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April 20, 2015

Marijuana dispensaries, recreational shops struggle to find homes in rental market

Puget Sound Business Journal

Annie Zak

If you run a medical marijuana dispensary or recreational pot store in Washington state, chances are you've had a hard time trying to find a place to set up shop.

Challenges in finding a home include landlords not wanting to deal with a business that is still federally illegal, landlords proposing rent hikes and state restrictions on where the dispensaries can move in based on what other businesses are in the neighborhood.

With the recent passage last week of the Cannabis Patient Protection Act in the Washington state Legislature, finding a place to house a marijuana business is only going to get trickier, industry experts say. That new law will lead to the shutdown of the state's illicit medical dispensaries and change the market drastically, rolling the medical industry under the same umbrella as Initiative 502, the state's recreational marijuana law.

"It's super tough to find a place," said John Davis, CEO of Northwest Patient Resource Center, a medical dispensary in Seattle. "Often when they are able to find a place, they're hit with what we call a cannabis tax. Landlords say, "'Hey you guys are dealing in cannabis so you're going to be rich and we're going to charge you double the market rate.'"

Landlords renting to a still federally illegal business could be subject to civil asset forfeiture if the dispensary ever gets in trouble with federal law enforcement. That's an issue for recreational pot shops, too.

Matt Wood, a senior vice president at real estate firm Kidder Mathews, said a landlord's debt situation can also prevent it from renting to a marijuana business.

Most properties have debt associated with them, he said, and if that debt is with a lender insured by the Federal Deposit Insurance Corp., it's not wise to rent to a federally illegal operation. That usually means the dispensary or shop needs to find a landlord that either owns the building or whose debt is through a credit union.

As for landlords jacking up rents, Wood said he has seen that, too.

"It's definitely because of the risk they have and because (marijuana businesses) have such limited alternatives," he said. "Definitely on the warehouse side, we've seen landlords charge what would be 150 percent of the usual rent. And the 502 (recreational) guys will pay premiums."

Some aren't waiting on a landlord to determine their fate.

"A lot of them have been forced to raise capital," Wood said, "and go buy buildings themselves."

For medical dispensaries and recreational shops alike, there are a ton of rules that must be followed just to find a location.

Marijuana businesses have to deal with zoning regulations that keep them at least 1,000 feet from schools, public parks, recreation centers and generally other places with children, such as daycare centers.

There's even a website, Canna Zoning, dedicated to helping businesses rule out spots that are off-limits and find locations.

"The 1,000-foot rule combined with unwilling landlords makes it extremely difficult to find suitable property," said Ryan Espegard, an attorney at Gordon Thomas Honeywell with a number of clients in the recreational marijuana business. "We have clients that spend an unbelievable mount of time looking for the right property, sometimes over a year."

Under the new CPPA law, unlicensed medical shops will be shut down by summer 2016. But after that, the Washington State Liquor Control Board will likely re-open the application process for medical dispensaries to start up again as a regulated business.

"There's going to be a whole new pool of people fighting for the same properties," Espegard said.

He said recreational shops are likely celebrating the changes in regulations for medical dispensaries. Because pot is usually cheaper in the medical setting, the new rules will get rid of a slice of competition for the recreational shops and allow them to start selling medical marijuana too.

For the full story, go to Puget Sound Business Journal.

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