Point Of View: Illegal Cannabis In Rentals

California, East Bay, Oakland Association of Realtors, California Association of Realtors, City of Oakland, medical marijuana, marijuana farm, Legalization, Landlords

By Anne Bruff, Anne Bruff & Associates

Before the legalization of medical marijuana, there was for many years an underground, not-so-hidden marijuana industry thriving in many parts of California. Growers found ways to inhabit all types of property: industrial areas, apartment buildings and single-family homes. Property owners often were taken by surprise to find out that their property was being used as an illegal marijuana farm, with all the resulting problems. Some owners turned a blind eye, taking unusually high rents in return for allowing these operations to exist. As a commercial real estate broker in the East Bay, I have run into these situations more than once. Below are three examples of personal encounters I have had that illustrate the spectrum of risks involved.

Example #1
This property owner managed a series of small industrial buildings (1,000–5,000 square feet). He had always rented to growers whom he considered to be good, high-paying tenants. His tenants tended to run professional organizations that complied with fire codes, had proper venting systems (so that the smell would not alert the neighborhood when a crop was coming in) and ran very sophisticated security systems. He felt he was too small an owner of property for federal authorities to go after him, so the risk was outweighed by the profitability of a relatively trouble-free tenant.

Example #2
This client purchased an apartment building out of foreclosure. The building was an excellent value but came with a grow house in a large garage and a guard that lived in a mobile home parked in the street. Neighbors hinted that this business was run by a member of a notorious motorcycle gang. This experienced owner finessed the tenant’s move by inviting his insurance agent to inspect the site. The insurance agent noticed some very obvious fire and safety issues, which necessitated a visit from the fire department. A fire marshal came out (he had made this kind of visit many times before) and gave the tenant a very detailed list of electrical improvements that would be needed or else the power would be shut off. Since these improvements were in the tens of thousands of dollars, the tenant decided to move on his own. The owner was able to successfully get rid of the tenant without exposing himself to any retaliation.

Example #3
This investor client wanted to sell a rental house, so that she could buy an apartment building. Giving the tenant the standard 24 hours’ notice, she arranged for me, as the broker, to tour the house. The tenant asked her to wait a couple of days, but the owner insisted on her rights to enforce the 24-hour notice regulation. Upon our arrival, no one answered the doorbell, so we entered the house and were greeted by a very large man (weighing more than my client and me together!). He came charging out of the bedroom, screaming at us, demanding to know who we were. My fearless client stood her ground and insisted that I tour the property. By the heavy marijuana smell, it was obvious what was being grown in the garage. As soon as we left, the owner called the police. By the time the police arrived several hours later, the plants, the equipment and the very large man were gone.

Will things change much with the legalization of marijuana? Legalization comes with government regulations and taxes. I suspect it will be a matter of economics. Word on the street is that cannabis prices have dropped dramatically, which will probably drive some small growers out of business. Larger, more sophisticated businesses may find it more profitable to remain illegal rather than pay the taxes and comply with government regulations. Landlords will need to be vigilant to protect their property.

About the Author
Anne Bruff is a commercial real estate broker specializing in the East Bay area. In 2011 Anne was president of the Oakland Association of Realtors and a director for the California Association of Realtors. She has also worked extensively with the City of Oakland on rent control issues, condo conversion regulations, and building department reorganization. As an independent broker managing her own company, she focuses on individual clients’ needs and can advise them on apartment investing, historical reuse projects, industrial sales, and condo conversions. Working with investors and developers, Anne’s goal is always to build wealth for her clients.

This article will also appear in The VIEW, the quarterly publication jointly curated by the three Bay Area chapters of Commercial Real Estate Women (CREW)—CREW San Francisco, CREW East Bay, and CREW Silicon Valley. CREW is a nationwide business networking organization dedicated to the advancement of women in commercial real estate. For chapter news, events, and membership information, visit the Bay Area member organization websites at crewsf.org, creweastbay.org, and crewsv.org.

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