Project Description

HOW HIGH IS HIGH?

 

Abstract: A Review of the Impact of Marijuana’s Legalization on Colorado’s Industrial Warehouse Lease Rates: How High is High?

This paper reviews the evolution of the marijuana industry in Colorado and its implications for real estate. We investigate industrial space pricing and the history of price effects caused by the legalization of marijuana in Colorado.  This study is the first to investigate how the legalization of marijuana has created an excess demand for real estate space, particularly for cultivation space (indoor gardening) in Colorado. We first review the history of the legalization of marijuana as well as marijuana related products in the United States and Colorado. Next, we focus on the demand and consumption of marijuana, as well as marijuanas associated pricing effects on real estate space in Colorado. Later we examine the future of marijuana in the United States, followed up by the findings of the legalization of marijuana in other early adopter states.   

Ultimately, this paper shows that the lease pricing of industrial grow facilities is well above that of  non-marijuana related industrial spaces by referring to examples and reasoning for the lease rate spread.  We conclude by commenting on what the next phase of the marijuana real estate market will be as the industry matures.

I. INTRODUCTION

Since the time that marijuana (also referred to as cannabis) was classified as a Schedule-1 narcotic and made federally illegal under the Roosevelt Administration in the 1930’s, positive public opinion about the narcotics decriminalization has increased.[i][ii] This viewpoint is notable today in the medical and recreational marijuana industries, which differ in that the recreational industry does not require a medical marijuana registry ID. This paper details the extent of changes and the current market environment within which these two components of the industry operate, using Colorado as the focal state. The legalization of recreational marijuana use was implemented in Colorado in January of 2014. This legalization furthered demand for industrial space, the space in which the “indoor gardening” of medical and recreational marijuana occurs. It should be noted that marijuana is typically grown within “warehouse space” which is a large subset of the industrial real estate product type. Demand for marijuana further increased, being driven by a new breed of consumers who no longer needed medical marijuana cards and who could avoid the inconvenience of associated doctor visits. This reduction of barriers to access established an influx of experimental users, out of state visitors, marijuana tourism, and ultimately people switching from medical to recreational consumption out of convenience.

Prior to the 2016 election season there were four states and the District of Columbia with legalized recreational use and purchase of marijuana.[iii] The state of Colorado was the first state to legalize and introduce an operating structure for licensing and regulating the recreational use of marijuana; therefore Colorado is used as a model by other states that are implementing or contemplating the legalization of recreational marijuana in their state. Colorado has been operational with recreational marijuana sales for more than three years; allowing sufficient time to review the Colorado experience with respect to its impact on industrial real estate pricing.

The focus of this paper is on the burgeoning legalized-marijuana industry in Colorado and the ultimate industrial real estate space impacts that are quite literally, unfolding today. We proceed by discussing the background and history of the national legalization movement. We then transition from national market demand and consumption to the Colorado market; exploring in detail how demand has and continues to shape industrial market characteristics. This is supported by a discussion of the structure of the Colorado marijuana market and the segmentation of the industry into medical and recreational usage. We examine the physical size of the industrial space market in Colorado and the characteristics of space demand within the state. Next we perform an analysis of average lease rates for each of these marijuana segments and explain the dynamics of the pricing discrepancy between marijuana and non-marijuana industrial space. Lastly, we review other states that are at an earlier stage of implementation and conclude with remarks about the future of the expanding legalized-marijuana industry on real estate.

II. NATIONAL MARIJUANA MARKET

BACKGROUND

According to the 2016 “Legal Marijuana Markets Analytics” report, legal marijuana markets in the United States are expected to grow by 26% in 2016.[iv] From the explosive growth in legalized marijuana (medical and recreational) sales over the last five years in particular, several growth trends are now underway within the legalized marijuana industry. These include innovative delivery systems, multi-state licensure acceptance, banking barriers, precision product testing, branding and packaging, and an overall change in the landscape of cultivation, as facilities grow in size to meet anticipated demand. Before delving into the market characteristics of Colorado specifically, it is important to understand the growing demand for legalized marijuana nationally.

There are growing populations of advocates pushing for ballot initiatives and legislation to immediately legalize recreational marijuana. Prior to the 2016 election season the states of Colorado, Washington, Oregon, Alaska as well as the District of Columbia passed recreational marijuana legislation with as many as seven states entertaining passage in the 2016 election cycle.[v][vi] Figure 1 shows the 2016 US recreational legalization landscape with associated tax rates on sales. As shown an additional 10 states had ballot initiatives for 2016 and Vermont is bypassing the ballot initiative for a legislative act.

Figure 1: Adult Use Recreational Marijuana by State (Pre 2016 Election)
Source: Tax Foundation

Legal medical use marijuana was established in 1996 by California which is now the country’s largest medical use marijuana market. Medical use legalization momentum continues as Ohio and Pennsylvania legalized medical marijuana in the first half of 2016. There are now 29 states and the District of Columbia with legalized medical use. As shown in Figure 2, 13 states or 45% of the current legal medical use states passed medical marijuana legalization in the past 5 years. Florida, Missouri, North Dakota, Montana and Arkansas approved medical marijuana legalization on the November 2016 ballot. The only exception is Missouri which rejected a referendum on the ballot this past November.

This election cycle also resulted in four states; California, Maine, Massachusetts; and Nevada joining the list of states with legalized recreational use. The only state initiative that reached the ballot and not approved was Arizona where recreational marijuana use was defeated 49% to 51%. Figure 3 shows the states that have passed medical, recreational and non THC known as cannabidoil (CBD) marijuana use legislation[vii] including the 2016 election results. 

Figure 2: State Passage of Marijuana Initiatives by Year
Source: Authors

Figure 3: Marijuana Legalization in the US

It is important to think about the economic impact of supporting this burgeoning marijuana industry. There are many supporting businesses to the industry along with real estate centric companies and investors. The multiplier effect is estimated at 3. This multiplier effect of a dollar in legalized marijuana spending includes the money spent by the growers, the infused product makers, testing labs, security, staff salaries, and of course the retailers themselves. Figure 4 shows the total economic impact of the US cannabis industry in billions of dollars.

