Some Landlords See a ‘Growth’ Industry

Donna Kardos Yesalavich, March 25, 2014, Wall Street Journal

MediSwipe bought a former cattle ranch in Pueblo County, Colo., where it plans to build greenhouses and sublease parcels to growers and medical marijuana dispensaries. Sean Sheridan

Some real-estate firms are capitalizing on the difficulties legal marijuana entrepreneurs face when trying to find space by specializing in the buying and leasing of properties where the drug can be produced.


Last week, two such firms announced marijuana-focused property purchases in Colorado and Arizona, two of the 20 states and the District of Columbia that have legalized medical-marijuana distribution. Colorado is also the first state where recreational marijuana is being legally distributed under state law; Washington state will follow soon.


Zoned Properties Inc.,  a recently formed real-estate investment company that will lease land, facilities and equipment to medical-marijuana businesses in Arizona, acquired a multitenant light industrial park in Tempe, Ariz., for $4.6 million. It includes 83,000 square feet of warehouse space on a 5-acre complex. This is only its second acquisition. Last month, it bought an approved site for a medical-marijuana dispensary in Gilbert, Ariz., for $1.1 million.


MediSwipe Inc., of Detroit, last week bought 80 acres in Pueblo County, Colo., zoned for agricultural use, a requirement for marijuana production there, on a former cattle ranch. It plans to put up greenhouses and sublease parcels to growers and dispensaries. This is the first real-estate venture for MediSwipe, which thus far has focused on other ancillary businesses to the medical-marijuana market such as digital patient records, as well as hemp beverages. It paid $122,500 for the land but has committed up to $5 million to build greenhouses and infrastructure on the property.


MediSwipe Chief Executive B. Michael Friedman said while the number of firms like his is limited right now, the field is likely to expand as others see value in the business.


“We’re only the first 90 days in and more firms and investors are going to look at this and say, ‘Are there acreages in these 20 states? If we’re able to get the proper zoning, it is now very valuable for this type of marketplace,'” he said.


These deals came a week after a 20-acre lot in the state of Washington, where legal recreational distribution is set to launch this summer, was purchased by a private group of investors planning a business park specifically for legal marijuana growing and processing.


The firms see opportunity amid the uncertainty wrought by a complicated web of regulatory red tape, contrasting state and federal laws, and the controversial nature of the legal marijuana industry.


Even in states where marijuana production is legal, some counties and municipalities can still ban production, while restrictions on proximity to schools and child-care facilities, among others, further limit the pool of potential locations. At the same time, federal law deems marijuana illegal, adding to the difficulty of finding landlords who will rent or lease warehouse space or land for legal marijuana businesses in those states that allow it. In August, the Justice Department indicated in a memo that it generally would leave marijuana enforcement to state and local authorities, but many landlords don’t want to take any chances.


Meanwhile, the firms are charging premiums to account for the industry’s inherent risk and the limited supply of places where marijuana can be grown.


MediSwipe is charging about $15 a square foot of greenhouse space fully outfitted with a computer-controlled environment of heaters and air conditioners, among other equipment. In comparison, according to real-estate research firm CoStar Group Inc., the average quoted asking rental rate for available warehouse space in the Colorado Springs industrial market area was $5.54 a square foot at the end of 2013. MediSwipe said it has three tenants in line to take up about 15 acres combined, starting as early as May.


Mr. Friedman said the industry’s higher rent prices were established by individual landlords who wanted extra compensation for taking on the risk.


“A lot of landlords are able to charge a premium for this situation,” he said. “What we’re doing is trying to take advantage of that.”


Demand for space by marijuana businesses is partly responsible for rising lease rates for industrial space, which are up 21% in Denver in the past two years, said Brad Calbert, president of the Denver office of commercial real-estate company Colliers International. He said rates for traditional warehouse tenants range from about $3.75 to $4.25 a square foot a year, while marijuana tenants are paying between $8 to $17 a square foot a year.


Meanwhile, Denver’s industrial vacancy rate has fallen to just 3.1%, a historical low. Demand is at “a frenzied level right now,” he said. “That’s put intense pressure on the existing inventory.”


In Arizona, Zoned Properties’ Tempe complex is zoned for marijuana production, and it has one tenant in the sector. The company isn’t able to put a medical-marijuana tenant in the complex’s only vacant space because regulations prevent two such companies in close proximity, but Zoned is betting its value will rise, especially if regulations loosen.


“There’s always the possibility of a variance,” said Bryan McLaren, vice president of operations and chief sustainability officer for Zoned Properties. “In working on developing a relationship with state regulators, we’re hoping to explore the possibility.”


In Washington, the investor group leased some 79,000 square feet of existing space in neighboring warehouses, which it is subleasing to medical-marijuana tenants, and plans by the end of the year to add more than 600,000 square feet of growing and processing space on the 20 acres it acquired from the Port of Willapa, according to Rebecca Chaffee, the port manager. The investor group paid $400,000 for the 20 acres, and the total cost for the development is expected to reach $95 million, according to one of the investors.


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