Landlords’ Considerations for the Cannabis Real Estate Industry
Landlords’ Considerations for the Cannabis Real Estate Industry
Operating as - and by extension, leasing to - a company in the cannabis industry carries unique risks. As of June 2021, 36 states have legalized marijuana for medical purposes, and 18 of those states have legalized recreational or adult use. Despite the trend toward legalization and the broader shift in societal acceptance of the substance, marijuana remains illegal under federal law. Marijuana’s federal classification as a Schedule I controlled substance (defined as having “no currently accepted medical use and a high potential for abuse”) creates legal dilemmas in jurisdictions where state law allows its use in some capacity. Each cannabis company must navigate a web of compliance issues, and those who lease or sell real estate to these companies must understand precisely how cannabis companies differ from other tenants or buyers.
Although there has been a sharp rise in cannabis industry entrepreneurship, federal law prohibits cannabis growth, sale, possession, and use, and continues to place parties engaged in these activities (in compliance with state or local law) in a legal gray area. Risk-averse landlords may generally prefer tenants engaged in a more solidly grounded enterprise. The risk of intervention from federal law enforcement is not borne solely by a cannabis company. For example, 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. This gives the Department of Justice at least the theoretical authority to prosecute property owners with tenants in the cannabis industry. The prioritization of such prosecution, particularly in jurisdictions with laws allowing for marijuana use, has become something of a political football in recent years, leaving landlords with contradictory guidance on the issue.
As a result, at minimum, landlords should critically review their standard leases for boilerplate requirements that a tenant comply with federal, state, or local law. Landlords should additionally consider additional terms, including: an early termination option in the event of any law enforcement action, or additional security deposit, indemnification, or insurance to cover such outcomes.
General Leasing Concerns
A study conducted by the National Association of Realtors found that in states with legalized recreational marijuana, there was increased demand for: warehouses (by 34-42%), storefronts (by 18-19%), and land (by 16-21%). Despite this economic boon, some landlords remain hesitant to become involved with this industry. According to the study, “the most frequently cited concern of commercial members was the smell when leasing to [cannabis companies], followed by theft of cash on property, moisture issues, and fire hazards.” Depending on the intended use, Marijuana ,may emit a strong odor, so landlords should be mindful of the area surrounding their property and consider whether any conflicts with neighbors may arise.
Landlords should also contemplate these issues in their lease to a cannabis company. An ideal lease would clearly address how marijuana will be stored on the premises, and any related obligations of the tenant. The agricultural aspect of marijuana cultivation may be extremely utility-intensive, often requiring high amounts of water and electricity. The responsibility for paying these bills should be clearly addressed in the lease. Cultivation processes can also create an increased fire risk, making the requirement of sprinkler system installation and maintenance a wise addition to any cannabis company lease. Landlords may similarly consider the requirement of security system or staff on the premises to address the theft concerns, which are fueled largely by the fact that, for reasons discussed in further detail below, many cannabis companies operate as all-cash businesses. Overall, landlords should carefully review their insurance policies and determine what coverage is available for these industry-specific risks.
In some jurisdictions that have legalized the medical or adult recreational use of marijuana, zoning restrictions are put in place that mandate cannabis companies be a minimum distance from sites such as schools or daycares. Others, such as Portland, Maine, require a cannabis company to submit an application to a local land use board for review before they can open. New York does not yet have a comprehensive set of regulations governing where cannabis companies may lawfully operate, but such local laws or regulations may come soon. Landlords of agricultural land must obtain a license from the New York Department of Agriculture and Markets before leasing to a cannabis company, but only for the limited context of industrial hemp research.
An important component of New York’s Marijuana Regulation and Taxation Act (MRTA), which legalized marijuana in the state, is that the same restrictions that apply to tobacco use will apply to smoking marijuana. This not only means no smoking in certain public areas such as parks, beaches, or indoor restaurants, but also allows localities and private property owners to set their own, stricter limits as they see fit. The MRTA also established the Office of Cannabis Management (OCM), which is tasked with creating clear guidelines on public marijuana consumption; guidelines which are likely going to be welcomed by landlords grappling with compliance concerns. Until then, according to state Senator Liz Krueger (also the bill’s sponsor), “if you can smoke tobacco there, you can smoke marijuana there.”
A landlord renting to a cannabis company should be comfortable with accepting rent payments in cash. Cannabis companies generally do not have access to banking services because of marijuana’s federal classification as a Schedule I controlled substance. Compliance with federal law is a prerequisite for any major bank, all of which are subject to federal regulation, and also for smaller local banks and credit unions, which still must comply with Federal Deposit Insurance Corporation (FDIC) guidelines. Banks are especially conservative with any activity that may run afoul of the Money Laundering Control Act of 1986, which defines the federal crime of money laundering as any banking transaction involving proceeds from an unlawful activity. This has had the effect of cutting off cannabis companies from conventional banks.
As a result, landlords who only accept rent in the form of check or other non-cash alternatives should keep this in mind. In April 2021, the House of Representatives passed the SAFE Banking Act, which would specifically carve out cannabis industry proceeds from enforcement and penalization by bank regulators. Should the act (or some variation) become law, it would allow banks to legally service cannabis companies for the first time – a potential game-changer. However, at the time of this writing, the bill is still awaiting Senate approval.
Selling Property to a Cannabis Company
Having a cannabis company as a tenant is already complex, so it should come as no surprise that having a cannabis company as your counterpart in an exchange of title to real property is also complicated. A cannabis company’s lack of access to conventional banking services includes the lack of access to mortgage loans. Having no available institutional lending is a factor which itself may be fatal to many cannabis company’s ideas of buying property. As a result, a cannabis company may have no choice but to seek capital from private lenders or funds, which has the potential to complicate deal timelines.
Additionally, for the same federal regulatory reasons as banks, many title companies cannot or will not provide their services in a transaction involving a cannabis company. Keeping these complications in mind should be imperative for anyone considering an offer from a cannabis company to buy property.
The Future of Cannabis Real Estate in New York
The legal framework for the cannabis industry in New York is still developing, but that has not stopped an influx of prospective cannabis operators from seeking to buy or lease property for their planned enterprises. This wave of new real estate activity has been described in the New York Times as a “land grab”.  Many have wondered whether the industry, which has a penchant for voguish retail spaces and increasingly markets itself alongside CBD as a high-end wellness product, may be the saving grace of the city’s retail market (which was already hampered by general retail woes, only to be devastated by the pandemic). Despite the enticing prospects for sellers, the foregoing complexities remain in place.
 Cole Memo issued 2013, available at https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf; Rescinded 2018, available at https://www.justice.gov/opa/pr/justice-department-issues-memo-marijuana-enforcement
 NY Agriculture and Markets Law, Article 29; NYCRR Title 1, Ch. III, Sub Ch. F.
 18 U.S.C. 1957.
 The MRTA sets forth guidelines for regulating the industry, such as the creation of the OCM, but the passed version of the law simply states that the OCM will develop specific rules and regulations at some point in the future. See generally: https://cannabis.ny.gov/adult-use
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