Figure 4: U.S. Cannabis Industry Total Economic Impact: 2013: 2020
Source: Marijuana Business Factbook 2016

Despite marijuana’s federal designation as a Schedule-1 narcotic, significant barriers to entry and difficulties obtaining business bank accounts or financing, the race to expand and meet expected demand is on.[viii] Potential marijuana markets consider the “blind eye” approach from the federal government to signal an unspoken acceptance for the industry.[ix]

MARKET DEMAND

According to Arcview Market Research Group the full legalization of marijuana nationwide would result in $36.8 billion dollars in recreational sales, even larger than the $33.1 billion U.S. organic food market.[x] In 2014 the legal marijuana industry expanded by 74% to reach 2.7 billion in combined recreational and medical sales.[xi] In 2015 the legal marijuana market reached $5.7 billion in combined sales.[xii] Figure-5 shows the US market share for states that currently have legal marijuana sales. Of the total $5.7 billion in U.S. marijuana sales (recreational and medical) in 2015, 47.9% occurred in California and 17.5% occurred in Colorado, with the next highest state being Washington at 12.4%.[xiii] Of note is the Colorado market percentage was 30% in 2014, demonstrating that as others states pass legalization legislation, industry dominance can dilute. Figure 6 shows the overall historical marijuana sales in the United States, highlighting that market growth is projected at 26% in 2016 with an average annual rate of 31% going forward.

 

Figure 5: Percent of Combined US Cannabis Sales by State: 2015
Source: New Frontier & Authors

Figure 6: US Cannabis Sales & Growth
Source: New Frontier

With the slow response of states like California to achieve state wide recreational regulation, the lime light is on Colorado. The Colorado market grew more than 300% in 2014, the highest sales growth of any state.[xiv] Colorado is the epicenter of the marijuana industry boom today as the very first active recreational adult-use market, one which recorded $315 million in 2014 adult-use sales and $588 million in 2015 with a combined adult-use (recreational) and medical marijuana market of $996 million in sales for 2015.[xv]

The sales taxes generated are a proxy for distinguishing the market demand for medical and recreational marijuana. The sales taxes generated from the five counties of Adams, Arapahoe, Boulder, Denver and Jefferson in Colorado are slowly decreasing on the medical marijuana side. Contrarily, recreational marijuana sales are increasing month over month since the start of legalized recreational sales in Colorado in January, 2014. The demand for marijuana by Colorado adult residents was estimated to be 121.4 metric tons or 121.4 million grams in 2014.[xvi] In addition, the demand by Colorado visitors is estimated to add an additional 8.9 metric tons, which reflects only the 21+ age (recreational) population.[xvii] The true size of Colorado’s marijuana market for 2014 is believed to be as high as 157.9 metric tons.[xviii] This includes medical and recreational marijuana outlets, along with medical caregivers, the latter of which is a gray market of informal producers and vendors sanctioned by state laws. The remaining demand is from home production, unlicensed vendors and the “black” market, the latter of which is projected to account for approximately 17.5% of total sales.[xix]

COLORADO CONSUMPTION

There are approximately 485,000 regular adult marijuana users who consume marijuana at least once per month, representing approximately 9.0% of the 5.4 million-person population of Colorado.[xx] An additional 201,000 adult residents reported using marijuana within the past year (2014), accounting for 3.7% of Colorado’s population.[xxi] The average Colorado daily user consumes one half to 1.5 grams per day, while many heavy users report much higher usage.[xxii] Regular users’ frequency of consumption varies between once per month and 20 days per month, and heavy or daily users who consume over 20 days per month.[xxiii] Heavy users drive almost 70% of total marijuana demand, and the prevalence of heavy users in Colorado is higher than the national average.[xxiv] In Colorado, 23% of marijuana users claim to consume marijuana near daily (26-31 times per month), compared to 17% in the United States overall.[xxv] 47% of medical marijuana users are people aged 21 to 30, while 21% are aged 31 to 40, 19% are aged 51 to 60, and 13% are aged 61 to 70 years old.[xxvi]

III. MARIJUANA HISTORY IN COLORADO

RECREATIONAL VS. MEDICAL

In order to fully understand how the Colorado and Denver marijuana markets impact industrial real estate space, it is first important to distinguish between grow space for the cultivation of medical marijuana and those grow spaces involved with the cultivation of recreational marijuana. As the use of industrial space pertains to the impacts of marijuana cultivation on real estate, this study focuses primarily on the cultivation related side of marijuana, and those industrial buildings that house such operations. Later, marijuana industrial space characteristics and the real estate market in which those spaces operate are elaborated upon further. Medical marijuana facilities and recreational marijuana facilities are not necessarily one and the same, although the once donned medical industrial facilities are transitioning into dual medical/recreational facilities, depending on local municipality laws and license availability. The industrial spaces (largely warehouse space; a subset of the industrial space market) uniqueness needs clarification; this understanding starts with the developmental foundation of the Colorado marijuana market.

The legalization of medical marijuana sales began over a decade ago in Colorado. In the November 2000 general election, Coloradans passed Amendment-20 and with this the Colorado department of public health and environment was tasked with implementing and administering a medical marijuana registry program. In March of 2001, the state of Colorado’s Board of Health approved the rules and regulations pertaining to the administration of the program. Then on June 1st of 2001, the registry began accepting and processing applications for registry identification cards. These registry ID cards pertain solely and specifically to the medical (not recreational) side of the marijuana industry.

Contrarily, recreational marijuana cultivation industrial facilities operate under the guise of Colorado Amendment-64, which passed on November 6, 2012. This Amendment decriminalized the non-card carrying personal-use of marijuana in Colorado in Article-18, Section-16 of the United States Constitution. The amendment addresses personal use and regulation of marijuana for adults over the age of 21, as well as commercial cultivation, manufacture, and sale, which effectively regulates marijuana consumption and usage in a similar modality to alcohol. The very first retail stores; however, did not open for operation in Colorado until January 1st of 2014.

Legalization does not mean it is legal in the entire state. Each county or jurisdiction determines if recreational and or medical marijuana are allowed. These local municipality differences include: how many licenses are allowed, the local sales tax, licensing fees (limited by state regulations), zoning restrictions and other restrictions such as odor mitigation requirements. There are 67 of the 321 jurisdictions that allow both medical and recreational marijuana sales while 93 jurisdictions allow either recreational or medical marijuana, but not both. Leaving 228 jurisdictions that prohibit all sales of marijuana.[xxvii] Figure 7 shows a Colorado map and the marijuana regulations by county.

