OHIO MEDICAL MARIJUANA: The In s and Out s of the Industry

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1 OHIO MEDICAL MARIJUANA: The In s and Out s of the Industry The purpose of this paper is to take a deeper dive into the medical marijuana industry that is entering Central Ohio, the potential impact it could have on the real estate market across all sectors, and the process, cultivation, and legal aspects of growing and distributing marijuana. Since Ohio isn t the first state to legalize this drug, we are able to compare and analyze the effects this industry has had on other states. For the purpose of this overview and based on the large datasets available to us, we ve selected Denver, Colorado as our comparison. EFFECTS ON REAL ESTATE The medical marijuana industry is shaking up commercial real estate in Ohio. Although still deemed illegal by the federal government, the state of Ohio has legalized medical use, which means there is new demand for space to grow, cultivate, and dispense. It is difficult to pinpoint exactly how Central Ohio will tackle this from a legal aspect, but it is common to compare other markets that already practice legal use to understand what effects this will have on real estate. The state of Colorado, which legalized medical use in 2000, is the ideal baseline to compare Central Ohio because Denver was the first city of significant population to practice the usage of medical marijuana. TYPE OF SPACE In Denver, mainly class B and C properties are used for cultivation, retail, storage, processing, etc. Looking at Central Ohio, it makes sense that class B and C properties would also be the ideal target for this use. These properties are classified with lower rents and less property to maintain. Growers and cultivators prefer to maintain a low profile and seek non-descript sites. INDUSTRIAL FOOTPRINT The city of Denver has a medical and recreational marijuana footprint of 4.2 million square feet, which is 2.9% of the total warehouse footprint. Ohio will initially have a maximum medical footprint of 336,000 square feet, which is only 0.24% of the total warehouse footprint, but this footprint is subject to expansion based on demand of the product. Members of the Ohio Medical Marijuana Control Program (OMMCP) are expecting expansion as more dispensaries and licenses are permitted. It is important to keep in mind the supply available for warehouses, as well as, the counties that permit medical marijuana have large effect on the size of the footprint. RENTAL RATES In Denver, industrial warehouse properties experienced an increase in rental rates to $14.19 per square foot that is 2-3 times higher than the average price due to a significant increase in demand. Other markets have seen similar demand for space causing an increase in rents, which allows us to draw the conclusion that without legal implications, Ohio will see similar rate increases. Currently, the average lease rate for an industrial warehouse property in the Central Ohio stands at $3.07 per square foot. Applying those rate increases in real-time, the state can expect to see lease rates for medical marijuana tenants jump to about $10.00 a square foot. VACANCY Lease rates are directly affected by vacancy in a market. Denver s industrial vacancy rate fluctuated between 4 and 5 percent at the time the metro prepared for legalization. Since the market was already relatively tight, lease rates increased accordingly. Central Ohio is very similar in this aspect, with vacancy rates hovering between 4 and 6 percent and is currently a landlord driven market. It is safe to predict that the Ohio market will see similar lease rate increases. LANDLORD OBSTACLES This new industry could cause increased pain for landlords. Owners of marijuana-leased industrial buildings could encounter industry-specific risks that include federal forfeiture, cash-paying tenants, and the possibility of damaging the structure, as well as smell of the overall property. Denver experienced many landlords unable to lease to marijuana tenants because of federal laws, and costly electric and HVAC upgrades required for cultivation and storage. They also face laws that prevent traditional banks and lenders from financing properties associated with marijuana. These obstacles make the availability pool for warehouses even smaller and cause rates to increase. Also, many municipalities have already said no to this type of usage. Major Central Ohio cities that have completely banned usage include: Dublin, Worthington, Lancaster, Plain City, and Canal Winchester. INVESTMENTS The average sale prices of marijuana-occupied properties have also experienced significant increases. In 2014, Denver s average sale price was $98 per square foot. Today, the average sale price for these properties is $115 per square foot a 17.6 percent increase in three years. The Ohio market expects to see the same demand. Currently, the average price per square foot for industrial properties in Central Ohio varies between $81.00 and $85.00 a square foot. In the future, Central Ohio can expect to see similar increases in year over year value as the industry grows. Due to this trend of significant annual increases, many marijuana-based tenants will look to buy; however, the initial sale price to the tenant will see a steep increase. 1

