Considerations and Challenges for Cannabis Businesses Seeking Space to Rent
Now that the legal challenges to the CAURD program have been settled, the OCM is able to issue licenses and allow the recreational adult use market to finally take off in New York. The Cannabis Control Board approved 109 license applications, including 38 new retail dispensary licenses and 26 microbusiness licenses. Over the next few months, the OCM plans to issue another 200 or more dispensary licenses.
In order to secure a cannabis license, applicants will need to demonstrate that they either own or are under contract to possess the physical location in which the applicant will operate during the applicant’s initial 2-year license period. Retail dispensary licenses require possession of the premises within 30 days of final approval for the license. Possession can be demonstrated with a deed, commercial lease or management agreement.
Finding the right location can mean the difference between success and failure for start-ups, and for retail operations, the old adage “location, location, location” will be even truer. With heavy restrictions on advertising for dispensaries, being visible to foot traffic is important. As an added benefit, heavily trafficked areas tend to be safer for customers and employees, something that will be important to elderly customers who comprise the largest growing customer segment.
Some cannabis business owners will find it challenging to secure a location for their business. A retail dispensary premises must be located in a store with a principal entrance at the street level and located on a public thoroughfare (no back or side alley entrances). No cannabis dispensary can be located within 500 feet of a school or within 200 feet of a house of worship and there are distance requirements between retailers and from youth-oriented facilities. There must also be 1000 feet from another dispensary (for municipalities with a population over 20,000). The OCM introduced an online tool for searching locations of pending dispensary applications Proximity Protected Locations for Adult-Use Retail Dispensaries & Registered Organizations Map | State of New York (ny.gov). These regulatory restrictions will limit available commercial space for dispensaries.
If you are looking to buy or rent property for your cannabis business, there are some critical location-related issues to consider:
- Municipal opt-out for dispensaries and on-site consumption lounges
- Zoning ordinances identifying where the municipality will allow cannabis businesses to locate and the local rules for the property such as height and lot-use limitations for structures on the property
- State laws regarding distances between cannabis retailers and churches, schools, day care centers and other youth-oriented establishments
- Proximity to major thoroughfares for retailers offering delivery services, having curbside delivery or drive through windows.
Another set of challenges is posed by the federal status of cannabis as a Schedule 1 controlled substance. Most banks and financial institutions are federally insured and unable to provide loans to businesses in the cannabis industry. This also means that real property owners with mortgages from federally insured lenders are also unable to lease to tenants that will be in the cannabis business. Cannabis tenants should require the landlord to represent and warrant in the lease that it is authorized to lease to a cannabis business. While some commercial landlords may be willing to run the risk of a loan being called for leasing to a cannabis tenant, this is not something we advise because too much is at risk for all involved. The key will be finding commercial landlords who own their property outright or obtained a loan from a non-federally insured bank or an alternative private or venture capital source of financing.
There is an inherent “chicken and egg” problem for cannabis license applicants and landlords. Applicants will not know if they are licensed before entering into a lease agreement, exposing them to significant risk and cost of the license is not granted. Cannabis tenants will need to negotiate with landlords to mitigate their risk with provisions such as delayed rent and potential opt-out if licenses can’t be secured.
Contact us if you would like to explore a lease for your cannabis business. We can help ensure your location will meet regulatory requirements and help negotiate terms that mitigate some of the risks for business owners in this highly competitive industry.
Tracy Jong is a Senior attorney at Evans Fox LLP with 30 years of experience focusing her practice in business law, intellectual property and licensing for alcohol and cannabis. Tracy Jong is a member of the New York Bar and is a registered attorney at the United States Patent and Trademark Office. She can be reached at [email protected].
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The content has been prepared for informational purposes only; it should not be construed as legal or tax advice, does not create or constitute an attorney-client relationship, and readers should not act upon it without seeking professional counsel.