Real Estate Market: Leasing to Cannabis Dispensaries – Choom for Growth?

For the uninitiated, “choom” is a term of art coined by our President and his high school buddies during their formative years to refer to smoking marijuana in lieu of attending class.

Since those days, marijuana consumption has become a lot more mainstream, with many states and cities permitting medical marijuana – and medical marijuana dispensaries. Though still deemed illegal federally (Gonzales v. Raich), many states are licensing these establishments. And guess what? They rent commercial property, an average of 1,500 to 2,000 square feet, not to mention their grow facilities!

Numbers of operating dispensaries are hard to reliably find. Internet research indicates that California has between 2,500 and 7,800 operating dispensaries. Colorado has about 700 dispensaries and Arizona has about 150. Licensing for the other states is difficult to find from reliable sources on the internet. But let’s assume those numbers are correct, this equates at the maximum to 17.3m square feet leased, just for those three states.

Given 15 other states and the District of Colombia permit medical marijuana, this has the potential of 92.6m square feet of commercial real estate rentals in the States where it’s legal, with a potential 288.3m square feet of lease space nationwide. That’s not an insignificant number. The commercial real estate website, CoStar, indicated that as of this writing, that 9.1bn square feet are available out of 89.2bn square feet of building area in over 1.58m listings. So, this means that medical marijuana could reduce vacancy in CoStar by 0.26%, based on the above numbers.

Now, we are NOT advocating the expansion of cannabis dispensaries, however, we note its potential to have a meaningful impact on real estate in these troubled times. However, that becoming reality is quite unlikely. The US Federal Government is against this industry, which is why so much data is hidden behind a cloud of smoke.

Indeed, several dispensaries have been hit with huge IRS tax bills and liens because their deductions were disallowed due to them being illegal businesses – thus not conforming to the Internal Revenue Code. In fact, one of the early pot pioneers is declaring bankruptcy, “Owner Of First U.S. Marijuana Pharmacy Now Broke And Fighting IRS”. (Just ask Al Capone, Elliott Ness couldn’t get him, but a number nerd at the IRS did – the pen IS mightier than the sword!) And when the dispensaries don’t relent, the US Attorney then threatens the landlords with confiscation of their property. So, it’s unlikely that this industry will grow as organically as hoped.

However, we’ll soon see. In Colorado, this could change. There is a Marijuana Legalization Amendment, also known as Amendment 64, that will be voted on November 6, 2012 as an initiated constitutional amendment. This would institutionalize marijuana usage in the State Constitution and set up an interesting 10th Amendment (State’s Rights) legal battle on this issue. If unsuccessful in the courts – which is likely – we’ll still have a commercial real estate environment with high vacancy rates. If Colorado’s amendment withstands appeal, then perhaps we will see a huge “choom” in commercial real estate nationwide and previously high vacancy rates will just seem like a bad trip.

Time will tell.