Delays in legalization of recreational marijuana have left businesses in lurch when it comes to real estate

By Brett Johnson
Lawrenceville | May 23, 2019 at 6:00 am
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When the idea was advanced that New Jersey might become the region’s first legalized marijuana marketplace, one of the auxiliary benefits proposed was that it had potential to lift real estate markets that may have gone overlooked.

As businesses hurried to set up shop, a wave of real estate deals would be a boon for all, it was said. 

Attorney Gene Markin said that excitement has been fast fading.

“There still deals being done, but not at the level that was expected,” he said. “There’s a lot of discussion and information gathering right now, but outside of those with a whole lot of money, there’s very few that are actually locking things down at this moment.”

Markin is a partner at Stark & Stark in Lawrenceville, one of the many law firms now representing cannabis clients on matters including real estate transactions. He’s expecting real estate deals involving his clients in this new sector will become more regular with the policy component’s completion, but the current activity levels are low.

The plans for legalizing recreational use of marijuana and expanding the medical use program in New Jersey haven’t totally gone up in smoke, but the state Legislature has weighed its options for longer than anticipated and now faces a deadline at the end of the month to move a bill forward.

In the meantime, cannabis businesses remain in a dicey situation when it comes to purchasing properties.

“It still being very speculative creates issues for businesses looking to lock down good real estate,” Markin said. “Because, if they find a property tomorrow, can they afford to hold it and pay whatever holding costs might be for another few months or even a year before applications are awarded?”

The business decision is this: What’s the risk of losing a property with a wait-and-see approach versus losing capital to secure it now if legislation doesn’t come soon?

“If you’re purchasing a property you can potentially do something else with it in the meantime, maybe — so there is that,” Markin said. “There’s a lot of considerations to take into account for these businesses right now.”

A primary consideration for these companies is that there’s an increasing shortage of available warehouse space in New Jersey, Markin added. That’s expected to make securing those properties for a cannabis manufacturing or growing business — operations that view warehouses in the Garden State’s industrial quarters as prime real estate — a competitive endeavor.

Markin has New Jersey clients who are property owners looking to lease or sell locations to potential cannabis industry tenants as well as those in the state hopeful about launching a cannabis business once legislation allows it.

Finding properties that are viable for the intended use of these businesses already isn’t easy.

“Dispensaries in particular have issues of visibility — they’re public-facing, meant to drive traffic like retail stores,” he said. “Is a strip mall owner going to let you put in a dispensary? Probably not.”

Businesses in this sector also have to earn the support and approval of municipalities that govern a property’s location. Some local governments in New Jersey already have established rules on which type of cannabis business they will allow within municipal borders.

“Some only want these businesses set up in discreet areas,” Markin said. “And then some more progressive townships may want to put it in an up-and-coming area and build a commercial center around it. They may feel that dispensary is going to drive people there and become a natural place for expansion in restaurants and other retail shops.”

Even if a municipality’s leaders are keeping an open mind about these businesses setting up in town, that doesn’t mean marijuana businesses can strike a deal with a landlord there. 

“Because if that property has a mortgage on it, that landlord is subject to various restrictions and covenants,” Markin said. “That’s all what he or she agreed to with a bank. One of those is a prohibition on an illegal use of the property. Even if it’s legal under state law, that landlord may be in violation of an agreement with the financing bank.”

Knowing that marijuana is classified as an illegal substance on the federal level, property owners have had some hesitance about completing real estate transactions with businesses selling or growing it for recreational or medical use. 

If policy shifts enough for those concerns to melt away, the businesses in the cannabis sector will still be left with the question that puzzles them now: What makes a good location?

The answer is different than what it is for other industries.

“In this space, what may seem to get great properties are not actually going to be suitable for these businesses — and, vice versa, properties that at first glance seem like throwaways may end up becoming top real estate candidates,” Markin said. 

Given that, there might be a silver lining in the continual delays on state Legislature action on marijuana for those trying to get an early foothold in this industry. … There’s a lot of time to think things through.

“There’s still a lot that needs to happen before we see the big business opportunity this has been billed as,” Markin said. “Right now, it’s all about planning and being ready for what’s ahead.”

Conversation Starter

Reach Gene Markin of Stark & Stark at: gmarkin@stark-stark.com or call 609-895-7248.