Institutional capital is not pursuing investment opportunities
related to the marijuana industry because it is an illegal
activity at the federal level. The primary real estate plays
are local and private investors who display a spectrum of
investor sophistication ranging from one-off deals to savvy
owners who have embraced the industry and will expand
not only within the local market but also to other markets as
The primary risk owners and investors incur is qualifying
prospective tenants, while also preparing the building with
expensive power upgrades. For this reason, landlords are
securing transactions with pre-paid rent, hefty security
deposits, and creative lease language.
Mold is not a risk to landlords and investors because grow
operations are not legally allowed to be hydroponic. A
lingering smell is also not a concern because the plant odor
dissipates when the plants are removed.
WHAT MARKETS ARE ON THE HORIZON?
Alaska, Oregon, and Washington, D.C. voted in favor
of legalizing recreational marijuana in the most recent
November elections following in the footsteps of Colorado
and Washington. In the next few years more states may
move in this direction amid growing public support and
federal relaxation. Twenty states and Washington, D.C.
already allow for some form of medical marijuana use and
16 states plus Washington, D.C., have decriminalized the
possession of small amounts of marijuana.
As discussed earlier, legalization brings much-needed
tax dollars into government coffers. NerdWallet recently
estimated U.S. tax collections from marijuana would top
$3 billion annually if all fifty states legalized recreational
marijuana use, with California taking in the largest share of
over $519 million annually.
There is much to be learned from Colorado’s venture into
legalized marijuana and how this emerging industry creates
both risks and opportunities in industrial real estate. What
is clear is that Denver’s industrial market benefitted from
the new demand source and the tenant’s willingness to pay
a premium. As growing public support meets struggling
government budgets and legalization spreads beyond the
current handful of states, it behooves industrial real estate
owners, investors, and brokers to carefully understand the
industry’s risk and opportunities.
“Market Size and Demand for Marijuana in Colorado,” Colorado Department of
Revenue, July 2014. Grey market transactions are medical marijuana patients selling
their excess product to take advantage of a tax rate differential. Recreational marijuana
is taxed at nearly 25% by the state, and local municipalities may levy an additional tax on
top of that. Medical marijuana is taxed at 2.9%.