Figure 7: Marijuana Regulations by Colorado County
Source: Avalon Group

MEDICINAL USE

A larger volume of data is available from the Colorado Department of Revenue on medical marijuana than recreational because of the longer time frame since legalization. Medical marijuana purchases require buyers to possess a state issued medical marijuana ID Registry Card, and this data has been tracked since January 2009. As of May 31, 2016, 330,425 new patient applications have been received for medical marijuana ID’s in Colorado since the registry started operating in June 2001.[xxviii] Currently the total number of patients who possess IDs in Colorado is 106,066, indicating that outside of death, 67.9% of cardholders have exited the medical marijuana side of the marijuana market.[xxix] 64.3% of approved applications are for males, while the average age of all patients is 41.8[xxx]

Medical marijuana patients also have a longer historical record of analysis than recreational for the Denver metro 7-county “front range” area, consisting of Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson Counties. Growth since 2009 has been tumultuous. Jefferson County and Arapahoe County had hovered just below 5,000 patients before January 2010, while Denver County reached nearly 10,000 patients. By mid-2011, Denver had reached nearly 20,000 patients for what would be the first of two Colorado medical marijuana patient peaks since 2009. Immediately following the peak in November 2011, all submarkets declined, which happened to be approximately one year prior to the passing of Amendment 64. Denver in particular dipped from around 20,000 patients in mid-2011 down to around 12,000 patients by the end of 2011. What is statistically surprising about this change is that medical marijuana experienced a recessionary like dip one year prior to the passing of Amendment 64, not after. A partial explanation for this dip in patients is a result of the news of recreational marijuana’s anticipated legalization in coming months, legalization which was eventually prolonged as a regulation system was developed. Since the trough at the end of 2011, patient count steadily increased to an average of 30% (Denver County) until mid-2014, and then once again slowly declined. Furthermore, all seven front range counties have experienced a negative growth rate since January 2014, ranging between -3.3% (Broomfield) to -8.9% (Denver). Figure 8 shows the historical trend in medical marijuana patients for Denver front range counties.

Figure 8: Medical Marijuana Patients (1,000’s) by County, 2009- 2016
Source: Colorado Department of Revenue, Medical Marijuana Registry

Potential and former medical marijuana cardholders may have either let their registration lapse or have switched to the recreational market that does not require a medical marijuana registry ID. The upfront ID costs combined with the delay from prerequisite doctor visits are deterrents to medical marijuana customers who find the recreational marijuana market to be the easier alternative. This market shift is occurring even as the cost of obtaining a legal medical marijuana card has plummeted from $100 in 2011 down to $15 currently.[xxxi] This shift away from medical marijuana also occurs in the midst of a reduced medical marijuana cost relative to the larger tax burden enforced on the recreational marijuana side at retail stores. Colorado’s 64.6 million visitors, who spent a total of $17.3 billion on medicinal marijuana in 2013, further find immediate retail marijuana purchases to be a more suitable option for their temporary visit.[xxxii] The demand for recreational marijuana, which has driven up industrial warehouse lease rates, is further supported by out of state visitors and the removal of purchasing barriers during such temporary visits.

MARIJUANA SALES

Despite open use restrictions, out of state visitors currently represent approximately 44.0% of all Metro Denver area recreational sales and approximately 90% of recreational sales in heavily visited mountain communities.[xxxiii] In heavily visited mountain communities, combined medical and recreational sales more than doubled after recreational adult use was legalized in January 2014. [xxxiv] In contrast the Colorado front range combined sales only increased between 15% and 19% after recreational adult use was legalized.[xxxv] These figures emphasize the proportionally stronger demand for recreational sales in mountain communities, where visitors tend to gravitate to the convenience of recreational marijuana during their temporary visit.

SALES TAX

Recreational marijuana cultivation facilities (grow houses) are primarily used for the cultivation and harvesting of a business’s marijuana.[xxxvi] If not associated with a product manufacturer, these licensees may sell retail marijuana to other recreational stores or product manufacturers within Colorado. These industrial based operations provide product to retail (not to be confused with recreational) based stores or dispensaries.

Medical marijuana registration fees are likely to be offset by lower tax rates paid for medical marijuana, compared to higher taxed recreational marijuana. Medical marijuana is subject to state and local sales taxes, but recreational marijuana is also subject to a 15% excise tax and a special state sales tax rate of 10%. In addition, each city can apply higher tax rates to recreational marijuana. For example, the Denver sales tax rate is 3.65% for medical marijuana, but the rate is 7.12% for recreational marijuana. The effect is compounded by state and district taxes. The final rate a medical marijuana I.D. holder pays for medical marijuana in Denver is 7.65%, compared to the total tax rate of 36.15% on recreational sales.[xxxvii], [xxxviii] This difference makes the purchase price for medical marijuana cheaper to the public than recreational marijuana.  In total the cumulative taxes make recreational sales approximately 30% more expensive than medical sales.

The state excise tax on recreational marijuana is imposed on the first transfer or sale from the cultivator to the retail marijuana store. The price of the recreational marijuana at any store will include this excise tax, similar to liquor or tobacco. The sales tax is imposed on the sale from a recreational marijuana dispensary to the consumer. If a business sells medical and recreational marijuana, a sales tax license for each type of marijuana is required, even if sold at the same location. If you are a recreational marijuana cultivator, a sales tax license or wholesale tax license is required for each recreational marijuana cultivation facility. If the recreational marijuana cultivation facility’s location is not at the same address as the retail or medical marijuana center, a wholesale license is required.

GENERATED TAXES

For this study, medical marijuana and recreational marijuana sales taxes have been tracked monthly since January 01, 2014. As of June 2016, Denver County accounted for the largest percentage of medical marijuana sales tax at 75.4%. Over this same time period, Boulder accounted for 10.4%, Jefferson for 6.9%, Arapahoe for 5.9%, and Adams County accounted for 1.4%. Figure 9 shows the medical sales tax collected by county from January 2014 to June 2016.

Figure 9: Medical Marijuana Sales Tax
Source: Colorado Department of Revenue, Colorado Marijuana Tax Data

Colorado recreational sales have continued to increase since the start of legalization. For the state overall, measured using the change in the 2.9% sales tax collected, the percentage changes since inception (Jan 2014) till June of 2016 is 395%, In comparison the change in medical marijuana sales tax collected over the same period is 16.94%.  Denver County which has the majority of dispensaries has a positive change in medical marijuana sales of 20.34% and recreational sales are up 150% over the same time span.  Indicating that outlying counties over time have become more active in the recreational market in comparison to the start of legalization where most flocked to Denver itself.  Figure 10 shows the comparison of medical and recreational sales growth.

