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In some parts of the country, the demand for cannabis extraction, distribution and retail dispensaries has outpaced supply. This has created opportunity for real estate owners and operators everywhere, whose empty strip malls and warehouses now represent a new and steady source of rental income.

Sounds like a win-win? Think again.

While cannabis operations may be coming to the rescue and joining the ranks of retail tenants, it’s not a simple process to repurpose your storefront for a cannabis operation. Whether that business operates a retail store with an extraction lab in the back, or plans to just be a distribution hub, cannabis plants are finicky, and so are their preservation needs, and both directly affect the environment they are stored in. This means new insurance and liability risks, too.

Building Considerations for Cannabis Real Estate

Because cannabis licenses are location-specific and in high demand, they are difficult to obtain — and are required for any new site. As a result, cannabis businesses can’t easily move locations if something compromises their extraction or distribution facility or retail storefront. They’re unlikely to leave a location once they’re settled, making it essential for property owners to “get things right” before tenants move in.

Each city, district or county will have rules when it comes to where cannabis facilities can be located. When your jurisdiction does not have a specific cannabis zoning type, these facilities will typically fall under liquor zoning rules, as both cannabis and liquor facilities are not allowed within a certain distance of schools and religious institutions. Additionally, renovation projects that incur a change in use often require rezoning or necessary municipal approvals.

When repurposing a space for cannabis retail or growth, the following changes to the building’s functional systems and zoning that are often required:

  • Fire and life safety. Extraction and cultivation sites, where growers use potentially dangerous chemicals, will need proper sprinkler systems. Municipalities with newer building codes may require update or installation of sprinkler systems before a cannabis operation can move in. Depending on the site, its configuration, the type of construction and use, additional fire or life safety upgrades may be necessary as well. Retail facilities need proper layout and safety precautions for fire safety and to deter crime.
  • Utilities. Cannabis cultivation and processing facilities require a considerable amount of power for lighting, dehumidification and cooling, ranging from 25 to 35 watts per square foot. When local utilities cannot provide the necessary power, cannabis cultivation and extraction facilities will need to have site-generated power through a generator.

    Grow sites need an irrigation system, therefore the site’s domestic water service to the building will likely need updating or upgrading. The site will need backflow prevention, and the location, routing, size and depth of the sanitary drainage system helps determine capacity. Sites that already have the proper utilities for cannabis cultivation or extraction will save a significant amount on design and construction.

Insurance Implications for Cannabis Operations

Building owners take on additional risk when cannabis businesses move into their space, as most property policies exclude any loss as a result of cannabis. Even in states where cannabis is legal, an insurer may still not be responsible for resulting damages under the insured’s policy.

Policyholders engaging in what is considered a “dishonest or criminal act” may find that it bars coverage for a loss or damage resulting from that activity. In one case, a court ruled that a landlord’s insurance policy did not cover the damage caused by commercial tenants who grew marijuana in rental units because of its “dishonest or criminal acts” exclusion.

In addition, cannabis retail facilities face an increased exposure to theft, as product and large amounts of cash on hand make these outlets a viable target. As a building owner, lessors may be liable and other tenants nearby may not appreciate the added risk of their newest neighbors.

Facilities that house cannabis extraction using flammable chemicals will also be subject to a more rigorous inspection and audit by their insurance carrier to ensure the space is well protected before offering a policy.

Weighing the Options: Thinking Outside Your Doors

With industry growth imminent, cannabis businesses can be a profitable source of revenue for retail owners and operators. Before jumping in, have an open conversation about the cannabis business’ operations, what their goals for growth are and consider the implications of it all — from property risks to cyber and general liability.