2 THE MARKET The first step in fully analyzing the effects medical marijuana will have on the state is establishing the market. Ohio is home to 11.6 million people and is growing year by year. The state has access to more than half of the U.S. population in less than a day s drive. Easily accessible airports, waterways, and railways. The law Ohio passed states that a maximum of 336,000 square feet will initially be granted for medical marijuana use and that square footage is broken down throughout the counties. The state estimates that initially, about 2 percent of Central Ohio population will participate in the medical marijuana program in other words about 20,000-25,000 people. LICENSING FOR CULTIVATION In the state of Ohio, there were 185 applications submitted for a cultivation license; however, initially only 24 licenses will be permitted. There are two types of licenses: Level I, which permits up to 25,000 square feet of growing space and comes with a $20,000 application fee, and Level II, which permits up to 3,000 square feet of growing space and has a $2,000 application fee. The 24 licenses are split evenly: twelve Level I and twelve Level II. According to the OMMCP, 109 applicants applied for the Level I license while 76 applied for Level II. These licenses are specifically for land used for cultivating medical marijuana. Recently, the OMMCP announced the recipients of the twelve Level I and twelve Level II licenses. Northeast Ohio landed more sites than other regions, receiving seven of the twelve Level I licenses and six of the twelve Level II licenses. In terms of individual businesses, Harvest Grows, LLC was awarded two Level I sites, one in Cincinnati and one in Cleveland. Additionally, Fire Rock Ltd, in Massillon County, was given three Level II provisional licenses, including one in Columbus at 873 N 20th Street. Lastly, Ohio Clean Leaf LLC in Lockbourne was awarded a provisional license for a 10,000-square-foot barn warehouse. WHAT IS DEFINED AS MEDICAL? The key word in this new industry is medical. Ohio has not passed recreational marijuana use, which means in order to legally use the drug one must be issued a medical prescription. The OMMCP has defined 20 medical conditions that can qualify to legally use the drug, including chronic pain. The conditions are to the right: In order to implement and maintain a secure and safe industry, there are three different boards in charge of over-seeing this industry. The Ohio Department of Commerce oversees medical marijuana cultivators, processors, and testing labs. The State of Ohio Board of Pharmacy oversees retail dispensaries, the registration of patients and caregivers, approval of new forms of medical marijuana, and coordinating the Medical Marijuana Board. Lastly, the State of Ohio Medical Board is responsible for certifying physicians to recommend medical marijuana and have the ability to add to the list approved for medical conditions. AIDS/HIV Amyotrophic Lateral Sclerosis (ALS) Alzheimer s disease Cancer Chronic Traumatic Encephalopathy (CTE) Inflammatory bowel disease Multiple sclerosis Parkinson s disease Chronic Pain Post-Traumatic stress disorder (PTSD) Crohn s disease Epilepsy or another seizure disorder Fibromyalgia Glaucoma Hepatitis C Sickle Cell Anemia Spinal Cord disease or injury Tourette s syndrome Ulcerative Colitis Traumatic brain injury 2

3 DISPENSARIES Dispensaries are an important piece to the puzzle because these are the stores where medical marijuana can be acquired in a sense like a pharmacy for marijuana. The Board of Pharmacy will award up to 60 retail dispensaries licenses in four regions before September 8, After this date, the board will reevaluate the demand and how many people are using medical marijuana to determine if more licenses are necessary. As of now, the Board has issued the maximum numbers of dispensaries allowed in the state. It is as follows: The Northwest Region includes 8 districts and allows up to 10 dispensaries; the Northeast region includes 6 districts and allows up to 18 dispensaries; the Southwest region includes 8 districts and allows up to 15 dispensaries; and the Southeast region includes 9 districts and allows up to 17 dispensaries. Along with set guidelines for total dispensaries, these stores are also prohibited from operating within 500 feet of a school, church, library, playground, or