Figure 10: Recreational vs. Medical Marijuana Sales Tax
Source: Colorado Department of Revenue, Colorado Marijuana Tax Data

IV. INDUSTRIAL REAL ESTATE MARKET SIZE

MARIJUANA USE

According to CBRE’s 2nd quarter 2016 market snapshot report the Denver metro area includes 231 million total rentable square feet of industrial space located among 4,535 buildings for an average industrial building size of 51,000 square feet. Furthermore, there is a total of 120.3 million square feet of industrial space located in the Metro Denver submarkets of Central, North Central, North, Northwest, Southeast, Southwest and West Denver. Based on CoStar data the average medical marijuana industrial grow facility is approximately 30,000 square feet. There are 385 medical marijuana cultivation facilities that occupy a total of 11.6 million square feet of industrial space in Metro Denver, representing roughly 5.0% of the total 231 million square feet of industrial space in Metro Denver, according to CBRE 2nd quarter, 2016 market report. In the Boulder-Broomfield corridor there are 37 medical marijuana cultivation facilities also with an average facility size of 30,000 square feet, for a total of 1.1 million square feet of industrial space, which represents roughly 1.5% of the total 74.58 million square feet of industrial space in the Boulder-Broomfield corridor.

The marijuana industry can further be distinguished by determining the percentage of marijuana cultivation facilities that are located in A, B and C class buildings. Based on data from CoStar coupled with state licensing data, 24% of both medical and recreational tenants each occupy Class B space, while 73% of medical and 72% of all recreational tenants occupy Class C space. Very few recreational or medical marijuana tenants occupy Class A space as a percentage of the total. The average year built of industrial buildings occupied by recreational marijuana tenants in Denver is 1964, while the average year built of industrial buildings occupied by medical marijuana tenants in Denver is 1963. This indicates that although the marijuana industry is relatively new, tenants involved in the industry are largely occupying older Class B and Class C industrial space. This indicates not only the lack of financing options available, but also the lack of industrial space available. Table 1 details the class of industrial space occupied by medical and recreational marijuana tenants in Denver and Colorado.

Source: Costar.com

NUMBER OF FACILITIES

The Colorado Department of Revenue tracks each medical and recreational industrial cultivation location within the entire state of Colorado. The list of medical marijuana cultivation facilities goes back to lease dates starting in 2010, while the list of recently legalized recreational marijuana cultivation facilities goes back to lease dates starting in January of 2014. As of July 1, 2016, there were 572 recreational marijuana cultivation facilities in Colorado. 205 (35.8%) were located in Denver, 81 (14.2%) are in Pueblo, and 45 (7.8%) are in Boulder. As of July 1, 2016, there were 786 medical marijuana cultivation facilities in Colorado. 407 (51.8%) are located in Denver, 175 (22.3%) are in Colorado Springs, 31 (3.9%) are in Boulder and 28 (3.6%) are located in Pueblo, according to the Colorado Department of Revenue July 2016 Marijuana Cultivation Facility Report.[xxxix] Due to a recently extended moratorium on new licenses in Denver and other jurisdictions, these numbers are based on prior holders of medical marijuana licenses. Medical license holders are the only group allowed to obtain recreational licenses at this time. The extension of the moratorium is to debate the request for a two year extension until January 2018.[xl] This extension could result in a slowing of industrial space demand as new entrants are forced to wait to be eligible. In addition Denver and other jurisdictions are developing caps on how many facilities can be in any area that is deemed “saturated.”[xli] Denver, as of June 2016, has also added a 1,000 foot restriction from schools and residential neighborhoods further reducing the number of potential sites for cultivation. The effect is expected to result in a greater premium paid for an eligible location.

V. METHODOLOGY/FACILITY DESCRIPTION

The following CoStar data driven research focuses on the Denver metro market with the ultimate goal to summarize the market and submarket characteristics of industrial space occupied by medical and recreational marijuana tenants. Data was collected on marijuana cultivation facilities by building square footage, lease rates, building operating expenses, all tenant industrial submarket lease rates, building age, and building class. Data was examined on each of the recreational and medical marijuana tenants using CoStar.com and the Colorado Department of Revenue website. Industrial warehouse space is the primary space in which marijuana cultivation operations are housed. Based on the data collected for the recreational marijuana cultivation facilities in Denver, the weighted average lease rate was approximately $19.33(NNN) per square foot per year. The rents for the industrial submarkets in which these recreational marijuana buildings operated showed an average lease rate per square foot per year of $7.38(NNN). It should be noted that these industrial submarket rates included both marijuana cultivation facility tenants and non-marijuana cultivation facility tenants. Because marijuana lease rates were not isolated from the submarket, this supports the notion that the lease rate differential between marijuana and non-marijuana tenants is likely greater. This rent differential is $11.95 per square foot per year or a 162.1% premium. The average recreational marijuana cultivation facility in this study leased space that amounted to 19,489 square feet, smaller than the 30,000 average leased space for medical marijuana cultivation space mentioned earlier. This is perhaps a result of the recreational industry existing in an earlier stage of development and therefore characteristic of higher capitalization struggles than the more mature medical marijuana industry. These recreational marijuana leased spaces ranged from 500 square feet all the way up to 60,000 square feet. Based on the recreational tenant data collected, the likely median square footage of industrial space rented ranged between 10,000 and 30,000 square feet.

The weighted average lease rates for industrial space that houses medical marijuana cultivation is $8.34 (NNN) per square foot for Denver. The submarket in which those medical marijuana tenants operate are experiencing an average lease rate per square foot of $7.38 per year (which again did not isolate marijuana tenants out and may therefore be a higher rate than non-marijuana tenants in the submarket are experiencing). This is a differential of $0.96 per square foot per year, or a premium of 13.0% for the more mature medical marijuana market as opposed to the aforementioned 162.1% premium in lease rates for the less mature recreational marijuana market. These disparate rates between recreational marijuana tenants and medical marijuana tenants is largely attributable to the recent legalization and booming demand for industrial space for recreational facilities as of January 2014. Furthermore, these disparate lease rates are further driven apart and perpetuated by the burgeoning in state and out of state visitors demanding recreational marijuana that does not require the inconvenience of a medical marijuana ID card. The risk premium for leases on recreational cultivation space is believed to be consistent with medical marijuana as general acceptance has risen and the federal government continues to not intervene, counteracting a search for landlords who would otherwise be more averse than the first mover landlords. Table-2 shows the lease rates per square foot for retail and medical marijuana facilities as well as the submarkets in which they operate.

Source: Costar.com

VI. TAX LAW EFFECTING THE MARIJUANA INDUSTRY

Until October of 2014 in Colorado, the laws prescribing the usage and distribution of marijuana declared that a retail dispensary had to grow at least 70% of the marijuana products sold at their location, with 30% of marijuana products allowed to be purchased from the medical marijuana wholesale market. A recent change to the state recreational regulations is the rescinding of this 70/30 ratio requirement. This change could drastically alter the ownership mix amongst dispensaries with independent licensed producers of marijuana attempting to expand their operations without the requirement to also be active in the retail or dispensary side of the business; they are thus able to focus on their core competency of cultivation. With a recreational grow license the cultivation facility and its operators can sell to all recreational license store fronts while avoiding the handicap of disallowed tax deductions associated with retail dispensaries.

