Pot Tenants Bring Problems

Fighting criminal charges in court, repairing damaged buildings and even losing property – these are the potential risks faced by property owners who rent to medical marijuana businesses. Owners and brokers say dispensaries-as-tenants have altered and damaged buildings’ interiors and exteriors. Their operations deal in cash and marijuana and therefore are often burglarized, and the marijuana smell causes neighboring tenants to complain. On top of that, most dispensaries are illegal and they are often targeted for prosecution by the city of Los Angeles. As a result, property owners who rent to them can face criminal charges and steep fines. New medical marijuana dispensaries are illegal in the city, and therefore most of the San Fernando Valley, but a relative few have been grandfathered under prior laws and are considered legal. It’s up to property owners to verify whether the marijuana business and potential tenant is legal before renting to them. It’s a high-risk – but high-reward – proposition for property owners. Marijuana tenants often pay above-market rents. In fact, they can run as high as double the market rates, according to commercial real estate brokers and cannabis attorneys. “A lot of inexperienced building owners who do rent to medical marijuana dispensaries, they look at the numbers they’re getting – the higher rent – but not at the risk,” said Yair Haimoff, a broker with NAI Capital Inc. in Encino. “But when they get the letter from city attorney telling them to evict a tenant, the owner then has to start the eviction process and search for a new tenant.” Eviction can be a dicey and expensive process that has cost property owners thousands of dollars in lawyers’ fees and has put them at risk of legal consequences for breaking the lease. And this is not an isolated problem. Since there were an estimated 1,000 or more illegal pot shops in Los Angeles County, that many property owners were at least exposed to the problems. Risk-reward A marijuana dispensary leased an 800-square-foot retail storefront about seven years ago in Pacoima from property owner Joseph Ahdoot. He said the dispensary owners told him the business was legal, they would make the space look good and that they would pay him above-market rent. “They moved in, and did invest a lot of money, and put in lots of security,” Ahdoot said. “Later, I found out that dispensaries are often burglarized.” Things went fine and the pot shop owners paid their rent. But after a few years, the owners were charged by City Attorney Mike Feuer with operating the business illegally and in violation of Proposition D, a zoning ordinance passed in 2013 that bans non-grandfathered dispensaries from operating. That pot shop is one of about 400 that Feuer’s office has filed criminal charges against, according to a list posted on its website. The cases are “typically filed against both business operators and property owners,” the site states. It was not something Ahdoot realized could happen, he said, when he leased the space. He saw them as a solution to his problem of renting a space difficult to lease because it sits in the “elbow” of his L-shaped shopping center. Aside from the legal problem, there were other issues. A break-in was attempted and was unsuccessful because the dispensary had reinforced the walls with brick. Other tenants complained of the odor, so the owners additionally insulated the walls and installed air purifiers. Then Ahdoot began getting notices from the city attorney’s office that the dispensary was illegal and that he had to evict it. “I showed it to the tenants, and they said it was going to be appealed, and that it will get delayed,” Ahdoot said. “And they were right. It got appealed, and it went away.” When the second notice came, a year or so later, it also went away. But when the third notice came, Feuer’s office told Ahdoot it had filed criminal charges against him. “Once I got criminal charges filed against me, I said, I’m not going to play ball with them, and I told them, ‘If you don’t leave voluntarily, I will have to evict you,’” Ahdoot said. The dispensary owners held off the eviction process with legal actions and Ahdoot had to hire a real estate attorney to evict them, and then a separate attorney to defend against the criminal charges. His lawyer helped him get the fines reduced but the situation cost about $23,000, primarily in legal fees, Ahdoot said. The higher rent he made from the dispensary went to paying off those costs, Ahdoot said, “but there was all the stress.” After the pot shop left, Ahdoot said he got numerous calls and at least 30 offers from dispensaries wanting to lease the storefront. He turned them all down. An insurance agency now leases the space. “I’ve been offered many times to do it again – but I don’t want criminal charges brought against me,” he said. Burden of proof Luke Stanton, an attorney with the cannabis specialty firm Frontera Law Group