park. Medical marijuana analysts expect the number of dispensaries allowed per region to increase as the industry matures and more people become licensed. Aside from the licensing process needed to operate a dispensary, there is also a mandatory license for employees with the title of either a key associate employee or a support employee. Both must undergo intensive background checks and pay $500 or $250, respectively. Once the dispensary licenses are approved more information will be available. PAYMENT One of the many difficult tasks for the marijuana industry is implementing a payment system. Since marijuana is technically illegal in America under federal law, the revenue created within the state that legalizes it gets a little fuzzy. Using cash transactions would make the money illegal in the government s eyes and is considered criminal activity. Because of these problems, the OMMCP has begun looking into the possible creation of a closed loop payment system to successfully flush the cash into a credit system. Patients that are licensed would deposit cash at a liquor store/state agency. The cash would then enter the electronic system as credits (sort of like adding tokens or credits to a game card). The agency would then transfer the electronic credits to the dispensary and the card could be used as a prepaid gift card. Ohio also envisions this system for making business transactions with any marijuana industries moving forward. The idea is to completely eliminate the use of cash within the industry. This would also allow every transaction and exchange to be tracked. ECONOMIC IMPACT Adding a new industry to the Central Ohio market has its ups and downs; however, one benefit will be the increase in revenue and taxes that will be a direct result from medical marijuana sales. Thus far, Ohio has been piling up revenue simply from the application process. For cultivation fees, $2,322,000 has been profited, along with $10,000 in each denied application and $5,000 in each denied dispensary license. The profit from annual license fee renewal will be roughly $2.64 million. Ohio will collect $4 million from processors, $70,000 from dispensaries, and $20,000 from testing labs. This brings the estimated total retail sales between $200 million to $400 million. Looking at it in tax revenue terms, this would translate to $24 million in tax revenue based on Ohio s 5.75 percent tax return. Another crucial aspect this industry will bring to the Ohio economy is employment. For cultivation sites alone, Level I licensed sites will employ full time employees, bringing the total employment for Level I sites to employees. Level II cultivation sites will employ 5-10 full time workers, making the total employment for Level II sites workers. In total, the medical marijuana industry will create jobs in the first year it is fully implemented. The base pay for marijuana industry workers has not been defined as of yet; however it will most likely fall within the regulations of what an average warehouse/manufacturing employee makes. An interesting finding in Colorado that could correlate to Ohio was that Colorado brought in $408M in sales revenue in 2015 specifically for medical marijuana sales. However, the recreational sales totaled to $597.8 million in one year. Colorado has roughly one-half the population of Ohio. The current numbers pertain to revenue strictly for medical use. In the event that recreational use is legalized in Ohio, the state can expect to see similar increases and positive effects to the economy as Denver has. In fact, with double the population of Colorado, Ohio could see double the amount of recreational revenue. 3

4 FEDERAL GOVERNMENT RESPONSES TO STATE MEDICAL MARIJUANA LAWS Though the federal government still considers marijuana an illegal Schedule 1 drug, there has been guidance from various federal agencies regarding state legalization of marijuana. This guidance suggests that enforcement of federal marijuana law is not a priority. However, these sources do not change the federal legal status of marijuana as a Schedule 1 drug and do not prevent federal enforcement of the laws against marijuana against states and individuals. Rohrabacher-Blumenauer (previously Rohrabacher-Farr) Amendment Becoming law in 2014 as part of an omnibus spending bill, the Rohrabacher-Blumenauer Amendment prohibits the DOJ and related agencies from spending federal funds to interfere with the implementation of state medical marijuana schemes. This amendment thus effectively precludes the DOJ (and, in turn, the DEA) from criminally prosecuting organizations, dispensaries, and individuals that comply with valid state marijuana regulations. Importantly, the amendment must be renewed each year and does not completely prohibit prosecution; it simply makes prosecution attempts