In the coined Colorado pot-tax trial, “The operators of a now-defunct Denver dispensary (Total Health Concepts) are challenging the IRS on a tax code that views marijuana dispensary businesses as an illegal trafficking operation, and thus ineligible to claim otherwise deductible expenses.”[xlii] A similar case (Harborsid) in California tax court was heard in June 2016 with a decision expected by early 2017.[xliii] The foundation of these tax court cases stems from the reality that marijuana dispensaries are currently considered illegal drug traffickers under federal law, while the grow warehouses are not.[xliv] The dispensaries are considered federally illegal criminal enterprises with no Internal Revenue Service (IRS) operational cost benefits and no bankruptcy law protection. Currently under IRS section 280E of the Internal Revenue Service Tax Code, deductions and tax credits are not allowed or applicable to businesses that are trafficking in illegal drugs (dispensaries), while the same does not hold true for industrial grow facilities. Marijuana is still considered by the U.S. Drug Enforcement Administration to be a Schedule-1 illegal narcotic, and IRS section 280E therefore restricts businesses that are legal under states laws. IRS section 280E excludes deductions and taxes dispensaries on their total gross income, while severely limiting their allowable deductions. The general consensus is that by taxing marijuana operators on income that was literally never earned or fully realized, operators are often not able to pay their tax bill when it arrives, effectively altering their ability to maintain their licensure.

In the meantime, on April 16, 2015, the Small Business Tax Equity Act was introduced into the U.S. House of Representatives and U.S. Senate. It is a step toward correcting the unequivocal business treatment of IRS section 280E, which was created in 1982 in response to a jailed cocaine and methamphetamine dealer who argued that his drug trafficking related expenses should be a tax write-off. The Small Business Equity Act would “Amend the Internal Revenue Code to exempt a trade or business that conducts marijuana sales in compliance with state law from the prohibition against allowing business-related tax credits or deductions for expenditures in connection with trafficking of controlled substances.” This Act; however, is not with its downside, in which it proposed a 50% excise tax on marijuana sales along with an annual occupation tax placed on workers within a cultivation business.

Today, IRS section 280E prevents businesses that are operating legally under state laws from tax deductions for retail expenses such as lease payments, employee salaries, utility bills, removing protections from federal bankruptcy and increasing the liability to potential RICO charges. Furthermore, IRS section 280E prevents protection from the punishment associated with all-cash payrolls in a business largely sidelined by the banking industry which won’t take marijuana clients and customers. Financial institutions have a legitimate fear of comingling monies with drug trafficking funds which potentially expose their banks assets to federal seizure. Non-marijuana related businesses usually pay around a 30% tax rate on their taxable income, after allowable deductions. Marijuana related businesses end up paying tax on their gross income (or taxable income without allowable deductions). This often equates to approximately 70% (depending on local jurisdiction tax) or more of their profits, a sizable handicap for the marijuana industry. Again, the lack of tax deductions mentioned apply to the dispensary side of marijuana businesses as opposed to cultivation (grow houses), which although not necessarily legal at the federal level are not punished through taxation and disallowance of deductions.

The federally unprotected status of a marijuana dispensary makes operating one more expensive than a non-marijuana related business because of the disallowance of deductions aforementioned. Contrarily, the marijuana cultivation industry by IRS rules is considered to be a federally legal manufacturer, although still part of a federally illegal operation. Marijuana dispensary owner-operators can shift part of their operating expenses from their dispensaries onto their cultivation operations where deductions are allowable. This incentivizes marijuana businesses to vertically integrate. Although profits are predominantly made on the cultivation side of the business, operators still need to ensure the sale of the product via their or another organizations dispensaries. While in an early stage of development, lack of demand isn’t currently a concern. As the marijuana market matures and independent operators reinvest profits into their own production sites and economies of scale are met, this distribution relationship will become a vital component to a grow facilities survival.

Because the dispensary is not as economically efficient as other businesses due to federal tax law, there is an incentive for vertical integration. There are several investment groups who have attempted to just own cultivations; however, these groups need dispensaries to sell to. Current disallowable tax deductions for dispensaries results in minimal improvements being put into dispensary locations where expenses like tenant improvements (TI’s) are not tax-deductible. Tenant Improvements (TI), are the customized alterations a building owner makes to rental space as part of a lease agreement in order to configure the space for the needs of that particular tenant. The cultivation facility can be improved upon with TI’s for increased water, electricity needs etc. which are written off as a cost of doing business, according to the IRS. [xlv] Although cultivation operations don’t face the disallowance of deductions issue like dispensaries, they do face the problem of available cash and financing to improve an existing building or develop a new site.

VII. MARIJUANA INDUSTRIAL LEASE RATES IN COLORADO

Most cultivation operations were originally started in available industrial Class B or C space. This is because the costs to get a working grow facility operational in a finance-strapped industry is reduced if the choice is to renovate existing space as opposed to more expensive new builds. Hence, the original space demands for such marijuana facilities was lower valued industrial space. Those willing landlords were less opposed to such renters (marijuana-related) due to the limited demand for their older space brought upon by the wake of the “Great Recession”. In addition, these older buildings are less likely to have mortgage debt which is another deterrent to leasing. Banks are aware of the potential for owners to lease space to this still federal illegal activity and review their loan portfolio for violations. Marijuana entrepreneurs are willing to lease these Class B or C buildings at a premium to lock in allowed locations and to mitigate an owner’s objection to legality concerns (real or perceived). Once a marijuana tenant is able to convince an industrial owner to provide them space, the user still needs tenant improvements. These TI’s may be expended by the marijuana grower, private equity, hard money lenders or “rolled” into the lease because the tenants face adverse financing options. The “TI’” needs are substantial to retrofit an industrial building to achieve the needed utilities for a marijuana cultivation facility. Such expensive retrofits include increasing utility capabilities, intense wiring, advanced insulation, security, and adding climate control systems with a total cost ranging from $500,000 to multiple millions of dollars per facility.

