Our clients often come to us with questions about real estate. This is not surprising as a license to grow, process, or sell cannabis is tied usually tied to a specific location. As a result, issues with real estate law can be devastating to a cannabis business. The following are some key points we try to convey to our clients about real estate:
- Location. Location. Location. Picking a location is an important decision for any business and this is especially true for a those in the cannabis industry. Finding a suitable and state-and-local-law-compliant location for a marijuana business can be difficult. Most states, cities, and counties limit where marijuana businesses can physically operate. Often a state or city will require cannabis businesses be at least 1,000 feet away from schools and parks. Why? Because federal criminal law sentencing guidelines tack on extra time at sentencing for cultivating, processing, and distributing cannabis within 1,000 feet of the same. Zoning laws can also significantly restrict location options and typically vary greatly from local government to local government. City planners often only allow marijuana business to operate in industrial or similarly dedicated zones. These limitations mean that there are limited spots available to operate. Additionally, cannabis regulations can limit the number of stores that are allowed in a given county and local governments may place moratoriums that prevent new cannabis businesses from opening. This makes finding a location incredibly important for the business and allows property owners to charge a premium for cannabis compliant spaces.
- Find a Landlord You Can Work With. It can be difficult to find commercial landlords willing to lease space to a cannabis business because of the risk of federal asset forfeiture of the building. Because cannabis remains illegal under federal law, landlords can face arrest for violating the federal Controlled Substances Act or, more realistically, losing their property via a civil asset forfeiture.To understand the reality of this risk, look what happened to the landlord in the Harborside case. Thankfully, that case was eventually dismissed. If you are a landlord to a cannabis business, you should get educated on your criminal liability and on federal and state forfeiture laws. If you are a cannabis business tenant, you should make sure that your landlord knows and accepts the risk related. A good landlord can be a strategic ally for a cannabis business, especially for cannabis producers and processors who will likely have to apply for permits. Permit applications often require that a property owner at least tacitly signs off on the process. The landlord-tenant relationship can be strained if the landlord is not informed of the nature of the tenant’s business and the risk associated.
- Make Sure Your Lease Is Carefully Drafted. Standard “boilerplate” lease agreements will not cut it for cannabis businesses. For example, the typical Commercial Broker’s Association lease states that any illegal activity on the property will constitute a default in the lease. We typically write our commercial marijuana leases to forbid only those actions that violate state law — not federal law. Additionally, Commercial leases typically contain a permitted use provision governing the activities permitted on the leased property. The permitted use provision for a cannabis business should specifically identify the activities allowed on the property. If the tenant is a marijuana retailer, the permitted use provision should explicitly permit “retail sale of marijuana.” Leaving the permitted use vague will likely mean that marijuana tenants run the risk of breaching the lease by conducting an activity not permitted on the property, which itself could invite federal scrutiny. A clear and complete lease agreement provides stability and peace of mind for both landlords and tenants
- Do Your Homework on the Property. If a cannabis business is in the position to purchase property, it’s important to investigate that property. This can be done by requesting a report from a title company. These reports will show ownership history, encumbrances (such as mortgages) on the land, and any easements or other restrictions on property use. This research is important because they allow a purchaser to understand the risks associated with a given property before placing money in escrow. For example, if there is an unpaid mortgage on the land, the holder of that mortgage can foreclose on the property, even though the current owner was not the one who entered into the transaction. A savvy purchaser can protect themselves by requesting the seller convey the property using a warranty deed, which means the seller guarantees to the buyer that the seller has the right to sell the property, and that the property is free of debt or other liens. Even a tenant, who is not purchasing the property, should be informed of the property’s history and the risks associated with that property.
When real estate decisions are not made carefully, it can significantly hinder a cannabis business’ operations. Hopefully, these keys help you make decisions carefully now, to avoid potential issues down the road.
Source: Canna Law Blog