By Tucker Herndon and Nicole Keefe
Oh, how businesses change! The growing trend of adaptive reuse projects allow an existing structure to be used for a purpose other than what it was originally built, and continue to populate markets where the investment makes economic sense to retrofit rather than scrape. According to the CCIM Institute’s Adaptive Reuse: Turning Blight into Brightreport[1], which noted that the U.S. has an existing inventory of nearly 32 billion square feet of commercial office, retail and industrial warehouse space, a property qualifies as adaptive reuse if it meets the following criteria:
- It is an existing structure;
- The property is in a state of disrepair and high vacancy; and
- The project must involve a repurposing of use and there is a degree of economic viability that the project transformation will occur.
While adaptive reuse projects can be attractive, the investment can be burdened by costly expenses related to rezoning or local ordinance variances. The report also notes that adaptive reuse has been trending for over a decade in primary markets but is becoming more prevalent in secondary markets. As real estate prices continue to rise, companies are reinvesting in existing industrial structures to create a new kind of product that does not fit the traditional definition of office or warehouse space.
Adaptive Reuse in the Cannabis Industry
As more investors consider the cannabis industry as a growth market, the need for cannabis cultivation facilities, processing centers and dispensaries is projected to significantly rise to keep pace with demand. States where medical and recreational cannabis has been legalized for more than three years have seen more increases in demand for commercial properties – specifically, 42% saw an increase in demand for warehouses, 27% an increase for storefronts, and 21% an increase for land.[2]In states where medical and recreational cannabis has been legal since 2016, 21% had increase in the value of commercial properties near dispensaries, but 18% reported a decrease.
With this growth, we believe the industry will see the need for quicker, cost-effective construction. Cultivation facilities, processing centers and dispensaries may choose to utilize the physical features of an old structure – such as a warehouse with high ceilings, large and divisible floor plates, and simple architecture – by remodeling the interior design of unused or abandoned buildings. Such renovations can be less expensive or time-consuming than starting with new construction.
Special Considerations for Cannabis-Related Adaptive Reuse
However, there are certain considerations to take into account when selecting vacant real estate for an adaptive reuse project. For example, an abandoned warehouse might be great for a cannabis facility, but it may not be economically feasible to incorporate the necessary utilities and modify the building to meet more stringent security needs. Alternatively, with the consolidation of a number of regional banks, an available bank building might be attractive to a dispensary that needs a secure vault to address the significant cash operations, though regulations often require that dispensary vaults cannot be on a wall that abuts the exterior of the building, and many bank vaults include an exterior wall.
To the extent a cannabis company might be leasing in an adaptive reuse project, there are additional factors to consider – as should any cannabis business tenant. States where medical and recreational cannabis are legal are introducing addendums regarding sales, growth, moisture issues, fire hazards and security measures on the properties, which prospective tenants should review carefully, along with any accompanying default provisions. Cannabis tenants should consider negotiating a cash payment term if there is a likelihood that rent will be paid in cash. Additionally, cannabis tenants should pay attention to any restrictive covenants, property owner association regulations and utility provisions when negotiating a lease.
Conclusion
As cannabis-related businesses seek locations that meet the long list of criteria required, adaptive reuse properties can be a viable solution due to their availability and quicker time to market than ground-up construction, providing tenants are able to find a property that meets all requirements and are able to negotiate favorable terms. Because of the long list of regulations surrounding real estate for cannabis-related businesses, legal counsel with an attorney experienced in the technicalities surrounding property agreements and zoning regulations for cultivation facilities, processing centers and dispensaries should be consulted before entering a lease agreement.
About the Authors
Nicole Keefe is an associate in the Corporate & Tax Practice and the Agricultural Funding and Lending Group, where she represents clients in a variety of corporate matters including mergers, acquisitions, entity formation, corporate governance and daily contract issues. She can be reached at [email protected].
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[1]https://www.ccim.com/newscenter/commercial-real-estate-insights-report/adaptive-reuse/?gmSsoPc=1
[2]https://www.nar.realtor/reports/marijuana-and-real-estate-a-budding-issue
