The Risks and Rewards When Cannabis Businesses Move into Malls and Warehouses
In some parts of the country, the demand for cannabis extraction, distribution and retail dispensaries has outpaced supply. That’s created opportunity for real estate owners and operators, whose empty strip malls and warehouses now represent a steady source of rent.
The need is clearly reflected by the demand: In states where medical and recreational cannabis had been decriminalized, there was a 42% increase in demand for warehouses, a 27% increase for storefronts and 21% increase in land for construction between 2017 and 2020 for cannabis facilities.[1]
Investors in cannabis businesses have pushed increasing amounts of capital into the industry, helping spur demand.
Meanwhile, the COVID-19 pandemic devastated the real estate business, which is still in an uncertain recovery. While real estate owners and operators may envision cannabis operations offering desperately needed revenues, it’s not a simple process to repurpose space for cannabis. On top of that, repurposing property for cannabis businesses raises novel risk and insurance issues for property owners.
Considerations for cannabis real estate
Cannabis licenses are location specific and in high demand — they are difficult to obtain and required for any new site. As a result, cannabis businesses can’t easily move locations if something compromises their extraction or distribution facility or retail storefront. They’re unlikely to leave a location once they’re settled, making it essential for property owners to “get things right” when looking for tenants.
The implications for repurposing a space for cannabis retail or growth and processing raise challenges to a building’s functional systems and zoning:
- Utilities. Cannabis cultivation and processing businesses can’t simply move into a warehouse that doesn’t meet specific needs. These facilities require a considerable amount of power for lighting, dehumidification and cooling requirements, which can range from 25 to 35 watts per square foot. When local utilities cannot provide the necessary power, cannabis cultivation and extraction facilities will need to have site-generated power through a generator.
- Because a grow site needs an irrigation system, the site domestic water service to the building will likely need updating. The site will need backflow prevention, and the location, routing, size and depth of the sanitary drainage system helps determine capacity. Sites that already have the proper utilities for cannabis cultivation or extraction will save a significant amount on design and construction are in high demand.
- Fire and life safety. Building code requirements may necessitate updating or installing sprinkler systems. All extraction and cultivation sites, where growers use potentially dangerous chemicals, will need proper sprinkler systems. Depending on the site, its configuration, the type of construction and use, additional fire or life safety upgrades may be necessary as well. Retail facilities must need proper layout and safety precautions for fire safety and to deter crime.
- Zoning codes. Each city, district or county will have rules when it comes to where cannabis facilities can be located. Even if your jurisdiction does not have a specific cannabis zoning type, these facilities will fall under another use type per local zoning codes. For example, cannabis facilities are not allowed within a certain distance of schools and religious institutions. Renovation projects may incur a change in use, which may require rezoning or necessary municipal approvals.
Insurance implications for cannabis operations
Building owners take on additional risk when cannabis businesses move into their space as most property policies exclude any loss as a result of cannabis. Even in states where cannabis is legal, an insurer may still not be responsible for resulting damages under the insured’s policy.
Policyholders engaging in what is considered a “dishonest or criminal act” may find that it bars coverage for a loss or damage resulting from that activity. In one case, the U.S. Court of Appeals for the Sixth Circuit ruled a landlord’s insurance policy did not cover the damage caused by commercial tenants who grew marijuana in rental units because of its “dishonest or criminal acts” exclusion.
In addition, cannabis retail facilities face an increased exposure to theft, as product and large amounts of cash on-hand make these outlets a viable target. As a building owner, lessors may be liable and other tenants nearby may not appreciate the added risk of their newest neighbors.
Facilities that house cannabis extraction that use flammable chemicals will also be subject to a more rigorous inspection and audit by their carrier to ensure the space is well protected before offering a policy.
