Is Your CRE Property Attractive for Marijuana Dispensary Tenants?

Pennsylvania commercial real estate owners and tenants are both about to the feel the impact of the Keystone State’s recent decision to legalize medical marijuana. That’s because dispensaries will be looking for space in shopping centers, which could be lucrative for owners whose properties have all the right characteristics for that type of business; it could be a terrifying proposition for a tenant whose business nature is at odds with marijuana sales, even though it’s legal.

The Pennsylvania Department of Health is developing a program (expected to be operational by 2018) for regulation of this industry. (Pennsylvania recently introduced temporary regulations that give growers and processors of medical marijuana rules for their operations.) In total, there are 50 dispensary permits (with each permit including three locations), 25 grower/processor permits, and eight clinical research permits (which include grower/processor ability and six dispensary locations, but must be partnered with a medical research facility). Regulations allow for 198 dispensary locations where medical marijuana can be purchased by people with qualifying conditions.

Specific types of commercial properties are most attractive for marijuana dispensary tenants. The dispensary business model requires real estate that’s a mix between office and retail space, as dispensaries will somewhat resemble a hybrid of a drugstore and doctor’s office. (Meanwhile, growers and processors will be looking for warehouse space that can be retrofitted with watering systems, climate control, and specialized HVAC.) Security is another crucial element for tenants with permits to sell medical marijuana. At any given time, these spaces contain valuable merchandise; and centers or mixed-use spaces that are vulnerable to break-ins are probably not eligible.

These developments could make hotly contested lease provisions—like permitted use clauses—even more important as owners try to take advantage of income from dispensary tenants while being pressured into using permitted use clauses by tenants that try to use those rights to ban marijuana sales nearby.