Marijuana entrepreneurs usually seek to acquire more than one cultivation facility over time for a number of reasons. Multiple facilities aid in efficiency through achieving economies of scale, and diversifying risk of jurisdictional changes of law by locating in more than one municipality. Inside of an increasingly consolidating industry, with little financing available, such entrepreneurs look to the landlord as a solution to financial flexibility. The landlord typically provides this flexibility by charging a premium lease rate to compensate for the perceived risk of the industry coupled with a recent upward shift in demand for their space. Landlords can also select to complete TI’s needed for operation. The latter can possibly be partially rolled into lease payments which the marijuana tenant can more easily pay with revenue from operations than a bank loan.[xlvi]

The lease rate spread of the industrial market vs. the marijuana industrial market can be explained by several points. First, lease rates are driven up because landlords are risk-adverse, which not only decreases the supply of available space to potential marijuana tenants but incentivizes willing landlords to charge additional lease premiums. There are also restrictions by mortgage lenders to not lease buildings to federal illegal activity or local jurisdiction rules on the number of locations, or as an allowable use in their jurisdiction. Furthermore, cash-strapped marijuana tenants can propose for landlords to finance TI expenses into lease payments, thereby increasing landlord’s capital investment and upfront risk; reimbursed in lease premiums.[xlvii] The landlord can also refuse these requests and require the tenant to pay such TI’s. Either way the landlord will retain these improvements after lease expiration, although in some cases the improvements may be considered a “super adequacy” to future tenants. Lastly, there is now a 1,000 foot setback rule from the warehouse to a change in zoning, such as residential, further minimizing the pool of leasable facilities.

To summarize, the average industrial lease rate is $7.38 (NNN) as opposed to average recreational and medical marijuana lease rates of $19.33 (NNN) and $8.34 respectfully in Denver. The medical marijuana lease rate premium is $0.96 per square foot per year ($8.34 minus $7.38) and the recreational marijuana lease rate premium is $11.95 ($19.33 minus $7.38).[xlviii] This $0.96 risk-premium for medical can be attributed to the perceived risk of a marijuana related tenant. These medical leases were in place prior to the shift in demand for space after passage of the recreational adult use. The remaining $10.99 ($11.95 – $0.96) rent differential is attributable to a shift in demand for limited warehouse space and the aforementioned issues that limit space. This increased premium is also occurring for recreational facilities because medical marijuana industrial warehouse leases have been operating since 2001 and the medical cultivation tenant has shown ability to make lease payments and stay in business.[xlix]

EXAMPLE OF TI ROLL-IN

An industrial warehouse is 15,000 square feet and on average $9 per square foot per year is the maximum additional rent to cover TI costs, the tenant improvements are $135,000. Much of the TI may be a fixed cost and not dependent on the size of the space. For instance this estimation was confirmed by a local grower with two 3,500 square foot cultivation rooms in operation within the warehosue space with a $135,000 TI equating to $38.57 per square foot per room.[l] There are federal tax rules that come into play by the TI roll-in decision related to equipment financing.[li] Part of the TI may be fixtures like equipment lighting (excluded by tax rule) and utility services that are not permanent improvements to the industrial warehouse location. Rolling in these equipment portions into the lease could be considered equipment financing and not part of the real estate lease.

SO HOW HIGH IS HIGH?

We hypothesize that a marijuana facility lease is made up of current industrial market lease rates, a risk-premium for the marijuana market and a premium because of shift in demand with the opening of a recreational market with restricted supply. Based on Denver data the current market lease rate is $7.38(NNN) per square foot per year. Adding $0.96 per square foot for perceived risk, $10.99 per sqaure foot for restricted supply coupled with a shift in demand results in a Denver recreational cultivation lease total of $19.33 per square foot per year. Now we address a potential for TI roll-in.

Assume we have a 15,000 square foot facility with two grow rooms. Multiple grow rooms are assumed, taking into consideration production size, timing of plant maturity, and timely delivery of product. If the cost of outfitting two grow rooms within the facility is $135,000 per room and 70% of the upgrades are permanent to the location, then $189,000 (70% x $270,000) can be attributed to tenant improvement needs that can potentially be rolled into lease payments. This would create a potential $12.60 ($189,000 /15,000) per square feet of add on into the lease. Amortizing this TI over five years at a 25% return (based on market interviews) yields a $4.68 PSF add on to the lease annually. This creates a total lease rate of $24.00 per square foot, which is approximately 226% above the $7.38 industrial market lease rates.

The leasing scenario illustration is important for the real estate professional to consider. For a broker, appraiser, market analyst, developer or investor it becomes critical to examine a proper pool of leases. They need to know the motivations and requirements of any market segmentation or otherwise risk misjudging a market and/or its associated market lease rates. Risk-premiums are a major factor in the marijuana industry which is continuing to grow into a major share of the industrial market. Until the marijuna market matures and these premiums quell, real estate professionals need to factor in marijuana lease rates when assessing any market in which medical or recreational marijuana is “legal”.

VIII. MARKET COMPARISON OF EMERGING CANNIBIS MARKETS

 We reviewed the legalization of recreational marijuana in the two states outside of Colorado with operating markets to see if similarities to Colorado are encountered. We comment on the experience in the states of Washington and Oregon.

WASHINGTON

With the passage of I-502 in 2012, Washington State joined Colorado as the second state to legalize recreational marijuana in the United States. The biggest difference between the legislation of Colorado and Washington is how the two states implement a 1,000-foot distance rule on locations. This distance rule in general is based on prior federal rules on alcohol during prohibition. It is illegal for a dispensary to be within 1,000 feet of another dispensary, school, day care, library, church or place where people congregate. Colorado with its recent expansion to a 1,000 foot rule specifically keeps the marijuana grow operations at least 1,000 feet away from schools and other marijuana operations. Contrarily, Washington also excluded all “places children congregate”, which includes day care centers, parks, libraries and so on. With stricter rules in Washington reducing qualified properties to locate a marijuana grow facility, increased competition for limited space or eligible locations.[lii] This result is expected to increase lease rates for certain industrial spaces (such as Seattle Close-in) being bid up by marijuana operations to a premium greater than current rent premiums experienced in Colorado.

According to CBRE Research, the Puget Sound (Seattle metro) demand for industrial space was strong in Q2, 2016. Even with over 1.5 million square feet of new completions, the vacancy rate of 4.9% remains well below the average of 6.2% experienced from 2000 to 2014. Currently, the asking lease rates for industrial space in submarkets range from $5.16 (NNN) to $8.88 (NNN) per square foot per year as shown in Figure 11. An examination of Figure 11 shows how the average submarket rents were on a steady price increase, then in late 2015 Seattle “Close-in” rents started increasing on a steeper trajectory. This is indicative of the anticipation of a fully operational legal marijuana market in Seattle and a need to create local grow space within the existing space inventory.

