Does it matter for value if there are a few legal marijuana grow operations in the neighborhood? That’s not really a question we asked much in the past, but it’s definitely a reality in many portions of California now since recreational marijuana was approved at the ballots last year. I know this is a polarizing topic, but legal cannabis cultivation is something we have to pay attention to now in real estate – regardless of our personal views. Today let’s look at a specific situation I encountered a few weeks ago and consider a few takeaways.
Not an advocate: Just to clarify, I am writing for the sake of analyzing real estate trends. I am not a cannabis advocate in any way and this post is not about whether marijuana is good or not for society.
If you didn’t see in the SacBee, there are now 108 locations within the City of Sacramento with a commercial cannabis permit in process. This means there are at least 108 planned legal grow operations. The largest cluster is in an industrial section off Power Inn Road, but there are quite a few in North Sacramento too.
The situation: I appraised a house on Eldridge Avenue in Sacramento a few weeks back and I discovered there are three commercial cannabis cultivation permits on file with the city one street to the south. This is a residential area, but it’s next to industrial properties.
On Kathleen Avenue there are residential homes to the north and the “green zone” to the south. In many cases commercial grow operations will be far from residential homes, but not in every case as seen below.
Three things to consider about legal cannabis cultivation:
1) Neighborhood trends: Part of knowing the market and being a real estate expert is being in tune with what is happening in the neighborhood – even in the commercial sector. If you haven’t bookmarked the SacBee cannabis map, I recommend doing that. You can also see where marijuana dispensaries are located here.
2) Disclosure: Anyone who works in real estate needs to consider what disclosure looks like when we find out about cannabis grows nearby. I won’t tell anyone what to disclose or how to do it because that’s not my role, but knowing about commercial cannabis grow operations might be a good place to start. This is especially true in a situation like the one above where one side of the street is residential and the other side is industrial. This is a conversation that each appraisal firm and brokerage ought to have as the legal cannabis industry emerges. In my appraisal report on Eldridge Ave I simply disclosed my knowledge of three cannabis cultivation permits one street south of the subject property. Remember, it is illegal to have a commercial cannabis operation in a residential home, so disclosure is probably something we’ll think about more when there are nearby industrial properties. Moreover, it is only legal to grow commercially in the City of Sacramento as most other areas including Sacramento County have said NO to legal commercial grow operations (for now).
3) Value impact: Over time we’ll have to ask if there is a value impact due to proximity of cannabis cultivation businesses. Right now this is all so new and we are only seeing the beginning of an emerging industry take root in Sacramento. Keep in mind there are very strict guidelines for these businesses, and the City of Sacramento is putting rules in place to ensure neighborhoods and areas don’t “go to pot” so to speak (pun intended). There are rules for security, safety, proximity to schools, and even odor. In many cases these businesses could operate without any visible evidence at all. Though if there does end up being a problem with odor, crime, or stigma, then that’s something we’ll have to watch and consider. On a side note, it seems many of these grow operations so far are located in areas with lower property values. To be fair there may be more industrial properties in these locations, but this is still something to watch closely.
4) Other: What is #4?
Cannabis class I’m teaching: By the way, I’m teaching a class at SAR called “The emerging trend of marijuana in real estate” on August 30. I’ll talk for 60-75 minutes about zoning, land value, disclosures, etc… More details here.
Questions: Do nearby cannabis businesses need to be disclosed? What do you think we need to look for to know if there is any impact to value? Anything else to add? Iād love to hear your take.
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Duuuddd, great (caugh) post (cough). I think… ahh ha ha, this reminds me of a map of alien sightings in a neighborhood… (crunch, crunch, glug, gulp, crunch) ahh ha ha. I love aliens, there so cute with those big eyes and no hair. It’s like our universe is full of little Howie Mandels. I bet he likes weed. When did you say you’re teaching a class on the emerging trend of marijuana? I’m totally there, unless its too expensive. Did you say you would have snacks?
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This is comment gold. Haha. Thanks Gary. And yes, we will have snacks at the class. It’s a Lunch & Learn (or “Munch & Learn” might be more appropriate).
I think one thing that is yet to be seen is how likely or often will these commericial operations be robbed.
We’ve all heard the story about the shady drug dealer around the corner who had some customers pull a fast one on him one day, and sometimes it even ends in violence:
http://fox40.com/2017/04/11/arrest-made-in-altadena-way-shooting-after-drug-deal-gone-bad-deputies-say/
Marijuana deal went bad, led to shots fired in a residential neighborhood. One man dead, luckily none of the nieghbors.
Obviously it takes a little more gall to be willing to try and knock off a commerical operation, but there are 5,000 or so bank robberies per year, so it will definitely happen sooner or later.
I think for now buyers should exercise caution but not let it be a deal killer, and give it some time for the industry to create a reputation for itself (good, bad, or neutral) before writing them off.
Thanks Wes. I always appreciate your take on things. I sure hope stealing plants does not become a thing. One of the concerns of the public is safety, and that’s why a security plan needs to be in place. I hope it pans out like the City of Sacramento plans.
My understanding is that indoor grows can take 8 or so weeks, which means criminals would have to be in tune with the harvest season. Otherwise it would be like stealing fruit that is not ripe….
