Pot, horses, and property values focus of Colorado trial; Who won today?

A federal trial in Pueblo could have far-reaching effects on the marijuana industry both in Colorado and throughout the country if a jury sides with a couple who says having a cannabis business as a neighbor hurts their property’s value.  Should you believe the hype?  Is this an industry altering case? How will this trial impact marijuana real estate and ancillary businesses?  Could you be at risk?

What is the trial about?

It sounds like a simple trial, Horses vs. Pot but there is a twist.  A couple (Mike and Hope Reilly) over several years acquired 100 acres in the small town of Rye Colorado with the intent to use the land for horses and they also built a house on the property.   Shortly after purchase an adjacent landowner who owned a 40-acre parcel gained approval from the county to construct a 5k foot indoor grow operation that sells wholesale product to dispensaries.

The Reilly’s have claimed that the “pungent and foul odors” have decreased the value of their property substantially and infringed upon their ability to use and enjoy their property.  Furthermore, their attorney states: “It’s not right to have people in violation of federal law injuring others.”  The defendant, Alternative Healing, has claimed that the Reilly’s property has not been harmed as his use is a valid use approved by the county with no impact on the adjacent property.

How can the Reilly’s sue a legal business that has followed all ordinances?

Under normal circumstances the Reillys would not be able to sue the adjacent property owner.  For example, assume the neighboring property owner decided to have a pig farm that is approved/legal with the county.  Although the pig farm likely would produce “odors”, it would be very difficult for the horse property owner to sue the business.  This is where the use of the property as cannabis come into play.

The southern Colorado horse-vs-pot case is interesting because the horse farm owners are trying to use a 1970 federal law crafted to fight organized crime.  Racketeer Influenced and Corrupt Organizations Act, better known as Rico was created by congress to target the Mafia in the 1970s. The Reillys say that federal racketeering laws entitle them to collect damages from the neighboring marijuana farm, even though the pot farm is legal under state law it is still illegal under federal statutes. “The landowners have plausibly alleged at least one (racketeering) claim,” the judges wrote.

Implications of the case

The trial began last week and the implications could be profound.  If the Reillys are successful, it will provide a roadmap for any adjacent property owners to sue for “degradation in value”.  The successful suit will also enable opponents of marijuana to go after ancillary businesses.  For example in the Reilly case various ancillary businesses were named including insurance companies, accountants, etc.. This plausibly could be used to go after banks, title companies, realtors, etc… Basically anyone involved in any way would be brought into the suit.  For example, a realtor could be sued because they are “enabling” an illegal operation by selling/buying a property for marijuana usage.

Adam Wolf, a California attorney, said he believes the suits are primarily intended to scare third-party companies into cutting ties with marijuana firms or persuading cannabis companies to shut down.  “What the plaintiffs seemed to be saying is anybody who touched, in any matter, any marijuana business is potentially liable,” Wolf said. (ABC news)  Even if the third party companies prevail, the cost in both time and legal fees is daunting.

What does this all mean?

This case is an interesting “test” of the validity of racketeering claims applied towards the marijuana industry.  Pot opponents say the racketeering strategy gives them a possible tool to break an industry they oppose and the implications could be far reaching if the Reileys are successful in their claims of diminished value.  This case could open not only the marijuana industry, but also ancillary businesses to profound liability.  How real are these claims by opponents of the marijuana industry?

I just saw that Alternative Healing one the case:

It will be difficult for the Reillys to prove that their property has been materially impacted by “odors” in a rural setting as many uses of a rural property can cause various “odors”.  Even if their property was impacted by the smell of marijuana growing, how much impact does that have on value?  The adjacent property is a small (5k foot) operation that is not much bigger than many large horse barns in the area so quantifying an impact and reduction in value as a result will be a large stretch.   The county assessor has continued to increase the value of their property even after the marijuana grow came online which furthers Alternative Healing’s case.    I think a reasonable jury should see through the Reilly’s case, fortunately they did in this case handing a total win to Alternative Healing

On the surface this case looks like it could have far reaching impacts, but the details paint a different picture.  The current case is not going to have a profound impact on the industry.  Even if the Reillys won, the impact on their property value would be negligible due to the rural nature of the property.  For example, let’s say they value decreases by 20k, this is such a small amount after factoring in time and legal fees that it would not make much of a difference in the industry.  Furthermore, as the industry continues to expand with billion-dollar companies like Constellation brands getting involved in the Canadian Marijuana industry they will have the pockets/firepower to take on small “nuisance” suits like the Reilly case.

Before the trial, I saw the story about this case all over the national news.  When the verdict was read, I was hard pressed to find any coverage in national media.  Marijuana opponents pinned allot of hype on this case as a future roadmap to turn the cards on the legal marijuana industry.  Quite the opposite occurred in this case with the marijuana industry winning a big and setting a precedent for how to defend against Rico type suits.

Resources/Additional Reading

1. https://coloradosun.com/2018/10/31/colorado-safe-streets-rico-lawsuit-verdict/
2. https://www.timesfreepress.com/news/breakingnews/story/2017/jun/07/court-neighbors-csue-pot-grower-stinky-smells/432252/
3. https://abcnews.go.com/Health/wireStory/lawsuit-pot-property-values-broad-impacts-58808327
4. https://coloradohardmoney.com/2018/10/25/corona-coming-for-your-real-estate/

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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