Puget Sound (Washington State) Warehouse Asking Rent, NNN, per Month
Source: CBRE Research, Q2 2016

PORTLAND, OREGON

On November 4, 2014, Oregon voters approved Ballot Measure 91, by a 56% to 44%, majority to legalize recreational marijuana sales. As of July 2015, Oregon legalized the possession, private use and cultivation of marijuana by adults 21 and older. Oregon liquor control officials now allow retailers to sell both medical and recreational marijuana. Since legalization occurred, marijuana growers have been looking to upgrade or expand their industrial warehouse space. These tenants are paying well above market prices to reserve space, especially in Portland, which has more large scale medical marijuana cultivation operations than other locations in Oregon.[liii]

According to CBRE, the Portland industrial market recorded net absorption in Q2, 2016 of 1.1 million square feet. The vacancy rate dropped to 3.6%, as tenants grab at any existing inventory they can get their hands on. Especially limited is supply for mid-sized tenants. The average asking lease rates for industrial and flex space was approximately $8.80 (NNN) per square foot per year and forecast to continue increasing. Figure 12 shows the rental rates for warehouse and flex space in the Portland market.

Portland Rental Rates- Warehouse vs. Flex
Source: CBRE Research, Q2 2016

What may be misleading about the Puget Sound (Seattle metro) and Portland industrial markets overall is that the aggregate lease prices per foot per year have not risen dramatically until recently in the Seattle “close-in” markets. A deeper review at a local level shows that marijuana operations are willing to compete for industrial space. In markets like Portland, the space that meets the geographic distance requirements (1000 ft. rule) faces increased bidders and lease rate premiums. Potential cultivators were willing to secure space prior to law passage and even a year in advance of use because of a need to secure this limited space combined with distance requirements from other growers or residences and potential caps on the number of stores from “saturation” claims in local markets. What may be a viable site now may not be in the future.

Since the total space demand for a marijuana cultivation may only be a fraction of total

absorption (2.0% to 12.0%), there is a dampened effect on overall market lease rates. The effect, however, is most apparent in the lessening of vacancy rates in already tight space markets for Class B and Class C property types targeted by marijuana operations. 

IX. CONCLUSIONS AND FUTURE RESEARCH

The state of Colorado was the first state to legalize the recreational adult use of marijuana. The state implemented a registration and licensing program along with a Marijuana Czar type office to create and monitor best practices for this burgeoning industry. The commencement of legal recreational sales is now more than three years old. The fledgling industry is still in its infancy stage and has issues to overcome such as the ability to engage with cashless banking and financing systems. Nonetheless, the industry has had a successful rollout in Colorado overall. Other states have used the Colorado experience to learn and prepare for their own implementation of legal marijuana usage.

This paper has shown that the lease rates paid for medical marijuana cultivation facilities in Colorado are greater than those lease rates for non-marijuana operations. This disparity is even greater for the more recent recreational marijuana cultivation facilities in comparison to overall market rates. The lease rates for recreational marijuana operations are believed to be higher for several distinct reasons. The relatively new demand for recreational growing space has furthered the shift in demand for existing industrial warehouse space above and beyond that of the initial medical marijuana market. The cultivation of marijuana requires specific industrial space that can provide superior electrical and water resources. Industrial space owners add a risk premium for the uncertainty of regulatory change potentially effecting a tenant’s ability to pay rents. The industrial warehouse space selection tended to be in older buildings that were in need of significant tenant improvements (TI’s) for the space to be functional for growing marijuana. Some TI’s may be amortized within the lease.  The demand for recreational product and cultivation space is heightened with the transfer of medical marijuana users to recreational purchases including those counted as marijuana tourism.

The future sustainability of industrial space for the marijuana cultivation industry in Colorado is dependent on several key factors. These factors are: future increases in lease rates; possible aggregation and economies of scale as the industry matures; detangling the vertical integration response to IRS section 280E; the legalization of marijuana in others states; and the ability to supply additional industrial space based on land-use and distance restrictions. It is likely that lease rate growth will slow or stabilize if demand for marijuana is satisfied by either the expansion of the national market through other states legalizing marijuana, or if economies of scale and consolidation of the cultivation industry takes place. The supply of new industrial space (since little existing space is available) is dependent on the ability to consolidate and create economies of scale with large and modern high tech industrial space specific to meet the marijuana industries tailored needs.

Pueblo in southern Colorado has led the way by allowing grow operations to locate in industrial buildings, greenhouses and outdoor farms. The potential for local jurisdictions to relax the grow restrictions of industrial space coupled with a savings potential on utilities could result in industrial space lease rates moving toward average market rate levels. Furthermore, Colorado has recently eliminated the 70/30 rule for recreational facilities (still in effect for medical facilities) that handicapped businesses uncharacterized by vertical integration. IRS section 280E however, continues to make it efficient to vertically integrate the marijuana industry, reducing the potential for increased economies of scale. Real estate trusts are starting to become a participant in providing grow space (Kalyx, AmeriCann).[liv] But broad institutional participation is not expected until a relaxation of IRS section 280E is in place and Schedule-1 narcotic status is changed.

Future research is warranted on the locational factors and price elasticity of demand to lease rates as competitive forces such as the legalization in other states and consolidation of the marijuana industry continues in this emerging industry.

Reference

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Arcview Group, The State of Legal Marijuana Markets, Executive Summary, 3rd Edition, 2015.

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Becker, Sam (2016, December 21), The Eight States that legalized Marijuana During the 2016 Election, Http://www./:cheatsheet.com/culture/The states that legalized marijuana during the 2016 election.html.?a=viewall[12/31/2016 2:26:27 PM]

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Donlan, T.G. (2013). Should pot be legal? Barron’s, June 3. Available at: http://online.barrons.com /article/SB50001424052748704509304578511261557343002.html #article Tabs article%3Dl.

Ingold, J. (2012, March 14). Boulder DA asks Feds to back off on medical marijuana dispensaries. The Denver Post. Available at:

http://www.denverpost.com/breakingnews/c i_201 72102/boulder-da-asks-feds-back-off-medical­ marijuana

Ingold, J. (2013a, May 8). Colorado Legislature gives final OK to marijuana driving limit. The Denver Post. Available at: http://www.denverpost.com/breakingnews /ci_23 l 89484/colorado­ legislature-gives-final-ok-marijuana-driving-limit

Ingold, J. (2013b, May 9). Colorado Legislature gives final approval to historic marijuana bills. The Denver Post. Available at:

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Endnotes:

[i] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 4.

[ii]. Title 21 USC Controlled Substances Act, 1970. Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote.

[iii] Colorado, Washington, Oregon, Alaska, while the state of Ohio rejected recreational marijuana in the Nov 2015 elections.

