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Bay Area Real Estate Is Flying High

Since the passage of California Proposition 64 in November 2016, communities in the greater San Francisco Bay Area are having discussions—some internal and quiet, others very public—revisiting their positions on medical and recreational marijuana.

What is a cannabis property?

A cannabis property is a property—industrial, warehouse, retail or otherwise—where a local municipality allows a cannabis business to legally operate. In their attempt to integrate cannabis into communities, cities can designate “green zones” where cannabis properties and communities can coexist with the least amount of adverse impact on “sensitive receptors” (see below).

Now, it must be noted that zoning differs from city to city. What works in a dense city like San Francisco, which mostly has retail and residential uses integrated throughout, won’t work for a smaller suburban community. So, look to local regulations to give you guidance whether your client’s property qualifies.

As real estate professionals we all understand the concept of highest and best use; here is where, through restrictive zoning ordinances, cities can create cannabis real estate winners and losers.

One local example is in San José, where the zoning ordinance allows dispensaries to locate in the following zoning districts: light industrial, heavy industrial, combined industrial/commercial, industrial park and downtown primary commercial (second story only). They are not allowed in other commercial zones, in planned development districts or in residential zones. They also are not allowed in three development policy areas (North San José, Edenvale and the International Business Park).

Patti Zanin, an independent real estate agent in Denver, says that buildings zoned as “light industrial” that have been vacant for years are now the most valuable properties in the area, thanks to the marijuana industry. “Properties go so quickly that a secondary market has blossomed; well-heeled companies will buy a property, get a license, and sell the whole package to smaller businesses.”

Translation: If you had a not-so-desirable industrial building in a not-so-desirable area but away from sensitive receptors, you had a property that saw rents almost double—and in some cases triple—and values go through the roof. Amazingly enough, this phenomenon is not only occurring in San José but also in Oakland, San Francisco, Hayward, Hollister, Gonzales, Monterey…in fact, throughout the state and even in other states—pretty much anywhere cannabis is allowed and properties are available.

Stay away from sensitive receptors

When evaluating a property for a client, a landlord or a potential tenant should be made aware of sensitive receptors, as they can make or break a deal. Sensitive receptors include, but are not limited to, all residential housing, schools, daycare, parks, hospitals, rehab centers, convalescent facilities and places of worship. These are areas where the occupants are more susceptible to cannabis’ adverse effects.

In San José, a property must conform to the following sensitive-receptor setbacks in order to qualify as a cannabis property:

  • 1,000 feet from public or private preschools, elementary schools or secondary schools; child daycare centers; community and recreation centers; parks; or libraries

  • 500 feet from substance abuse rehabilitation centers or emergency residential shelters

  • 150 feet from places of religious assembly; adult daycare centers; or residential uses (including legal nonconforming residential uses)

  • 50 feet from another collective

Potential windfalls and pitfalls

Because of the scarcity of available properties, the reward to the landlord is the opportunity to receive higher-than-market rents. There are many examples of this: one registered medical marijuana dispensary in San José negotiated a lease in 2015 for $1.25 per square foot; the going rate for commercial light industrial sites in the area at the time was $0.85 per square foot, a 47 percent increase to the landowner. Another dispensary in San José is paying almost $3.00 net for a property (well over the rent for a comparable industrial building and closer to a retail rental rate). In Oakland, some warehouse/industrial buildings are fetching as much as $200 per square foot! Another positive is that a property owner who leases space to one of the “good actors” can typically expect a tenant to spend millions in improvements to the property.

On the other hand, a property owner might face a risk if her mortgage is held by a federally chartered bank. The loan could be recalled, as the tenant would be considered to be engaging in illegal activity and in violation of the loan agreement, without exception.

Although banks don’t typically go looking for federally illegal tenants, they are on occasion notified by federal law enforcement. Property owners should beware that if they have financing, they understand the peril of a note being recalled.

An additional risk to landowners is the current climate in Washington, D.C. and US Attorney General Jeff Sessions’ stance on marijuana. Although steps were taken by Rep. Barbara Lee to defund the “war on drugs,” leaving the department rather unable to enforce such laws at present time, there is the potential of the Trump administration reviving enforcement activity.

One such notable case was that of Harborside Health Center, an Oakland medical marijuana dispensary in operation since 2006 with tens of millions in annual sales, which the Feds targeted in an attempt to shut down its operations, seize all its assets (including the property held by the landlord), and incarcerate the business owner. In this unique case, Oakland’s then-mayor Jean Quan stepped in and stated the city would not follow federal demands to shut down this tax-paying business owner. After five long years in litigation and millions of dollars in legal fees for Harborside and the property owner, the Justice Department dropped the case in May 2016. This prompted current Oakland mayor Libby Schaaf to say, “It’s a great day for Oakland and for all of California: the federal government isn’t going to waste tax dollars trying to frustrate the desires of Californians to have safe access to medical cannabis.”

The near future

Every day, conversations are taking place in California cities about cannabis. Cities and counties such as San Mateo, Menlo Park, San Carlos, Union City, Fremont, Mountain View, Milpitas, San Juan, San José and San Benito are

having open discussions about cannabis business licenses (dispensary, cultivation, manufacturing, testing and distribution) within their borders. Keep your eyes open and your clients abreast of the potential of cannabis properties and the game-changing opportunities they can bring.

About the Author Sean Kali-rai, founder of Jackson and Main, LLC, in Los Gatos, is a California-based business advisory and lobbyist specializing in land use entitlement, the cannabis industry, and state-level legislative actions. Sean is also a California real estate licensee/broker. He represents the top five largest medical cannabis dispensaries in San José. In 2015 Sean helped seven of San José’s 16 legally operating medical marijuana facilities secure their local licenses. His expertise is in government affairs, land use, lobbying, business development, and business consulting in the San Francisco Bay Area and Silicon Valley. Sean works with city, county, and state regulators on behalf of his clients. He graduated from Santa Clara University with a BS in economics. He was a former budget and policy aide under San José Mayor Gonzales and a deputy campaign director and finance director for Measure A (“BART to San José”).

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