidelines;
  5. Controlling the smell of marijuana;
  6. The effect of the potential illegal use would have on the landowner’s insurance and/or potential default under its loan; and
  7. Whether the tenant would be able to obtain insurance on its product. If a tenant cannot obtain insurance on the actual product it is selling (i.e. marijuana) and a fire destroys the premises, the ability to pay rent goes “up in smoke.”

On January 4, U.S. Attorney General Jeffrey Sessions issued a statement rescinding an Obama-era policy of non-interference with states that have legalized marijuana, which would allow federal prosecutors to determine which cases to prosecute. Needless to say, it will be very interesting to watch this process unfold in the coming years.