I think you are also correct about buyers exercising caution while also giving the industry some space. If all goes as planned, nobody will notice these grow operations because they are going to be secure. This is a whole new trend though, so it’s unclear how things will go in the future exactly. We can plan something on paper, but what will it look like in real life? That’s the real question. While I’m not an advocate, I do at least appreciate the safety measures being put in place by the City of Sacramento. I’d much rather have the city be strict than not. We’ll see how it pans out….
Regarding disclosure, let me clarify a bit because I’ve had a few people respond by email saying, “Hey Ryan, we don’t really need to disclose this.”
This is new territory in real estate, and it’s therefore something that each agent and brokerage (and appraiser) needs to figure out. As mentioned above, I wouldn’t presume to speak to what should and should not be disclosed because I’m not a broker or lawyer. Yet I would say we need to know what is happening in the neighborhood and be in tune with things that can shape value. From an appraisal perspective I plan to mention grow operations if they are nearby. I don’t want someone to come back and say, “Hey, I bought this house and you didn’t even say anything.” In most areas this won’t even be an issue, but it might be in some residential neighborhoods right next to commercial areas.
From a value perspective I always want to be aware of what is happening in the neighborhood and what might influence a change in the market – whether with actual values, safety, smell, or even with the way others perceive or talk about the neighborhood.
On a practical level, would clients potentially be unhappy with a real estate agent if a home was bought and there was no mention about the pot businesses in the neighborhood? It may not have been needed to be formally disclosed, and that may not even by the agent’s responsibility at all, but is there a place for knowing the market and helping clients understand dynamics happening in the neighborhood market? That’s all I’m saying. To each his/her own on what is disclosed, but let’s be in tune with the trends.
Also, there is a stigma associated with cannabis, and we have to remember it only narrowly became law in California last year. Thus it feels a bit different than say a metal fabrication shop across the street. For instance, an auto business might be legal, but if there was noise associated with the business we might disclose it despite the business being fully legal and such. As an example, I have seen disclosures for a meat rendering plant that is external to a neighborhood in Rancho Cordova. It is not even in the neighborhood, but it can impact the neighborhood, which is why it is disclosed. These commercial grow operations may very likely fly under the radar and not even be seen, so they really might not need to be disclosed, though if they become an issue with smell, crime, or stigma, then that may change.
All I’m saying is we need to know what is happening in the market and consider what does and does not need to be disclosed (whether formally or informally with clients).
Ryan, the article in the Bee does not say these are permits on file, but these are APPLICATIONS on file. As far as I know, nothing has been approved.
Thanks Jim. That’s really what I meant to communicate in my language. I’m not sure I was successful in doing that, so I appreciate your clarification.
One more thing. It is very significant that these are applications on file for permits because it is expensive to get a cannabis use permit (typically anywhere from 15-30K+ for that permit alone). Getting a permit approved and going through the process is not for the faint of heart or those without deeper pockets. This is an industry where the big fish will thrive because of the start-up costs, while it is more difficult for the smaller players to get ahead.
Someone asked me if I think Realtors need to look up marijuana grows every time they list a property. Here’s my response: It sounds like a pain to look manually, and I don’t think that will be necessary because most neighborhoods do not even have industrial properties. However, if there are industrial properties nearby, it might be worth a quick look because I do advocate knowing neighborhood trends. Over time my guess is real estate professionals will get to know where these grows are located, so I don’t think we’ll have to put too much thought into this. The tricky part though is there are “green zone” properties located in portions of Midtown and other areas where we might not expect them. The truth is it takes work to know a neighborhood market and it takes time to be the expert. I’m not a fan of more work, but there are always new things to start watching. In real estate some things come to our attention, but they end up being small factors like the water-conserving plumbing fixtures law so far. Though other things end up being worth watching over time and at least talking with clients about. I plan to be in tune so I can inform clients and be aware of what is happening that might be a factor for the neighborhood. But on typical appraisal assignments that are not located anywhere near commercial or industrial properties, I won’t spend any time looking up cannabis properties. All things considered, it’s not the end of the world to not know about a commercial grow or dispensary, so let’s keep things in perspective and not freak out or stress. But at the same time if someone took a listing on Kathleen Avenue and there are three commercial grow permits on file across the street, that’s probably worth knowing about, right? So there will be instances where knowing is important for the sake of communication with clients and such. Thus we just need to know how to find out this information and what to do with it. When the market changes, we need to pause and consider if we need to do anything differently or not. That’s what I’m advocating here as this new trend emerges.
I can’t say this is an issue right now in my area but it could possibly be in the future. I will definitely be keeping an eye on what is going on in your area and the effect on property values. Thanks for being so cutting edge Ryan and taking on the tough questions.
Thanks Tom. Right now there are about 30 states with some form of a marijuana law, so this is worth watching.
This will be interesting to watch as it develops, Ryan. Just starting slowly here in Florida (medicinal only as of now.)
Thanks Gabe. That’s where it started for us too in 1996. There were two previous attempts in 1972 and 2010 that I’m aware of for legalization of recreational marijuana. Both of them failed. This past time in 2016 it was voted in by 57%, so that shows me it’s still a polarizing issue with much of the population not on board.
Here’s a factoid for any onlookers. Do you remember Napster from the 1990s? It was the music sharing service. Well, the found of Napster, Sean Parker, actually donated over $8M to the YES campaign for Prop 64 to pass last year in California.