Considerations for Landlords Leasing To Cannabis Businesses
While some commercial property owners are being cautious about entering the cannabis space, others are taking advantage of the opportunity.[1] The rise of national delivery companies such as Amazon and the pandemic forced many small retailers out of business so the opportunity to fill vacant retail space is welcomed by many commercial property owners. Cannabis retailers tend to lease large spaces, ranging from 3,000 to 10,000 square feet. With the cost for licensing and build-out a substantial investment for cannabis tenants, they also tend to be long-term tenants. Since mail-order marijuana is not legal and dispensaries are considered essential businesses, some consider cannabis retailers a good risk for landlords because they are not only long-term tenants of large spaces, but arguably Amazon and pandemic-proof so they won’t be subject to the same market forces that have been the demise of prior retail tenants.
Commercial landlords should review their standard leases and add provisions for cannabis tenants. At a minimum, leases should include provisions requiring that a tenant comply with federal, state, and local laws and an early termination option for the landlord in the event of any law enforcement action hampering operations. Additional provisions may be beneficial to mitigate the risks of this new industry in the form of enhanced security deposits, indemnification, or specific insurance to cover such situations.
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. While landlords will not want to tie up space and not be earning rent during the license application process, they will have to collaborate with cannabis tenants to find mutually acceptable solutions that mitigate the risk for both sides. These can include provisions for delayed or reduced rent, potential opt-out provisions if licenses can’t be secured, opportunity or option costs for “holding” the space’s availability for a specified period, and forfeiture of security deposits for early termination.
A study conducted by the National Association of Realtors[2] found that some of the biggest concerns of commercial property owners are the smell associated with cannabis, moisture issues, and fire hazards. When considering leasing to cannabis tenants, Landlords should be mindful of the area surrounding their property and consider whether any conflicts with neighbors may arise if a cannabis business opens nearby. Landlords should also carefully review their insurance policies and determine what coverage is available for these industry-specific risks.
Industry specific provisions should be considered for leases to cannabis tenants such as (1) requirements for sprinkler system installation and maintenance to address fire hazards, (2) security system installation and maintenance to reduce theft and harm to customers and employees, (3) requirements for secure storage of marijuana on the premises, (4) allocation of costs associated with installation and use of utilities such as electricity, water and sewer and (5) the requirement for “green” or energy efficient technologies to be implemented.
A landlord renting to a cannabis company should be comfortable with accepting rent payments in cash. Cannabis companies generally do not have access to full service banking services. This may require changes to payment procedures and money handling for the landlord’s leasing office or management company operations.
Please to contact us if you have any questions about leasing or selling your property to a cannabis business. Our team’s experience with both cannabis and commercial real estate can help commercial property owners considering leasing to cannabis businesses protect their interests and evaluate potential opportunities.
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.
[1] 21 U.S.C. § 856, also known as the “crack house statute,” makes it a felony to knowingly lease or rent any property for the purpose of manufacturing, distributing, or using any controlled substance, including marijuana. There has not been enforcement of these laws, especially in light of the movement towards rescheduling cannabis and eliminating the federal prohibition on cannabis.
[2] https://www.nar.realtor/sites/default/files/documents/2020-marijuana-and-real-estate-a-budding-issue-02-11-2020.pdf