in Sherman Oaks, said about 135 businesses are grandfathered under Proposition D – a term the city calls immunity. These marijuana businesses were deemed legal before 2007 and met the requirements of every subsequent medical marijuana law that was passed. Determining the legality of a dispensary is complex and challenging, he said, and something property owners are unlikely to have the time, inclination or legal understanding to do. “(Proposition D) is not particularly well-written and leaves much up to interpretation,” Stanton said. “It’s very difficult to navigate and difficult to understand. “ Brian Sullivan is a property owner who leased his 3,800-square-foot retail building in Tujunga several years ago to a dispensary that was noticed by the city attorney’s office. The dispensary owners presented paperwork that looked legitimate, Sullivan said, and he thought it meant they were legal. He said the business had to pay taxes and had what he thought was a business license. “It’s a real game – the representation of what’s permitted, and what’s not permitted. It’s not clear,” Sullivan said. He also had to defend himself against criminal charges filed by the city. His legal fees mounted to about $10,000, Sullivan said, although the pot shop left when he asked them to. There are no licenses allowing marijuana dispensaries to operate in the city of Los Angeles, Stanton said. The form that trips up property owners is called a business tax registration certificate. It only opens up a tax payment account with the city for the business and has a particular code for medical marijuana businesses, Stanton said. While property owners do mistake that for something that implies the business is legal – dispensaries post this on their walls sometimes and that helps enhance the ruse – the form expressly states it is not a license in bold print on the front of the certificate. “Despite the fact this says it’s not a license, people try to say, ‘I don’t read this boring paperwork,’” Stanton said. Property owners renting to illegal dispensaries could incur penalties of up to $1,000 and serve six months in jail for each violation, said Rob Wilcox, director of community engagement and outreach for Feuer’s office. The prosecutions are both criminal and civil, he added. Stanton said the penalties for property owners can include up to a year of probation. And if the attorney’s office reasons that an owner knew the dispensary was illegal, the penalties could be worse. “Dispensaries always pay their rent, and they always pay way more rent than anyone else in any business would pay,” he said. “If you’re getting way more than market rate for that space, it’s pretty good evidence you knew what was going on.” Million-dollar paperwork To help make property owners aware of the risks associated with renting to dispensaries, Wilcox said Feuer’s office has partnered with the Southland Regional Association of Realtors Inc. on an education campaign. The extensive paperwork that identifies a dispensary as legal can sell on the black market for up to $5 million, Stanton said. Although unlikely, another potential risk to property owners is that they could lose their building, depending on the specifics of the loan they have on it. If the dispensary is paying the owner rent from the proceeds of selling medical marijuana – which is illegal under federal law – the building owner is opening himself up to the potential forfeiture of the property, according to Stanton. “If a bank finds out that’s where proceeds are coming from – because it opens up the bank holding that loan to that federal Schedule I drug (definition) – they can call in the loan, and may immediately want you to pay it off,” he said. According to Feuer’s office, no property owners have lost their buildings as a result of its actions. Sullivan said his dispensary tenant was fine and he never heard complaints of people loitering around the building or trash piling up. But he has no plans to rent again to a dispensary. Commercial real estate broker George Bouzaglou with John Hart Real Estate in Glendale said one of his client’s experience renting a 15,200-square-foot industrial building to a medical marijuana grower in Van Nuys also was not troublesome. The grower leased the space only about a year and a half and subdivided the interior into about six rooms; the property owner had to knock down the walls after the tenant left, Bouzaglou said. It was minimal damage, he added. Burglars, however, broke into the warehouse, and the police discovered the grower’s paperwork was incomplete. As a result, the grower had to leave. Bouzaglou feels the businesses do no harm, but agreed renting to the illegal ones can be risky. “You can have a good mechanic who’s honest and fair, and have a good mechanic who’s a thief,” Bouzaglou said. “A real smart one (cannabis grower) is going to fix his place to grow, and is not going to ruin his relationship with the landlord and lose all his money.”