Cannabusiness Advisory

Five Major Concerns When Leasing to Cannabis Businesses (Part 2)

August 9, 2017


In my previous post, I outlined some of the challenges property owners face with regard to leasing real estate to registered marijuana dispensaries (RMDs) and cannabis cultivation centers (MJ Tenants). For all parties involved, the path to success in the cannabis space begins with an understanding of the differences between applicable state and federal laws. With respect to leasing to businesses that actually touch the flower, there are significant zoning and locational restrictions imposed on RMDs and MJ Tenants that must be taken into consideration.

Additionally, factors like financing, security, and liability are also strong concerns for all stakeholders – protecting the property, as well as the business, is critically important.

3. The cost of financing
Many, if not most, federally regulated lenders do not, or will not, make loans to entities involved in cultivating or dispensing cannabis. Indeed, very few banks will even allow a dispensary to open a simple operating account. Banks remain concerned about the federal prohibitions against the use and sale of cannabis, and because most are either federally chartered or federally insured (or both), their unwillingness to lend to such businesses is expected to continue until marijuana is legalized at the federal level.

As the legalization of medicinal marijuana, at a minimum, becomes more prevalent across the country, many property owners with pre-existing mortgages seeking to lease to MJ Tenants and RMDs are experiencing pressure from their banks or mortgage holders. Typical commercial real estate mortgages contain provisions that prohibit owners from using properties for purposes that do not comply with federal law. Oftentimes, when landlords inform their lenders of plans to engage an MJ Tenant or RMD, those lenders then declare an event of default and require their borrowers (i.e., the landlord) to refinance their mortgages. Given that refinancing options are limited, despite an increasing number of private lenders continuing to enter the space, associated costs (e.g., the interest rate, closing & compliances fees) can be sky high, and add to the property owner’s overall burden. To combat this, we’re increasingly seeing landlords shifting these refinancing expenses directly to potential MJ Tenants and RMDs, a practice we anticipate will become more commonplace moving forward.

4. Increased security concerns
Cannabis-related inventory is valuable, but it’s also a controlled substance. Most states require license applicants to provide descriptions of the security system/procedures that will be in place at their proposed business. And while requirements may vary from state to state, generally heightened measures (e.g., cameras, fences, lighting) need to be integrated into the property and/or design of the building. Creative solutions include specialized landscaping that prevents a person (or persons) from concealing him/herself from sight, as well as sufficient perimeter lighting that facilitates surveillance. Regardless of the measure(s) taken, one of the main questions property owners and tenants will have to agree on is: Who should bear the costs? In situations where there are few viable locations in permitted and zoned areas, the landlord will hold most of the leverage, and would be expected to pass these costs onto the tenant.

Additionally, as collateral security for a lease, a property owner will often take a security interest in the assets of the tenant at its property. In a typical commercial leasing situation, a landlord would have access to the leased premises and be able to seize the non-paying tenant’s personal property as reimbursement for lost rental income. However, in the case of cannabis-related tenants, new rules apply. Most states prohibit property owners from seizing cannabis, as they would not be licensed to possess or sell it, and require any leases being submitted in a license application to specifically provide that the landlord would not take ownership of any product.

Moreover, a landlord’s ability to enter the premises of an RMD or MJ Tenant – a typical provision in commercial leases – would also be limited by state law. If the property owner needed access to the RMD or MJ Tenant space for any reason (e.g., repairs or inspection), he or she would need to be accompanied by an authorized agent of the tenant.

5. Insurance protection from liability
Large insurance firms have a tendency to terminate insurance coverage for property owners that make space available for use to cannabis industry participants. There are, however, some that specialize in general, property, product, medical, and business liability for the cannabis industry. Landlords should require tenants to obtain each of these specialized coverages on their properties, the services being provided, and the inventory. The policies should also name the landlord as an additional insured party.

At present, perhaps the best position for someone interested in entering the cannabis space is that of property owner. It’s better to own, so as to avoid dealing with (and paying for) the property owner’s concerns. Potential cannabis cultivators/dispensers should identify properties (both on- and off-market) that comply with requisite zoning laws, and try to purchase those properties for “market value,” before the property owners fully understand their holdings’ worth and escalate prices exponentially.

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