Recreational Marijuana Commercial Tenant in NJ?

Question

Hi BP members!

Anyone know anything about recreational marijuana dispensaries from a landlord concern? I own a vacant commercial medical office in South Jersey and was approached by a realtor to rent out to a dispensary. What concerns should I have? What legal concerns, financing or insurance impact would it have. Are the rents and deposits the same as a standart commercial tenant? Wondering if there are the same DA concerns as years ago?

Looking forward to any feedback as well as advise on who I should be consulting while going forward.

John McKee · Answer

Sounds reasonable to me. Get the lease signed and move on with it.  You can always keep marketing the property until the license is granted.  in fact put that in your lease that you are Allowed to use marketing signs on premise to lease your property until the Co/license is granted. Always be marketing the property because you never know when the tenant will default.  In fact in my leases I have the right to market the property using signage if they are 30 days past due on rent

Sol Romand · Answer

Thanks for all the good advice. I purchased the property with cash so I have no issue with a lender unless I hope to refinance. The city gave a approval for one facility on the block, and I'm the only space for rent on the MLS. They won't give a COO until the state license is gotten.

I just got their letter of intent, anyone have some advice? They want to commence the lease in May at 10% more than standard rental rate with 2/3 month deposit. They keep the option to terminate the lease if no license is given, and forfeit the deposit.

Something tells me that I would be taking to much risk, but the area isn't too busy and a good tenant may be hard to find.

John McKee · Answer

I get a call once on a month about renting space for a marijuana use.  It's gifting like hot cakes here in D.C.!  At first I was hesitant, but as long as it was legal I didn't care.  We have about a 20% retail vacancy rate in the city so I had to keep an open mind about this kind of tenant.  Just make sure you get the certificate of Occupancy from the city.  That's the approval stamp you need for this kind of business.  As far as resale value I have no idea, but I can tell you these places are raking it in and will have no problem paying the rent.  You should get someone in there that knows what their doing or has a few locations of experience.  It's kind of the wild wild west and some of these tenants don't know the laws but each city has it's own unique set of rules, grams, age requirement, and how the transaction is handled.

Joel Owens · Answer

I see this all the time. Buyer investors get sucked in by high cap rates on marijuana NNN looking at for sale flyers. Then they find out most of those are purchased ALL CASH. The reason is most lenders won't touch them because of their source of lending money from the government. There are some that might do self funding internally but expect the rates to not be good and then take away any advantage you saw with the higher cap rates expecting to get higher cash on cash returns.

In addition to a lender doing a loan call if you have a loan on your vacant building you have to be careful with the lease and what it says. Landlords typically have language that says even though that business might be allowed locally if the government says it is illegal and clamps down then the landlord has the right to terminate the lease IMMEDIATELY. What the landlord does not want is a 10 year lease from marijuana tenant and then landlord stuck renting to them and not in compliance with the law as the building owner.

There are bigger brands like Cura Leaf and other so if you look to rent to one making sure it is one of the big brands with tons of units helps for resale to cash buyers. If it's small tenant like joe schmo wanting to open a marijuana place with little to no experience it's a bad idea. Marijuana places usually sell about 200 basis points or more with higher cap rate and lower price than credit investment grade type tenants. If you can find another tenant without taking on all those issues would be better.

No legal advice given.

Tchaka Owen · Answer

It's just a business. If anything, probably highly regulated and will likely have a consistent client base so risk of default should be low. Not sure about the insurance aspect. Not sure why it would be any different than any other retail.

Sol Romand · Answer

Cash wouldn't be an issue. I can have my PM pick it up. Why would my lender put me in default?

Ronald Rohde · Answer

Most of your lenders will put you in default. How will you accept payment? They mostly do cash...

Jason Bott · Answer

@Sol Romand in regards to the insurance, most of the standard market carriers will not be interested.  You may have a difficult time finding some options.

The good news is the available options are not much more than if you were renting out to lower risk retail tenants.

Recreational Marijuana Commercial Tenant in NJ?

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