Cannabis entrepreneurs pay prime rents for warehouse and storefront space

Growing up in Minnesota, Stephanie Smith dreamed of being a golf pro. Instead, the mother of five who lives in Pacific Palisades has ended up in the unlikeliest of trades.

She claims to be one of the largest marijuana-industry landlords in the state in a business that is growing chaotically as cities begin to allow recreational cannabis sales after passage of Proposition 64 two years ago.

And though it’s been plenty lucrative for her, the murky legal status of the cannabis industry has led to a police search of her home and to some unflattering news coverage — including a headline that painted her as a drug lord.

“Cannabis is not illegal,” said Smith, who is not shy about what she does. “There is no such thing as a cannabis drug lord.”

But she does control nearly 2 million square feet of industrial property, mostly in Southern California. Not all of it is rented to the cannabis trade — one of her tenants is Walmart — but she found that cannabis growers can be desirable tenants willing to pay top-dollar rents.

That’s because there’s a race on among formerly underground growers and new entrepreneurs angling to become rich supplying legal marijuana to Californians.

Some are looking for prime storefronts to open often upscale retail shops, or in rare cases bars where patrons can indulge in cannabis on the property. Others want discreet warehouses — the kind of property Smith owns — where they can grow it, but the buildings are already in short supply.

Dennis Hunter co-founder of CannaCraft, tours an OCLI / JDS Uniphase warehouse in Santa Rosa, Friday Sept. 8, 2017. The facility was purchased last year by CannaCraft after nearly a decade of being vacant. The cannabis industry is impacting the price and availability of warehouse space in the region. (Kent Porter / The Press Democrat) 2017

Consider the city of Lynwood, which has lower taxes on cannabis businesses than others in the county, said Los Angeles attorney Aaron Herzberg, who helps retailers obtain cannabis sales licenses and arranges purchases of buildings for growers and manufacturers of cannabis products such as oils and edibles.

Prices for Lynwood industrial buildings were about $107 to $120 per square foot in 2016, he said. Now they are selling for more than $300 a square foot. He expects prices in the region to continue to climb as real estate speculators jump into the market.

“Prices will skyrocket,” Herzberg said. “People are land-banking.”

Smith learned about the demand in 2009 when she bought a former Los Angeles pawn shop that she decided to turn into a laundromat by upgrading the water, gas and power hookups.

Smith advertised the renovated building on Craigslist and got a quick response from a would-be tenant offering double her asking rent if he could use it for growing marijuana. Then another grower offered triple the asking rent.

“I set up a bidding war,” she said, and ended up settling for the bidders who came in just under three times her asking rent “because I trusted them to run a professional grow.”

Cannabis growers and processors are good tenants, she decided, “low-maintenance people who just want to do their jobs without a lot of drama.”

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Still, some of her tenants got into a lot of drama in December, when San Bernardino police raided three buildings she owned and confiscated thousands of marijuana plants. They also conducted a surprise search of her Pacific Palisades home the next day and seized her cellphone, she said.

She was not arrested or charged, but got plenty of media attention: “Mom accused of running multimillion-dollar pot-growing operation,” said one headline on a local television station’s website.

She weathered the bad publicity — and then some.

The two tenants that were raided are back in business and paying her a combined $140,000 a year in rent, she said. This week, she sued the city of San Bernardino to overturn its new law regulating marijuana commerce, which she claims is unconstitutional.

In January, U.S. Attorney General. Jeff Sessions ended an Obama-era federal policy that protected sales in California and five other states that have legalized recreational marijuana, placing at risk thousands of businesses operating legally under state laws.

“Sessions caused more confusion in the industry,” said real estate analyst Spencer Levy, head of research in the Americas for property brokerage CBRE.

The federal stance that marijuana is a dangerous drug like heroin and LSD discourages conventional banks from doing business with cannabis-related entrepreneurs.

That makes it more challenging to buy or rent the property that entrepreneurs need for their work and keeps big well-known landlords and developers such as publicly held real estate investment trusts out of the business.

Marijuana’s outlaw history and uncertain present also get in the way of retailers’ efforts to sell it over the counter, Levy said. In addition to government rules such as no sales near schools or churches, there are unofficial barriers imposed by owners of upscale shopping centers and other landlords who fear being tainted by association and won’t consider cannabis-store tenants.

But such judgmental attitudes probably won’t last long, Levy said.

“What is considered appropriate retail is a moving target. Bowling alleys and gyms were once out of favor and now are in” with image-conscious landlords, he said. “The pendulum will shift as cannabis becomes as socially acceptable as liquor.”

Anyone older than 21 can walk in to a cannabis store and make a purchase, but they can’t indulge there. Now, though, there is a movement to open marijuana businesses similar to bars.

West Hollywood officials expect to shortly be the first in the region to issue licenses — 16 of them — for cannabis consumption lounges, said Jackie Rocco, the city’s business development manager.

Check out our updated map showing shops licensed to sell recreational cannabis in California.

West Hollywood has long supported cannabis for medical use, she said, but many apartment landlords don’t allow smoking.

“So where do you go? You can’t do it on the street,” Rocco said. “We need safe spaces to consume responsibly.”

Rents are also jumping for storefronts that could lease to shops or cannabis bars, if cities approve them.

“There’s definitely a markup as soon as you say marijuana” to many landlords, said longtime L.A. dispensary operator Oliver Summers, who has been in the industry since 2005.

Some cannabis retailers even agree to share profits with their landlords. “I don’t know anybody who’s paying less than $6,500 a month rent, and that is for a small shop in a tough neighborhood,” he said.

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