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Marijuana Businesses Not Seeing the Welcome Mat

NEW YORK (TheStreet) -- Marijuana businesses are finding that landlords aren't putting out the welcome mat in Washington. The state expects to begin sales of recreational marijuana in June, but businesses need to have a location nailed down in order to apply for a license.

"We're getting inquiries from potential licensees reporting a "Not Welcome Here" response when applications for space are requested," said Robert Flatt, director of southwest Washington's Initiative502.com. "We've contacted all the big brokers in the area and it appears they fear problems with occupying tenants not wishing to be associated with cannabis dispensaries."

The problem isn't only in Washington, other heavily regulated marijuana states report the same issues. Not all landlords look favorably on the marijuana industry and some refuse to rent to these businesses on moral grounds. While this angers the pro pot crowd, it isn't unusual for a landlord to prefer certain businesses as tenants. Landlords see a risk that for some isn't worth taking.

The biggest risk is federal confiscation of property. Ultimately, cannabis is still illegal and the Department of Justice could still seize the property. "There's always the risk that the feds say game over," said Justin Abbate, counsel for Zoned Properties, a real estate company that specializes in finding properties that face challenging zoning issues. "But they tend to send a letter in advance giving the business time to move and it's usually because the location is close to a sensitive place, like a school."

The Department of Justice letter from Deputy Attorney General James Cole in August of 2013 outlined guidance regarding marijuana businesses and Abbate said this gives some level of comfort to landlords with regards to confiscation.

Landlords also put their insurance at risk when opening the doors to the cannabis industry. Doug Banfelder of Premier Dispensary Insurance said one landlord was willing to rent to a dispensary and the location was within the zoning requirements. The landlord's building was 90% leased with big name chains, but the insurance company cancelled his policy when they learned a dispensary was moving in. Luckily Banfelder was able to help the landlord get a new policy.

It would seem that the simplest solution would be for the marijuana business owner to purchase a location, thus removing the landlord issue. Banfelder though said it typically costs half a million dollars to open a facility, with security costs alone running between $50,000 and $100,000. These are mostly small business owners that can't afford a building purchase on top of the startup costs. Abbate agreed. "These are mostly renters. The upfront money is high and many don't have the capital to purchase."

Ken Morris of Morris Southeast Group pointed out that these renters tend to be new with little credit history and so landlords, if they agree to rent, want big deposits and multiple months up front. Renters also have to make big investments in these properties for additional water, power and security. "That all adds up to a lot of money to improve someone else's property," said Morris.

"Smell is another issue," said Morris. Landlords typically include noxious clauses in agreements and a dispensary that can't control the odor could bother other existing tenants. However, Abbate said, "There's always an inherent risk with smell, but you can take measures to counteract that such as carbon filters."

Even with these challenges, marijuana businesses aren't completely out of luck. Abbate suggested that businesses look for a standalone building. This provides privacy for the customers and doesn't disturb other tenants. "We look for properties that conform to zoning requirements. We also want to be conscious of our ecological footprint as well," said Abbate.

Water issues affect these businesses. Morris pointed out that the space needs adequate water supplies and are discharge compliant as well. Toxic water can't be released just anywhere.

Bob Calkin of Cannabis Institute tells potential marijuana business owners to make sure that if they find a workable location and the landlord is willing to rent, that they also have an exit strategy. So that if there are any problems, like the DOJ sending a letter giving you 45 days to vacate, your landlord will release you.

"The good thing is that there are millions of square feet of available space," said Morris. "Older warehouses with low ceilings don't work for today's businesses, but are perfect for growers. There is older retail space in undesirable parts of towns that needs tenants."

"Usually the zoning restricts them to industrial areas, which is not ideal for a retail setting from a design standpoint," said Megan Stone of High Road Design, but she specializes in making these challenging spaces work for her cannabis customers.

"You can find a great location, but not create a nuisance for yourself, said Calkin. "You want a good location and the support of the community."

Written by Debra Borchardt in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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