This article explores the Implications of Pennsylvania’s medical marijuana for commercial real estate.
On April 17th, Pennsylvania joined 23 other states and the District of Columbia that have legalized some form of medicinal or recreational use of marijuana. Under the new law, specially-licensed physicians will be able to prescribe medical marijuana to patients who have qualifying medical conditions. Of significance to the commercial real estate industry, the product must be be grown, manufactured, and dispensed through highly regulated physical locations within Pennsylvania. The law raises many new and unique issues for those who plan to own or use property related to the marijuana industry.
Pennsylvania’s legalization permits use for medicinal purposes only. The patient must be under the ongoing care of a physician, and prescribing physicians must obtain a special license after completing a course. Patients and/or caregivers will also need an identification card from the state. Unlike some states where prescriptions are issued to walk-in patients on-site, in Pennsylvania the dispensary must be in a different office from the prescribing physician.
The law divides industry participants into two categories: 1) grower/processors; and 2) dispensaries. There will be up to 25 grower/processor licenses, and up to 50 dispensary licenses. Each dispensary licensee may operate up to three (3) dispensing locations, for a potential total of 150 dispensary sites throughout the state. There will be a thorough licensing process with significant financial qualifications and fees for application. The licensing and regulatory process will be overseen by the Pennsylvania Department of Health, which is expected to issue its initial regulations in November, 2016.
One major difference between Pennsylvania and many states is that leaf or bud marijuana will be prohibited, as will smoking or retail sales of edibles. The only types of medical marijuana initially permitted will be pills, oils, gels, creams, ointments, tinctures, liquid, and non-whole plant forms for administration through vaporization. Access to dry leaf marijuana will not be considered until at least May, 2018.
From a facilities perspective, the law requires that all growing and manufacturing activities take place at an indoor facility. On the retail end, dispensaries may not be located within 1,000 feet of a school or day care. Each type of use is also subject to local zoning requirements, and the land use classification of marijuana facilities is one which may generate confusion at the municipal level. Dispensaries also face the hurdle of community acceptance, although the prohibition on dry leaf sales and smoking could make that process somewhat easier.
The manufacture and sale of medical marijuana presents additional legal and practical issues for tenants and landlords. Much of that complication arises from the fact that the legality of the industry is treated differently under state and federal law. Because marijuana is still illegal under federal law, financial transactions cannot be processed through credit cards or the banking system. As a result, the medical marijuana industry is largely a cash business and security concerns are paramount in storing and transporting what are often huge sums of cash. Physical space must account for these concerns, as well as the security of the product itself. Also, landlords can likely expect to be paid in cash or money order.
Existing contractual provisions and insurance considerations are also a concern. In a multi-tenant property, having a marijuana-related use may violate conditions in other leases. Commercial loans generally prohibit a marijuana use, so a large majority of commercial space may be unavailable to the industry. When there is a marijuana-related use, insurance costs will generally be higher. Finally, while federal prosecutions of state-authorized marijuana businesses are extremely rare, forfeiture laws still place landlords at technical risk. Not surprisingly, industry rents per square foot are significantly higher than market rate – in some cases up to two or three times higher.
One final unknown is the likely demand for medical marijuana space. Medical marijuana has been legal in New Jersey since 2010, but distribution is still limited to five dispensing locations statewide. By contrast, more than one-third of all industrial space in Denver (where recreational use is also permitted) was occupied by marijuana industry growers between 2009 and 2014.
State legalization of marijuana is a trend that is likely to continue for the foreseeable future, and even the growing call for changes to federal law will not eliminate the need to exercise additional care. Anyone entering the industry needs to be aware of the many hurdles, costs, and opportunities presented to owners and tenants of real estate used for medical marijuana manufacture and distribution.
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