Leasing woes: How the cannabis industry is finding space to grow

Apr 17, 2019

The latest hurdle in the cannabis industry is one of growth. As New Jersey works to legalize the recreational market in the coming months, state officials are estimating that nearly 100 cultivation sites will be needed to grow and supply The Garden State with cannabis. This estimate gets bigger when one considers the boom in the state’s medical marijuana market should adult-use be legalized by the end of May.

The New Jersey Department of Health anticipates enrollment in the state’s medical marijuana to double in size by 2020, calling for up to fifty more cultivation sites for the medical market alone. This comes out to about 1 million square feet in growing space, but with only twelve licenses issued so far, the likelihood of meeting that goal by May 30 is shrinking.

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New Jersey is not alone. Finding space to cultivate and grow marijuana could hamper the growth of many American markets. Many states grow their own since shipping across state lines or importing from Europe or South America is out of the question, but finding available land and factory space is not getting any easier.

In California, the quest for cultivation space is altering property prices. According to the local North Bay Business Journal, prices have nearly tripled since 2017, with monthly rates skyrocketing to $225 per square foot in some places. This is due to the fact that location is critical. California laws restrict manufacturing and distribution to specific zones, and cultivating cannabis comes with even more restrictions.

Because of this, cannabis companies are reluctant to disclose to tenants or leasing agents what business they are actually in. Not only is cannabis still federally illegal in California, but there is also a mountain of red tape to go through in order to even lease a cultivation or distribution site. Cannabis growers need a license, and this license must be authorized by a landlord before the site can legally start growing, extracting, and distributing cannabis and cannabis products.

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Los Angeles-based lawyers Gipson, Hoffman, & Pancione note that traditional lease forms do not apply to cannabis facilities, meaning that landlords need to have risk management strategies in place to protect themselves and their tenants.

“Savvy landlords and tenants and their respective lawyers should be aware that leasing to a cannabis business poses unique issues not ordinarily encountered by commercial landlords or typically addressed in the commercial lease forms currently in wide circulation,” the law firm stated in their blog last summer, explaining that commercial cannabis leases need to have unique permitted use and compliance-with-law provisions that apply specifically to the marijuana industry.

While other, non-cannabis related businesses can easily comply with federal and nuisance laws, cannabis leases require special addendums that address the legality of the drug as well as the smell, which could be a nuisance for neighbors and nearby businesses. This is all in addition to obtaining all of the necessary licenses and having those licenses authorized by a willing and able landlord.

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As the cannabis industry continues to grow at an exponential rate across North America, finding space for that growth is going to be critical. States are working within the confines of their own laws to address the needs of their local cannabis markets, but these kinds of limitations are not making it any easier. The unnecessary stress it puts on the infrastructure of states like California and New Jersey could deter other states from opening up to the possibility of legalized marijuana in the future. Investors need to be aware of these limitations as they will no doubt affect the future growth of this industry.

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