A dilemma for commercial owners.

Medical marijuana Is a tricky issue to some commercial property owners, in states where possession and dispensing of the product is permitted. It has always been notoriously easy to cultivate and process small amounts of marijuana for personal use while evading legal hassles--but providing marijuana to the public is another matter. Many landlords would be glad to rent space to medical marijuana dispensers, but Ts a risky business, and nobody can be certain of how the legal situation will play out.

Federal law is at odds with 16 States, plus the District of Columbia, on the legality of .0 medical marijuana. In states where it's legally tolerated, Federal officials have been cracking down on businesses that dispense it. Moreover, pressure is coming to bear on commercial property owners who permit this activity.

According to legal experts, landlords, and businesspeople recently contacted by IREM, owners need to ask themselves two basic questions: First, are you comfortable with this type of business on your property? Second, are you willing to deal with the attendant legal hassles?

Anecdotal evidence indicates that with reasonable security precautions in place, these businesses don't attract a criminal clientele. However, neither owner nor tenant can be sure that Federal agents or the local government won't try to shut the business down.

In states where medical marijuana is legal, zoning is determined at the municipal level, and the zones in which these businesses are permitted are tightly restricted. Debate on whether to allow them at all has been contentious.

Cleve Schenck, a Denver-based property owner who has rented to medical marijuana dispensaries, urges fellow property managers to look down the road and anticipate any problems that might arise.

"Check the tenant's background and references: he advises. You need a provision in the lease that if laws change, or if the political/legal climate changes, you may terminate the lease. There have been cases in California where the government went after landlords who legally leased their property to these dispensaries. A dispensary that might be legal under state law might still be in violation of Federal law."

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Another issue, Schenck warns, is that lenders will often demand to approve tenants in a retail property. If a lender fears that a tenant will be turned out--thus affecting the property's income--it might be difficult for an owner to get financing or refinancing.

"Even if the industry becomes more legitimate," Schenck speculates, "the criminal element and the cartels might try to infiltrate, just as they did with legalized gambling in Nevada, despite efforts to keep the Mob out. Make sure that these dispensaries are legitimate. Look at where their funding comes from. Look for criminal connections."

In Denver, at least, the regulations governing marijuana dispensaries are strict and clear, Schenck says. However, security can be an issue.

"You want a secure building that won't attract riff-raff," he says, "and you have the danger of burglaries or armed robberies, so you want cameras on the premises, and a closed-entry system where you have to push a button to get in."

ARIZONA SEES BIDDING WARS

Government attempts to allow marijuana dispensaries to operate without offending the public will sometimes exacerbate security concerns. Cameron Artigue, partner in the Phoenix-based law firm of Gammage & Burnham, said that the State of Arizona legalized medical marijuana in 2010 with a bill that avoided many of the mistakes made by earlier adopters--but several of its well-intended provisions have proven problematic, and dispensaries have yet to be set up.

"California's 1996 legislation was broad, and left many unanswered questions about who's authorized to recommend medical marijuana, where you can buy it, where it's legal to possess it and whether employers can discriminate against users," Artigue explains. 'Arizona brought everything aboveboard by regulating the industry on a statewide level. The only decisions left up to cities and towns were with regard to zoning. They could regulate the location of the state's 125 authorized dispensaries; they couldn't ban them."

Thus, siting has become an issue all over Arizona. Are these dispensaries to be regarded as traditional retail and stationed in a mall or downtown? Are they ancillary medical facilities, suitable for a medical office park? Or are they comparable to adult bookstores, to be placed in industrial neighborhoods?

"That last alternative has the advantage of not offending people, because of the lack of pedestrian traffic in those areas," says Artigue, "but it's foolish from a law enforcement perspective because those neighborhoods aren't well patrolled.

"Also, according to the law, Arizona was carved into 125 geographic subsets called Community Health Analysis Areas, or CHAAs, with one dispensary license per CHAA. How do you decide who gets the license in each CHAA? It's like taxicab medallions in a big city."