more difficult. Memos by Previous Deputy Attorney Generals David Ogden and James Cole Writing to all US Attorneys, AG Ogden encouraged federal prosecutors not to prosecute those who distribute marijuana for medical purposes in accordance with state law by identifying eight enforcement areas that federal prosecutors should prioritize. These priorities include trafficking, drugged driving, activities involving minors, etc. Outside of these enforcement priorities, however, AG Ogden encouraged federal prosecutors to rely on state and local authorities to address marijuana activity rather than relying on federal mechanisms. AG Cole followed with a similar memo reaffirming AG Ogden s position. INSURANCE ISSUES The conflict between state and federal law regarding the legal status of marijuana has made most insurers reluctant to enter the market for fear they will be found complicit in the violation of federal criminal law. Those insurers that remain usually provide policies that tend to be more costly than for comparable non-marijuana businesses. Insurance agents and companies must first be authorized or approved to sell insurance in Ohio; after that, they can decide if they will provide policies to the marijuana industry despite the illegality at the federal level. Regarding marijuana businesses, there are companies that operate as brokers between insurance carriers and marijuana and ancillary businesses. Their services include covering properties with marijuana landlord insurance; building insurance; general, professional, and product liability (for edibles, vaping devices, etc.) insurance; umbrella insurance; equipment insurance; and employment practice liability insurance. However, because these companies still face the risk of being found complicit in violation of federal law for acting in the marijuana industry, policies often come at a much higher price and other legal industries. TITLE INSURANCE Many title companies will not provide insurance to Ohio marijuana or ancillary businesses. Those title companies that have issued policies for marijuana- related transactions in states like Colorado usually mitigate the risk involved by not facilitating the exchange of funds. These companies will issue these policies often on the rationale that the insurance product relates to land ownership, rather than to the activities taking place thereon. If a policy is issued, it will often expressly exclude coverage for governmental actions, including civil and criminal forfeiture under the federal Controlled Substance Act. 4

5 BANKING AND LENDING Since possession or distribution of marijuana violates federal law, banks that provide support for those activities risk prosecution and assorted sanctions. Federal regulation is pervasive and controlling, and federal financial regulators have significant power to punish state institutions that do not comply with federal law. Handling money from marijuana businesses could be considered money laundering. Chartered lenders are unwilling to finance the purchase of an asset that could be seized at any moment under the federal Controlled Substances Act. In Ohio, a safe harbor of sorts is provided to banks and lenders dealing in the marijuana industry. Ohio H.B. 523 [e]xempts a financial institution that provides financial services to a licensed cultivator, processor, retail dispensary, or laboratory from any Ohio criminal law an element of which may be proven by substantiating that a person provides financial services to a person who possesses, delivers, or manufactures marijuana or marijuana derived products, if the cultivator, processor, retail dispensary, or laboratory is in compliance with the bill and the applicable Ohio tax laws. H.B. 523 defines financial institution as any bank, trust company, savings and loan association, savings bank, or credit union or any affiliate, agent, or employee of such an institution and any money transmitter licensed under Ohio law or any affiliate, agent, or employee of a money transmitter. Importantly, this provision only saves banks and financial institutions under state law; any of these actors could be subject to penalties under federal law if they interact with marijuana businesses. Colliers Columbus Statistics Leased and Sold More than $388+ Million in Volume Completed More than 370 Transactions Managed over 21 Million Square Feet 115+ Professionals working toward Accelerating Your Success Leased and Sold More than 22 Million Square Feet All statistics are for FOR MORE INFORMATION Tyler Craig, CPRC Research Analyst Columbus tyler.craig@colliers.com James R. Garrett, MCR Executive Vice President Managing Director Columbus james.garrett@colliers.com Copyright 2018 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. North American Research & Forecast Report Q Office Market Outlook Colliers International 5