[iv] ArcView Market Research Group | New Frontier, The State of Legal Marijuana Markets, Executive Summary, 4th Edition, Pg. 9.

[v] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg.4.

[vi] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg.4.

[vii]Cannabidiol (CBD) is one of the 400+ ingredients found in marijuana and is not psychoactive. Many states have passed laws allowing for the use of a CBD extract, usually in oil form, with minimal tetrahydrocannabinol (THC), and often for the treatment of epilepsy or seizures in seriously ill children. These states laws do not legalize use of the marijuana plant for medical purposes. http://medicalmarijuana.procon.org/view.resource.php?resourceID=006473.

[viii] On August 11, 2016 the DEA advocated for further research by agreeing to increase the number of registered manufacturers who can provide cannabis for research. But the DEA acting on a study by the FDA have sustained their stance on potential medical use of marijuana. The DEA has denied two petitions to reschedule marijuana under the Controlled Substances Act (CSA). In response to the petitions, DEA requested a scientific and medical evaluation and scheduling recommendation from the Department of Health and Human Services (HHS), which was conducted by the U.S. Food and Drug Administration (FDA) in consultation with the National Institute on Drug Abuse (NIDA). Based on the legal standards in the CSA, marijuana remains a schedule I controlled substance because it does not meet the criteria for currently accepted medical use in treatment in the United States, there is a lack of accepted safety for its use under medical supervision, and it has a high potential for abuse. Stymieing the ability for research initiatives to function. https://www.dea.gov/divisions/hq/2016/hq081116.shtml

[ix] Recently a case brought by the states of Oklahoma and Nebraska for interstate trafficking has been ignored at the federal level.

[x] ArcView Group, The State of Legal Marijuana Markets, Executive Summary, 3rd Edition, Pg. 5.

[xi] ArcView Marker Research Group | New Frontier, The State of Legal Marijuana Markets 4th Edition, Pg. 1.

[xii] ArcView Market Research Group | New Frontier, The State of Legal Marijuana Markets, Executive Summary, Edition, 2016.

[xiii] ArcView Group, The State of Legal Marijuana Markets, Executive Summary, 3rd Edition, Pg. 4.

[xiv] Colorado Department of Revenue ArcView Market Research Group, The State of Legal Marijuana Markets 3rd Edition, Pg. 7.

[xv] Colorado Department of Revenue ArcView Market Research Group, The State of Legal Marijuana Markets 3rd Edition, Pg. 1.

[xvi] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xvii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xviii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xix] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xx] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xxi] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 2.

[xxii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 17.

[xxiii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 12.

[xxiv] Colorado Department of Revenue, Medical Marijuana Registry Update, Pg. 3.

[xxv] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 12.

[xxvi] Colorado Department of Revenue, Medical Marijuana Registry Update, Pg. 3.

[xxvii] Marijuana Real Estate in Denver: The Early Years. CBRE Viewpoint, September 2015, 1-13.

[xxviii] Colorado Department of Revenue, website. https://www.colorado.gov/pacific/tax/marijuana-taxes-file. https://www.colorado.gov/pacific/sites/default/files/CHED_MMR_Report_May2016_Statistics_0616.pdf

[xxix] It is not determinable how many of this 67.9% switched to recreational use.

[xxx] Colorado Department of Revenue, Medical Marijuana Registry Update, Pg. 1. https://www.colorado.gov/pacific/enforcement/marijuanaenforcement https://www.colorado.gov/pacific/sites/default/files/CHED_MMR_Report_May2016_Statistics_0616.pdf

[xxxi] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 7.

[xxxii] Denver Post, Colorado expects tough fight to fund $1.73 billion VA hospital, Pg. 1.

[xxxiii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 3.

[xxxiv] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 3.

[xxxv] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 3.

[xxxvi] There are three primary recreational licenses: 1. Cultivation (OPC) 2. Manufacturing (MIP), 3. Retail (MMC).

[xxxvii] Colorado Department of Revenue, Market Size & Sales Demand for Medical Marijuana in Colorado, Pg. 7.

[xxxviii] Retail marijuana 21.15% = 7.15% – Denver, 12.90% state, 1% RTD, .10 cultural facilities district.

Medical marijuana 7.65% = 3.65% Denver, 2.90% state, 1% RTD, .10% cultural facilities district.

Retail marijuana sales tax (RMS) 15% of an average market rate (AMR) = as of January 1, 2016 = flower rate ($/LBS) $1948, trim rate ($/LBS) $464, immature plants rate ($/EA) $9.

[xxxix] https://www.colorado.gov/pacific/enforcement/med-licensed-facilities

[xl] http://kdvr.com/2015/12/30/how-entrepreneurs-are-reacting-to-denvers-retail-pot-moratorium/

[xli] Denver City Council Purs new Caps on marijuana shops, grow houses. April 26, 2016, Chuck Hickey, http://kdvr.com/2016/04/26/denver-city-council-puts-new-caps-on-marijuana-shops-grow-houses/

[xlii] Total Health Concepts (THS) vs. Commissioner of the IRS, US Tax District court.

[xliii] John Shroyer, “Possible Landmark Marijuana Tax Trial Starts Monday, June 2, 2016, Http”mjbizdailycom/Possible mj industry tax trial starts monday/(7/25/2016 8:09.55 PM).

[xliv] Alicia Wallace, Denver Post, May 31, 2015, Pg. K1, K7.

[xlv] Specialized lighting is considered personal property.

[xlvi] Federal tax law may limit this non realty within a lease.

[xlvii] There is a limit to rolling in TI to the lease because the IRS may consider it financing.

[xlviii] As previously noted the premium may be greater since the market rate measure includes marijuana leases.

[xlix] The risk premium at the margin can increase as a tenants search is extended to more adverse landlords. This price effect is offset by a greater familiarity and general acceptance of the industry.

[l] We want to thank former University of Denver student Leif Wagner owner of Mile High Green Cross for his valuable input.

[li] The tenant improvement property is generally classified as section 1245 property.

[lii] Stephen Fur, June 26, 2014, Rental Costs How Much is Too High? http://www.marijuanaventure.com/rental-costs-much-much/

[liii] Noelle Crombie, The Oregonian, Jan 20, 2015, “Oregon Marijuana Growers Vie for Real Estate as They Prepare for Recreational Markets.” www.Oregonlive.com/marijuana/index.ssf/2015/01/oregon_marijuana_Growers_vie_ f.html.

[liv] http://mjbizdaily.com/cannabis-cultivation-leasing-companies-undergoing-boom/[7/25/2016 8:04:25 PM]

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