Pot of Gold?

In early February, two monthly gatherings of real estate professionals hosted by the Realtors Commercial Alliance Miami saw attendance spike three-fold. “We usually get 25 to 30 people showing up to these events,” said Michael Silver, first vice president for CBRE Miami. “But we had about 90 people at the February events because both had to do with medical marijuana.”

Silver told The Real Deal that a majority of attendees were interested in how they could cash in on a new segment of the commercial real estate market now that medical marijuana is legal in Florida. “They asked where they should be buying industrial warehouses that could be leased to marijuana growing businesses,” Silver said. “And they wanted to know if it was true that they can charge three to four times the [normal] rent.”

Across South Florida, realtors and developers are anticipating that an influx of medical marijuana tenants will add another profitable dimension to the region’s already bustling industrial sector, as well as other segments of the commercial market. At the same time, government officials are scrambling to come up with new zoning regulations that will determine where indoor marijuana grow houses and medical marijuana treatment centers and dispensaries will be located. Dozens of cities and counties have enacted moratoriums that range from three months to one year on allowing medical marijuana businesses until rules have been put in place.

All of this is occurring as the state department of health works on developing regulations that will govern how medical marijuana businesses can operate in order to meet a July 1 deadline set by last year’s passage of a constitutional amendment that made medical marijuana legal in Florida.

The state had already established a limited medical program that handed out licenses to five operators to produce and distribute cannabis in a non-smokable form to patients with epilepsy and certain types of cancer. One of those companies is located in Miami-Dade, which adopted zoning regulations in 2015 for cannabis production and dispensing facilities for the unincorporated part of the county. The zoning rules prohibit grow houses and dispensaries from being located within 1,000 feet of child care centers, schools and religious buildings. The facilities are also prohibited from being within 500 feet of any area designated as an urban center.

Recently, Miami’s planning and zoning appeals board instructed city planners to investigate how jurisdiction works in other states that have legalized marijuana. After conducting research, they are to make suggestions on where indoor nurseries and dispensaries should be allowed, what restrictions can be placed on marijuana businesses and what the building permit process for stores and grow houses should be.

Lewis Cohen, a Miami attorney who focuses on real estate banking and finance, told TRD that brokers and developers interested in chasing medical marijuana tenants are in for a long wait. “It is going to take some time for regulations to be promulgated that make it very clear what a landlord can and cannot do,” Cohen said. “The waters are still a bit muddy.”

While medical marijuana businesses are willing to pay top dollar for warehouses to grow cannabis, Cohen says there is also a high level of risk in renting out to these types of tenants. “A landlord has to do due diligence on the tenant to make sure it is properly licensed to operate as a nursery or dispensary,” he said. “Most of these operations are indoors, so the landlord has to ensure the facility is appropriate for growing activity, which involves a lot of moisture, a lot of heat and draws a lot of electricity.”

Another problem with medical marijuana tenants is that they can only pay in cash because cannabis businesses are still unable to secure traditional banking relationships. “The [U.S.] Treasury Department has issued regulations on how a bank can legally open an account for a legal marijuana business,” Cohen said. “But it is still illegal under federal law, so most banks remain unwilling to get in that line of business.”

Still, in states where marijuana has been legalized for medical and recreational use, industrial and other commercial landlords are making a ton of money. In Oregon, all-cash investors flocked to the state to buy warehouses in 2014 after voters passed an amendment making recreational marijuana use legal, according to a recent Bloomberg report. In Portland, non-marijuana companies can rent industrial space for about $5 a square foot, while cannabis companies pay from $12 to $18 a square foot.

According to a 2015 CBRE report, the marijuana industry helped the post-recession real estate market in Denver recover quickly. Between 2009 and 2014, the industry accounted for 35.8 percent of the total net absorption in industrial space. At least 3.7 million square feet of industrial warehouses in Denver are occupied by marijuana tenants. Specifically, marijuana tenants have provided a boost for Class B and Class C warehouses in Denver, which saw vacancy rates decrease from 8 percent in 2010 to 2 percent in 2015, according to the CBRE report.

“Before marijuana was legalized in Colorado, landlords and developers couldn’t give away these buildings,” said CBRE’s Silver. “Now these locations are leasing or selling for three to four times what a normal dry warehouse would normally cost.”

The CBRE report states that lease rates spiked 56 percent, from $4.06 per square foot to $6.34 per square foot. Also, marijuana investors paid an average of $80 a square foot to buy warehouses in Denver that were going for $40 to $50 a square foot. And the city now has more marijuana dispensaries than liquor stores, the CBRE report states.

“In 2012, when recreational marijuana was approved in Colorado, there was a huge influx of investors,” Silver said. “We expect to see the same thing in Florida.”

However, Silver noted, the primary real estate players going after medical marijuana facilities will largely be local private investors willing to take on the risk. “Since marijuana is still illegal at the federal level, institutional capital is not pursuing this market,” Silver said. “You are not going to see the big trusts or major industrial developers that are funded by institutional capital getting into this industry.”