Cannabis landlord cuts through the weeds

As California adjusts to the slow rollout of legal recreational marijuana use, the industry’s players are navigating through the haze of regulations that vary from city to city.

No one knows this better than Stephanie Smith, who has been in cannabis real estate for more than a decade. She previously worked at a liposuction clinic, but became an investor and landlord for every type of cannabis tenant, including growers, manufacturers and retailers. Her firm, Industrial Partners Group, now manages more than 2 million square feet of developed space, mostly in Southern California, Smith said. (She owns non-cannabis space as well, including a property leased by retail giant Walmart.)

It’s a challenging time, Smith said, because even though recreational use is now legal, local regulations keep changing behind the scenes. Recreational pot has been legal since the start of 2018, but beginning at the start of this year, all but six of Los Angeles County’s 88 cities have prohibited marijuana retail sales, along with more than 80 percent of cities throughout California. The state has issued far fewer licenses than projected, and residents in some cities in the San Gabriel Valley have been fighting lawmakers who permit cultivation.

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Smith said many cannabis-related business owners are frustrated with how municipalities, including the city of Los Angeles, have complicated the situation for would-be players.

Smith got into the field in a roundabout way. When she started to lease space more than a decade ago, Smith renovated a property so that it could accommodate a laundromat. Then a bidding war between cannabis companies that wanted to use the space started. After Smith secured rental rates at three times the amount she originally asked for, she started to add properties that would attract more marijuana firms to her portfolio.

Fast-forward to today, when Smith is leading political action committees to initiate ballot measures on commercial regulations in cities throughout Southern California. She is also suing several cities — including Colton, Hemet, Moreno Valley and San Bernardino — over cannabis policies that she claims create monopoly markets.

In the legal battle that Smith is embroiled in with the city of San Bernardino, local police have reportedly been building a case against her for allowing the illegal production of cannabis at her properties. Police have raided six of those locations since 2017.

That tension led to police raiding Smith’s house in the Pacific Palisades twice. The most recent raid occurred in February, and Smith was arrested for possession of hydrocodone pills that were found at her home. Smith said they were left over from the liposuction practice in Beverly Hills. That same night, the city of San Bernardino denied her bid to grow and distribute marijuana, although it approved 16 others.

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Smith pleaded not guilty and was released on bail. She is scheduled to appear in court on April 25 for a pretrial hearing for drug charges related to the raid. A few days after her arrest, Smith sued San Bernardino, alleging that some of the 16 businesses that received licenses from the city had arranged a pay-for-play scheme to win approval.

Smith spoke with The Real Deal about the changes the cannabis industry has experienced and the hurdles it faces moving forward. This interview has been edited and condensed for clarity.

How has your business changed since recreational marijuana became legal last year? Every time the laws change, it ripples through the industry. Cannabis has gone from the Wild West to quasi-corporate. Jan. 1, 2018, was the put-up or shut-up moment. Now, there is a real compliance framework and a sense that tenants can rely on the state, instead of fearing [the government]. [Before that], the industry had zero trust in the government, but that day began the trust-building process.

How have things changed in terms of demand for cannabis-manufacturing industrial space in the past year? We’ve seen a dramatic jump in the space requirements from the industry, especially manufacturing and processing. The demands from the industry are for larger size spaces and higher quality assets… Ceiling heights are going to trend upward as distributors [become] more sophisticated and adopt racking systems. Once interstate commerce opens up, it will be tough to lease anything without a dock high [loading bay] and freeway access.

How do you see regulations at the local and state level changing in the next year? The state has done an excellent job — maybe not an A-plus, but certainly a solid A. The only real fault I can find at the state level was giving local municipalities so much control, but I understand why they thought it was necessary. On a local level, I sincerely hope L.A. opens up licensing to all that qualify and puts efforts into closing unregulated shops.

Manufacturing, growing and retail businesses can be a bit of a hot potato in some areas in terms of zoning, having to be a certain distance from schools, etcetera. What strategies do cannabis companies have to adopt in order to grow under those conditions? The industry as a whole has done a stellar job explaining how manufacturing, growing and retail are different animals. Most citizens get it, even if their elected representatives don’t… Too many city councils have no idea how the industry works, and they think that their personal beliefs absolve them of the responsibility to learn.

On the other hand, there are smart and progressive municipalities [that] are working hard to attract the industry with competitive tax rates… We will see a municipality offering tax incentives to attract the industry as early as 2020. A few years ago, cannabis was taxed up to $25 per foot. Today, it’s as low as 0% for certain parts of the industry.

What aspects of commercial real estate in L.A. make it more difficult here as opposed to someplace like Denver? The stakes are high in Los Angeles because the city has moved so slowly and regulations have changed repeatedly. From a landlord’s perspective, keeping a property vacant in hopes of land use entitlements isn’t feasible given the pace of licensure and lack of cannabis use requirements… We still don’t know the parking requirement for cannabis, so whether a particular property will work often remains to be seen.

Colorado rolled out an open, thorough, corruption-free licensing program that worked. Most people in the cannabis industry wish L.A. would take notes.