SAN DIEGO—With the likelihood of a 2016 California ballotinitiative to legalize recreational marijuana along with new Cityof San Diego zoning laws, Cassidy Turley realestate experts recently took a closer look in evaluating thepotential impact such an approval would have on the industrialmarket. In doing so, the firm looked at cities such as Denver,where marijuana legalization has fueled a boom in demand.

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“The legalization of marijuana is a hotly debated topic on manyfronts” says Todd Davis, senior vice presidentwith Cassidy Turley's San Diego office. “While it remains to beseen how the movement toward legalization progresses in California,it's interesting to observe the impact being felt in markets suchas Denver, where marijuana retail and industrial grow facilitiesare absorbing available space at an incredible rate.”

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San Diego recently adopted a new zoning plan for medicalmarijuana dispensaries that currently allows no more than four ineach council district. Dispensaries cannot be within 1,000feet of schools, libraries, churches, parks, child-care facilities,and drug and alcohol rehab facilities. There also must be a100-foot buffer from residential zones. The zoning plan stillawaits approval from the Coastal Commission for shoreline areas.These very defined restrictions drive the scarcity of availablespace, creating huge value for owners of real estate that meetthese guidelines.

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“San Diego is proactively planning for how to integrate andmanage marijuana facilities into the real estate landscape,considering overall impact on the community—from public educationand recreation facilities to residential neighborhoods,” Davissaid. “While the focus right now is on medical facilities, the newzoning guidelines should be firmly in place and understood by thetime recreational sales are possibly allowed.”

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Davis continues that“Escalating demand for warehouses in Denverpits dispensary against dispensary, while landlordscapitalize by charging premium lease rates.”

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Cassidy Turley industrial brokers in Denver report instances ofwarehouse space leasing for up to four times the asking lease ratesonce medical marijuana sales began to boom in 2009.

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Since Colorado legalized the recreational use of marijuana inJanuary 2014, the state has collected over $3.5 million in taxesand fees from recreational and medical marijuana sales during thefirst month alone, says Cassidy Turley. Just over $2 million ofthis amount came directly from recreational marijuana andapproximately $1.5 million was attributed to medical sales tax.

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While marijuana is still illegal under federal law, 20 statesincluding California, Oregon, Arizona, Nevada, Michigan and theDistrict of Columbia have legalized it for medical use. Coloradoand Washington are the only two states allowing recreational use,with many groups speculating that California is likely to becomethe third if voters approve the 2016 ballot initiative.

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“In Denver, the legalization of marijuana for recreational useappears to be a net positive for commercial real estate, not onlyfor industrial space but for retail and office space as well,”Davis says. “Demand for warehouse space for growing anddistributing marijuana is surging in that market, as is demand forspace to sell it and space to manage it.

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“Should marijuana be legalized in California, available space inSan Diego and other markets like it will be limited due to land userestrictions and this could cause fierce competition forlocations,” he says.

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Davis noted that marijuana cultivation facilities can range insize from 2,000 to 50,000 square feet. Retail dispensariesare considerably smaller, typically 1,000 to 2,000 square feet.

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“Size-wise, warehouse space will see the most pressure in themarket,” Davis explains. “With little land available for newdevelopment in many San Diego submarkets and vacancy rates alreadyin the single digits, landlords will benefit from a competitivemarijuana market.”

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Do commercial real estate landlords face uniqueissues or liability when leasing to tenants in the marijuanaindustry?
“There already is a divide between tenants and landlords wheremedical marijuana is concerned,” Davis notes. “Some landlords arewilling to take on marijuana uses and others aren't. Some of theconsiderations include negatively impacting other tenants in thebuilding or project. With recreational distribution and sales,landlords need to consider many factors including the risk ofincreased liability or exposure—not to mention being a goodneighbor to those who may not want a marijuana facility close totheir business.”

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Because marijuana is still illegal under federal law, manybanks, insurance companies and other auxiliary companies do notsupport the industry—even for medical use only, says CassidyTurley. “The financing of such operations, for now, will be hardmoney lenders and funds that are specifically set up to deal withthese operations.”

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Newly introduced marijuana stocks have skyrocketed, but manyclose to the industry look at it like the dot-combubble, where manyof these companies are not posting any profits. However,there is a race to invest with the companies that will rise to thetop of an emerging industry, the firm says.

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“This in turn affects a landlord's ability to secure financingor insurance coverage,” Davis adds. “At the very least, landlordswho allow marijuana operations in their propertiesmay face a myriadof different issues, such as increased insurance costs, potentialseizures from the federal government, and possible problemsclaiming normal property tax deductions.”

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Looking ahead, how marijuana plays into the San Diego realestate market remains to be seen. If voters approverecreational marijuana use in California, and if Denver is anypredictor, the industrial market will see a tremendous wave ofactivity and a surge in rental rates to new all-timehighs.
“As long as there is clear legislation for the sector, landlordswill adapt as will their third party providers.”

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.