This article was originally published in Forbes on April 21st, 2023
by Kyle Crown
When I think of illegal activity happening at a seemingly legitimate place of business, I picture the classic mob fronts of film and television: Genco Pura Olive Oil, where the Corleone family meets in The Godfather or Satriale’s Pork Store where Tony discusses business in The Sopranos.
Of course in the real world, organized crime doesn’t have the same glamor or romance it does onscreen. And unfortunately for commercial property owners and managers, illegal businesses behind legal fronts are very real and more common than you might think.
I know from personal experience; my company recently discovered that one of our tenants in a commercial plaza was operating an unlicensed marijuana dispensary. Separately, the L.A. Times has reported on the proliferation of casitas, hidden casinos whose profits help fund a criminal syndicate.
You as an investor don’t want to end up on the hook for financial or legal fallout. Therefore, I recommend certain steps to help spot an illegal business being run out of a commercial property that you own or manage.
The Difficulty Of Spotting Illegal Operations: A Cautionary Tale
Before I begin the steps, I’d like to illustrate just how difficult it can be to spot these illegal operations. The business we recently caught selling marijuana under the table—a store advertising the sale of mixed-martial-arts fighting gear—passed nearly every test.
During the application process, they provided legitimate tax returns and bank statements. They borrowed through a reputable broker who we later found out they’d defrauded. We had worked with that broker before for tenants.
They provided a real California driver’s license and passed intensive credit checks and background screenings. On top of all this, they did in fact use the storefront to sell MMA equipment. But if customers asked the right questions, they’d be led to a back room where the real money was being made.
Now, it’s worth noting that in certain areas with the correct licenses, cannabis can be a legitimate business. But that’s not what this was, and it was putting us at risk of legal repercussions.
Unfortunately, managers and owners don’t have much recourse in these situations except for eviction. For example, the state of California and cities in the L.A. area do little to nothing if notified, so we had to send in one of our property supervisors “undercover” to pretend they were interested in buying.
Spotting And Avoiding Illegal Businesses
The sooner you nip these situations in the bud (no pun intended), the less messy it’ll get. So how did we detect it in this case, and how can you detect it in your buildings?
1. Update your lease language to explicitly limit use of the space and prohibit specific activities. For example, my company manages property in a municipality where the sale of marijuana is explicitly prohibited at the local level, so we’ve highlighted that in the lease.
2. If you think a space might be at risk, increase the security deposit required of new tenants. This way, you have money to pay for the unlawful detainer action and to cover any rent lost during the resulting vacancy. This also makes tenants think twice about risking it with illegal activity.
3. It might sound basic, but physical presence is important. Be onsite before, during and after the tenant improvement process. Illegal operators usually do a few key things that will tip you off. One example is building a small waiting room in the front so that the bulk of the space is hidden from view and only accessible through a heavily locked door. They also tend to install unauthorized security cameras in front of their space. Going to visit the property and noticing these cameras was our first clue that tenant was doing something illegal.
If you’d like to avoid the bad reputation and the risks (both legal and financial) that come with renting to illegal businesses, you’ve got to be proactive about keeping them out of the buildings you own and manage.
I hope that bearing these things in mind when you rent commercial space can help make you wise enough to beat the wise guys.
