Why the Legalization of Marijuana Will Have a Negative Impact on These REITs

Why Canadian Apartment Properties REIT (TSX:CAR.UN) and other REITs may not be too excited about the day when marijuana is legalized.

| More on:

Marijuana legalization is set to take place in Canada within the next year, and there are many legal issues that need to be sorted out before that happens. However, those issues largely relate to how marijuana will be sold, distributed, and advertised. Marijuana legalization will also impact other industries and companies as well, and I will specifically focus on how it could affect residential REITs.

Residential REITs, like Canadian Apartment Properties REIT (TSX:CAR.UN) and Boardwalk REIT (TSX:BEI.UN), operate apartments and townhomes — the very types of properties, where people could legally grow marijuana themselves.

Any adult will be able to have a grow-op 

When marijuana becomes legal in Canada it can have serious impacts beyond just the ability of people to consume it for recreational purposes. The new legislation would allow any adult to grow up to four plants in a residence.

Insurance providers don’t want to insure the risk

There are many inherent risks with growing marijuana, and insurance companies are unwilling to cover the risks related to it — at least not yet. Marijuana grow-ops lead to lots of moisture, which can create mould that could result in potentially expensive repairs for the landlord. In addition, grow-ops can also be fire hazards and create poor air quality inside the residence.

There is no shortage of issues for landlords when tenants are allowed to grow marijuana. The law is clearly on the side of the tenants at this point and puts landlords in a precarious position.

Landlords might not know of a grow-op until well after damage has been done

Even if landlords were to try and restrict grow-ops by putting conditions in the rental agreement, those terms may not be enforceable. In fact, under existing legislation for those that are allowed to grow marijuana, landlords don’t have the right to even know about it.

The obvious concern here is that if a landlord doesn’t know of the grow-op going on, then there is no way to prepare or mitigate the related risks. This could result in costly expenses to repair any damages after the tenants have moved out.

What this means for investors

Long term, this could mean lots of problems for shareholders of these companies since it could mean added expenses that will erode the profitability of these stocks. It remains to be seen the scale of these potential issues and how widespread of a problem marijuana grow-ops will be for the industry. There is still time before legalization takes place, and some of these issues may be resolved by that time.

However, if landlords don’t even know about the grow-ops in the first place, it would be difficult to enforce any laws relating to the amount a tenant can grow, to what height, and whatever other restrictions (if any) are put into place.

Although the legalization of marijuana might be good news for stocks like Canopy Growth Corp. (TSX:WEED), companies operating residential properties are likely not looking forward to the day when grow-ops become legal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any stocks mentioned.

More on Dividend Stocks

thinking
Dividend Stocks

Should You Buy BCE Stock for its 8.6% Dividend Yield?

Down over 20% from all-time highs, BCE stock offers you a tasty dividend yield in 2024. But is the TSX…

Read more »

grow dividends
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how high-quality TSX dividend stocks and the power of compound interest can help grow your investments by 400% or…

Read more »

Paper airplanes flying on blue sky with form of growing graph
Dividend Stocks

2 Soaring Stocks I’d Buy Now With No Hesitation

These two stocks may be the most expensive on the market, but they're high for a reason! And I'm still…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Invest $374.50 Each Month to Create Passive Income of $288 in 2024

Investing a specific amount each month to create passive income this year is possible with monthly dividend payers.

Read more »

Happy retirement
Dividend Stocks

2 Stocks to Help Turn $100,000 Into $1 Million

If you want to reach $1 million, $100,000 can certainly get you there. Even if you invest in some low…

Read more »

warning or alert
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

There's no shortage of companies that raised their dividends recently. Here's a trio of options to consider buying now.

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

Don’t Look Now, But These 3 TSX Stocks Look Poised for a Nice Rally 

Three TSX stocks are in a downtrend amid headwinds. 2024 may be rocky for them, but they are poised for…

Read more »

protect, safe, trust
Dividend Stocks

3 Safe Dividend Stocks to Beat Inflation

These three dividend stocks are excellent buys to beat inflation, given their solid underlying businesses and high yields.

Read more »