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The Cannabis Industry and Commercial Real Estate: Real Property Issues

As with any real property transaction, it is the responsibility of the buyer to complete the appropriate due diligence work when purchasing commercial real estate.

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:

  • The location:
    • Zoning — Will the local zoning codes allow the intended use and configuration of the asset? A Zoning Report or more comprehensive Feasibility Study will examine this.
    • ALTA Survey — Are there easements or encumbrances that could affect property usage, or exceptions to title? An ALTA Survey, along with title insurance, will help protect a buyer against unexpected restrictions or an unclear title.
  • The physical premises:
    • Enviromental hazards from current, past, or surrounding uses — Once a buyer takes ownership, she or he can become liable for cleanup of contamination even if they didn't cause it. Additionally, if contaminated soils will be disturbed by regrading or development, it would need to be handled and disposed of properly. Assessing environmental risks and cleanup costs ahead of a purchase can be critical steps for a buyer to minimize their liability.
  • Asbestos/Lead/Mold issues — Often present in older, vacant buildings, these human health risks should be assessed and, prior to disturbance during a renovation, removed or mitigated properly.
  • Existing property condition/cost of necessary improvement — Getting an understanding of costs for the maintenance, operation, and capital improvement of an asset are vital to the deal economics.
  • Energy audit/usage benchmarking — Particularly for energy-intensive uses such as grow houses, understanding and minimizing the costs of energy consumption can be a competitive advantage.

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.