Thinking of leasing your real estate to a cannabis business? The returns you can make on a commercial lease to a cannabis grower, processor or retailer can be extremely lucrative. Consequently, the higher the risk, the higher the reward. Before you finalize the lease, make sure you have a lawyer review it to prevent potential pitfalls down the road. The cannabis industry is unlike any other industry. There are several factors to consider before you jump in. Below I will highlight a few high level issues, but the list is by no means exhaustive.
1. As most of you probably know, marijuana is listed as a Schedule 1 drug under the Federal Controlled Substance Act (“CSA”) which makes it illegal for anyone to manufacture, cultivate or distribute. Pursuant to the CSA, the Federal government can seize any property that is used to facilitate the manufacturing, cultivating or distributing of cannabis. Therefore, it is extremely important, in an effort to mitigate your risk as a landlord, to have an escape clause.
Reason being that the clause will specifically list any federal intervention, such as the federal government acting through the U.S. Attorney’s office, or any other federal office, threatening to take the landlord’s property or intervening in any way whatsoever in the tenant’s business, as option to terminate the lease without further liability to either party.
2. If you have a mortgage with a bank, the bank could call the mortgage or foreclose on the loan. It’s just that simple. Is that a risk that you are willing to take? Since the bank is FDIC insured, banks have to comply with Federal regulations. Banks do not want to risk losing their charter by gambling on marijuana businesses. If you have a mortgage, I suggest being honest with the lender up front to see what the options are for you unless you have enough capital to pay the loan if need be.
3. You will want robust, iron clad indemnification provisions that allocates risk accordingly. Aside from the typical indemnity requirement landlords often require from tenants on general liability issues, an experienced marijuana landlord will also require indemnity on the specific issue of civil forfeiture under the CSA, as well as for any violations of law, including, without limitation, the local land use regulations, state regulations and the Cole Memorandum.
This stipulation requires a marijuana tenant to defend a landlord and absolve the landlord of wrongdoing if the federal government takes enforcement action against the landlord for renting to the pot business or if the tenant violates any local or state laws or the Cole Memorandum. The Cole Memorandum is the safe harbor memorandum for state legal cannabis businesses to operate without threat of federal prosecution. The Cole Memorandum is not law, but merely guidance from US Attorney’s office, that will likely be re-addressed by the new administration.
4. The lease should spell out what the permitted use is for the real estate and have standards for code of conduct for the tenant to abide by. Every commercial lease has a permitted use provision that states what activities are permitted on the property. It’s best not to shy away from stating exactly what the intent is for the property in the lease agreement. In addition, the lease should have a code of conduct for the tenant that aligns with the local county or city land use regulations.
5. All state legal marijuana businesses must either have a recreational license from the Oregon Liquor Control Commission Licensing (“OLCC”) or a medical license through the Oregon Health Authority (“OHA”). If the business does not have authority to operate from the OLCC or the OHA, the marijuana business is likely operating on the black market. In addition, most marijuana licenses are tied to locations. A landlord will want to make sure that the tenant represents and warrants that it has the proper state licenses to operate its business. In addition, some landlords request that the tenant is obligated to keep them informed about any changes to the local or state laws that could potentially jeopardize their license. The OLCC license has to be renewed annually. If it is a new business operation, the tenant may want to have the lease be conditioned on the tenant obtaining its license.
6. Water rights and other environmental issues are a huge issue for cannabis growers and processors. Cannabis growers and processors must either have a water right that runs with the land, must purchase a water right from a third party or obtain a water right from the state.
Typically, when leasing a piece of property, the parties need to determine if there will be water rights with the lease, and who is responsible for paying for the water. In addition, landlords and tenants will want to address other environmental issues, such as whether pesticides and herbicides will be stored on the premises and how the cannabis will be disposed.
There are situations where a cannabis lease will be the perfect fit for both the landlord and the tenant, and there are other times when clearly it is not the right match. It’s imperative for both the landlord and the tenant to evaluate (or HASH out) all of the issues thoroughly to avoid future pitfalls or negative consequences. If the parties do their due diligence, it can be a very profitable venture for all.
Jennifer Clifton is the founder of Clifton Cannabis Law, LLC. At CCL, we represent cannabis entrepreneurs in Oregon and California in all corporate matters, from startup counseling and general corporate matters to angel and venture capital financings to mergers, acquisitions and sales of businesses.
jennifer@cliftoncannabislaw.com, 541-797-9995