To qualify, a potential dispenser must have commercial space locked in. Strict zoning laws have led to bidding wars among several would-be dispensers, fighting to lease one of the two or three spaces in a CHAA that would be suitable but the lease would be contingent upon their winning the business.

"The issue that property managers are dealing with," he says, "is, how can you lease to someone and be certain you'll have a paying tenant? Will they get a license? Will they pay the rent? Will there be a change in enforcement? Your lenders won't be happy if the Feds seize your collateral."

"U.S. Attorneys see a shop with bars on the windows, and they see a cartel," Artigue adds. "This has held up the issuing of permits. We're now going forward with the dispensaries, but the timetable is unclear. We've represented some landlords who wanted to rent retail space or open-to-grow sites, who are concerned that the Federal government is going to seize their property. The main advice we give is, 'Don't be the biggest fish in the pond."

KNOW TENANT'S BUSINESS PLAN

A business of this sort, Artigue notes, will be physically similar to a store or restaurant, depending on the operator's business plan. It might be simply a marijuana shop; it might be a wellness center, or it might sell paraphernalia, clothing, crystals, vitamins and tchotchkes. Brian Cook, president and CEO of Altitude Organic Corp. in Denver, is in the business of giving these dispensaries an umbrella organization under which they can operate, to assuage landlord concerns.

"My business is a pre-franchise operation, for companies that dispense medical marijuana and want to attach themselves to a brand," he said. "We offer a limited-liability way to have a licensed corporation, and I provide consulting on how to find commercial space.

"Among commercial landlords, you'll get a 90 percent 'no' rate. Maybe 10 percent of retail or warehouse owners will want any tenant they can get, and most of them are good to work with, but some of them will try to gouge the medical marijuana tenant. They'll insist on a premium over the normal rent, and they might demand a large deposit."

These landlords are usually not worried about the conduct of the tenants or their clients, Cook said - but they are concerned that the law will intervene and shut down the business.

"We've seen 70 percent of these businesses either fold or change hands in the past three years," Cook estimates. "It's not the business that's the issue; it's the nature of the laws, and the changes in zoning regulations."

In other states, where medical marijuana regulations are less defined, a doctor who recommends the use of it might come under scrutiny--particularly if most of his recommendations are to people in their 20s, for "chronic pain." Such a doctor might be disciplined to the extent of losing his license, which of course could leave a landlord with empty real estate.

RESIDENTIAL USE: LITIGATION LOOMS

Can landlords ban medical marijuana in residential properties without getting sued? Last fall, the Attorney General of Michigan, Bill Schuette, published his opinion--which is that Michigan landlords have the right to ban both smoking and growing marijuana in rental properties. The fact that marijuana is still Federally illegal, says Schuette, makes it lawful for landlords to ban its use. However, this opinion will almost certainly be challenged on the grounds that it discriminates against people with disabilities.

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Meanwhile, in California at least, landlords who don't mind renting to marijuana dispensaries may not have the opportunity for long. Several locales, including Sacramento County (excluding the City of Sacramento), have virtually eliminated the business from their jurisdiction. Steve Pedretti, County Engineer for Sacramento County, explains that the county's crackdown is in response to changes in zoning law that prohibit any use of a property that's prohibited by State or Federal law.

"Every jurisdiction looks at this issue differently," he reports. "Some have imposed outright bans; the City of Sacramento allows the dispensaries but regulates them; we took the position it's not allowed in our zoning code. Using a business for that purpose now requires a permit--which, with the new ordinance, I'm not sure could even be issued."

Meanwhile, the City Attorney of Los Angeles (where marijuana dispensaries were once easy to find) has suggested a total ban. Further litigation is inevitable.

JOSEPH DOBRIAN IS A CONTRIBUTING WRITER FOR JPM[R]. IF YOU HAVE QUESTIONS REGARDING THIS ARTICLE OR YOU ARE AN IREM MEMBER INTERESTED IN WRITING FOR JPM[R], PLEASE E-MAIL MARIANA TOSCAS AT [e-mail].