EBA Summer Meeting: Challenges Facing CRE Industry as a Result of Legalized Pot

Ross Simmons Project Manager GRS | Corteq

Ross Simmons
Project Manager
GRS | Corteq

GRS | Corteq is being represented this week by Tony Mueller, Jeff Coyne and Ross Simmons at the semi-annual conference of the Environmental Bankers Association (EBA) in Denver. Conference attendees learned yesterday about the perils faced by landlords and lenders in areas where possession and use of marijuana has recently been legalized.

EBA attendees heard a presentation Monday from Denver Assistant City Attorney Marley Bordovsky, who reported that the pot business has raised new concerns in varied and surprising ways. In 2012, voter-passed initiatives made Colorado and Washington the first states to legalize the recreational use of marijuana. Oregon, Alaska and the District of Columbia followed suit in 2014 and 2015. Marijuana use for medical purposes is allowed in 18 other states.

The first challenge for the lending world is that possession and use of marijuana remains a criminal offense at the federal level, meaning that federally-regulated banks are not allowed to open accounts or provide other services to marijuana-related businesses, even in locales where it has been legalized by state or local laws. Consequently, the legalized pot biz is a 100% cash operation. Marijuana businesses are often far down a chain of lessees and sub-lessees, so that building owners and their lenders may be completely unaware of the specific uses for their properties.  Bordovsky told EBA attendees that the legalized pot industry has quickly grown to represent 1% of the GDP in the metropolitan Denver region, and is still rapidly expanding. Available commercial warehouse space in the region has been quickly gobbled up by large indoor grow operations.

Because marijuana use has been illegal for so long, Bordovsky said that something of a criminal mind-set often still prevails even where the business has suddenly been legitimized. Hence, egregious violations of building codes, fire and life-safety codes, and public health rules are rampant at the grow operations. Temporary walls and dividers installed to improve the growing environment for plants often block light and ventilation to other parts of the buildings, or impede access to fire exits. Widespread building mold problems have resulted from plant irrigation activities in buildings not designed for such use. Hash oil is a popular by-product extracted from marijuana plants using a solvent, often butane, which is highly flammable and heavier than air. Nearly three dozen violent hash oil explosions have been reported since the beginning of 2015 in Colorado, Bordovsky reported.

Rapid growth in the legalized marijuana industry has been good news for the real estate markets in Colorado and Washington. But, add the hazards of production for marijuana products to the litany of concerns deserving attention from commercial real estate owners, managers, lenders and consultants as the legalization of pot spreads across the country.

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