The rise of the controversial cannabis industry is creating enormous opportunities and risks for new and experienced commercial real estate investors, lenders, and developers. With the legalization of Colorado’s cannabis industry and sales exceeding $1B in 2016, the need for inventory storage and fulfillment facilities has led to purchases of vacant and antiquated warehouse spaces. These properties can have a higher likelihood of environmental risks or other physical asset liabilities that need to be understood, but often the buyer in these deals is a novice to commercial real estate due diligence. As with any real property transaction, it is the responsibility of the buyer to complete the appropriate due diligence work and protect themselves from risks when purchasing commercial real estate. But because there are conflicting local and federal regulations on the production and sale of cannabis, this creates issues for those buying or lending on cannabis-related assets. Borrowers may not be able to get conventional loans from lenders, which means that many of the transactions will be done in cash or through alternative financing methods.
Alternative and cash financing do not always have the same pre-closing due diligence requirements such as those required by traditional lenders. Traditional lenders typically require Phase I Environmental Site Assessments, Property Condition Assessments, and ALTA and Zoning Surveys before lending on a commercial property. So without a lender setting the requirements, what kind of due diligence should the buyer perform if they’re using cash or other financing methods? And what are the steps the buyer should take to make sure they are still protected from risk and liability?
What to Look For:
Investors should take a detailed look into various matters surrounding a target real property. A cursory look to see if the premises are in a location that permits legal marijuana business and activity is not enough. When conducting due diligence on a company’s real property, an investor should consider:
For more information on best practices for due diligence steps to minimize risk and ensure liability protection when purchasing an asset, please check out these helpful resources:
Feel free to contact me with questions on your particular project, whether in Colorado or nationwide.