How to spot illegal trade in your commercial property and how to respond

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Kyle Crown is the president of Crown Commercial PM. He has a BS in business from the Wharton School of the University of Pennsylvania.

When I think of illegal activity taking place at a seemingly legitimate business location, I envision the classic mafia 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 The sopranos.

Of course, organized crime in the real world doesn’t have the same glamor or romance as it does on screen. 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 was operating an unlicensed marijuana dispensary in a commercial plaza. Separately, the LA times has reported on the spread of casitashidden casinos whose profits fund a criminal syndicate.

As an investor, you do not want to get into trouble due to financial or legal consequences. That’s why I recommend certain steps to help track down an illegal business that no longer has any commercial property that you own or control.

Contents

The Difficulty of Recognizing Illegal Operations: A Cautionary Tale

Before I begin the steps, I want to illustrate how difficult it can be to detect these illegal operations. The company we recently caught selling under-the-table marijuana — a store that advertises selling mixed martial arts combat 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 had scammed. We had previously worked with that broker for tenants.

They secured a genuine California driver’s license and passed intensive credit checks and background checks. Moreover, they did indeed use the storefront to sell MMA equipment. But if customers asked the right questions, they would be led to a backroom where the real money was made.

It’s worth noting that cannabis can be a legitimate business in certain areas with the proper licensing. But it wasn’t, and it put us at risk for legal consequences.

Unfortunately, managers and owners don’t have much recourse in these situations, other than eviction. For example, the state of California and cities in the LA area do little to nothing when notified, so we had to send one of our property managers “undercover” to pretend they were interested in a purchase.

Detect and avoid illegal activity

The faster you nip these situations in the bud (no pun intended), the less messy it gets. So how did we detect it in this case and how can you detect it in your buildings?

1. Update your rental language to explicitly restrict space usage 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 may be in danger, increase the security deposit required from new tenants. This way you will have money to pay for the unlawful foreclosure action and to cover any rent loss during the resulting vacancy. This also makes tenants think twice about the risk of illegal activity.

3. It may sound simple, but physical presence is important. Be on site before, during and after the tenant improvement process. Illegal operators usually do a few important things that tip you off. An example is building a small waiting room at the front so that most of the space is hidden from view and accessible only through a heavily locked door. They also tend to install unauthorized security cameras for their space. When we went to visit the property and noticed these cameras, our first clue was that the tenant was doing something illegal.

To avoid the bad reputation and risks (both legal and financial) associated with renting to illegal companies, you must be proactive in keeping them out of the buildings you own and manage.

I hope keeping these things in mind when renting commercial space can make you wise enough to beat the wise.


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