LEASES GO TO POT AS L.A. CLOSES VALLEY MEDICAL-MARIJUANA COLLECTIVES

The store had been a perfect fit for Martin Khachaturian's small
Canoga Park strip center.

It brought in tons of business. It paid its rent on time at well over
market rates and up to a year in advance. It was a good neighbor and
even had its own security guard.

But then Los Angeles clamped down on hundreds of medical marijuana
shops across the city and the dispensary known as the Roscoe
Compensation Collective closed its doors - its three-year lease gone to pot.

"I spoke to the city regarding this," said Khachaturian, 72, of Sun
Valley, whose sole source of income is the center at 20941 Roscoe
Blvd. "I said, 'Look, this place is paying top dollar. What the hell
are you doing?"'

"It hurts, big time."

Since the city ordered more than 600 medical pot shops to close last
June, many of their former storefronts now stand vacant in a nearly
moribund commercial real estate market hammered by the economic slump.

Then last month, the city clerk determined that 128 of the 169 pot
outlets that had applied to legally operate under the city's new
medical marijuana ordinance were ineligible.

The ordinance bars clinics from operating near schools, playgrounds,
homes or from grouping in specific areas. The city has put a cap of
70 such outlets across the city.

The city attorney quickly filed a lawsuit against the dispensaries,
asking a judge to support the closure of the ineligible shops, which
will remain open until the judge's ruling. Meanwhile, other clinic
operators have filed dozens of lawsuits to challenge the city ordinance.

The upshot, for mom-and-pop landlords like Khachaturian, are hundreds
of empty storefronts in a city where up to seven out of 10 commercial
properties remain vacant, commercial real estate developers say.

"This is a serious blow to landlords across Los Angeles, as well as
the local economy," said Collin Plume, a commercial real estate
broker for Real Estate Investment Associates of Encino.

"They're closing 550 stores, at a loss of almost $20million to the
economy - and that's really conservative."

Good Business

What made the pot dispensaries attractive to many landlords, Plume
said, was their 30 percent to 40 percent greater rate of returns, on
average, with some clinics paying up to 70 percent higher rents than
their neighbors.

Before the economy tanked in 2006, for instance, the average rate of
return on a San Fernando Valley storefront each month was between $2
and $2.50 per square foot. That has since dropped to between $1.35 and $1.65.

Pot shops, by comparison, paid $3 per foot in 2006, and around $2.50
now, according to a REIA analysis.

Plume said the smaller strip malls were more willing to rent to the
pot dispensaries after the economy tanked. Others said landlords
could charge more because of the stigma attached to selling weed, and
because of the risk inherent in facilitating such shops.

Two years ago, federal drug enforcement agents reportedly sent
letters to 200 pot shop landlords threatening to take their
properties if they didn't evict the sellers.

For this reason, some property owners refused to rent to medical
marijuana dispensaries.

"We would not rent to any of these marijuana dispensaries, period,"
said Rickey Gelb of the Gelb Group in Encino, a commercial developer
with many properties across Los Angeles. "They offered lots of bonus
money over the years, but we just said 'No."'

"We stay away from anything stigmatized, like massage parlors or
marijuana dispensaries."

Gelb, a civic leader and San Fernando Award winner, said he spoke
with some business owners located next to dispensaries along Ventura
Boulevard who said they were forced to move because of the pot
customers loitering out front.

"People (were) hanging out front all day, smoking a joint, being
happy, talking to people coming by," he said.

While some landlords countered by saying the shops made good
neighbors, some neighborhood advocates said the area had more than
enough dispensaries - even after the city purge of hundreds of the
shops in June.

Lisa Sarkin said after she was notified of a new medical pot store
opening in Studio City, she conducted a roadside survey. The tally:
11 dispensaries in Studio City, including eight that appeared open.

One of them had just moved from Studio City after being declared
ineligible by the city clerk. To draw business, it offered valet
parking for pot buyers.

"We definitely care," said Sarkin, chair of a land use committee for
the Studio City Neighborhood Council. "We definitely care that they
follow the rules, that they not sell it, not smoke it on the premises
and not drive away stoned, after smoking it."

"Two (dispensaries) are what we feel is the right amount for 3 1/2
miles and 28,000 people in Studio City."

A city attorney spokeswoman said her office knew of no city economic
impact report concerning the loss of hundreds of medical marijuana
dispensaries.

An economic study reported 400 dispensaries had pumped $100 million
in sales tax revenue into California coffers, according to Americans
for Safe Access, an advocacy group for medical cannabis.

With 1,200 operating dispensaries, they say those sales taxes may
have tripled, although the state maintains the $100 million tax take
is unchanged.

The loss to Los Angeles was unknown.

"The economic impact is great, not just in terms of leased
properties, but in the thousands of workers who have lost their jobs
in the process of closing down in a very poor job market," said Kris
Hermes, spokesman for the Oakland-based ASA. "The city needs to think
of ways to create jobs, not to take them away from those who want them."

Los Angeles landlords, meanwhile, are struggling to attract new tenants.

What compounds the loss of pot businesses, Plume said, is the six
months or more it may take to rent the vacated space.

"They're getting killed," Plume said. "This hurts the synergy (of the
shopping centers). Mom-and-pop tenants feed off each other. When a
store moves out, there's less business."

A Commercial Void

Last week, Khachaturian could only shake his head as he approached
the Canoga Park strip mall he'd bought in 1993, then fixed up with
hundreds of thousands of dollars in improvements.

For nearly two decades, his 10,000-square-foot Roscoe Center had
provided a good living for the Armenian native, his wife and three
children, who are now adults.

Until the end of June, each of his four storefronts were leased,
including a gift shop, Mexican restaurant, laundromat and the RCC pot
collective.

When an ethnic market moved out nearly two years ago and left the
shop in shambles, Khachaturian said he sank nearly $60,000 into the
space hoping to lease to a doctor or a dentist.

But then RCC approached him in February 2009, offering to pay an
initial $5,000 a month in an escalated three-year lease, the first
year paid in cash. While the pot shop paid $2.63 per square foot, the
neighboring laundromat pays roughly half that amount.

Then the pot proprietor said the city was shutting him down, and the
landlord received two notices from the city, including one ordering
he evict the pot seller.

When RCC moved out on its own accord in June, it owed Khachaturian a
month's rent, he said. Since then, he said he's lost more than
$20,000, not including the balance remaining on the storefront lease.

"It was a good living, until now," said Khachaturian, walking through
a labyrinth of caramel-colored rooms formerly occupied by the bud
distributor. "(But) in this market, it's hard to find tenants. Not
only that, we're asking below market for our center."