Cannabis Real Estate Leases: The Roots of Your Cannabis Business, Part 1

31 May Cannabis Real Estate Leases: The Roots of Your Cannabis Business, Part 1

Whether you are a landlord, tenant, or subtenant in the cannabis industry, you need a first-rate cannabis lease. The structure of the leasing relationship and the terms of the lease are key components, both for getting funds out of the primary business and mitigating your risks, of which there can be many. If you are involved in more than one venture or have a complex organizational structure, any good attorney or accountant will advise you to put a separate lease in place for each discreet relationship. No, you cannot find the right lease on Google. No, you cannot use the lease your lawyer drafted for a non-marijuana real estate scenario. No, you cannot jot some bullet points down on a piece of paper and call it good. And you should not use a retail cannabis lease as a substitute for a manufacturing space or a cultivation facility. You also should not use a cannabis lease in place of a hemp lease, and vice versa, because those products are treated completely differently.

Every contract in every scenario in every business in every industry needs to be customized to some degree, and marijuana real estate leases are not your typical leases. If the other party wants to negotiate (e.g. change) any portion of the lease arrangement, even if you think it may not have any significant effect on your bottom line, you will want to have a good cannabis real estate lawyer backing you up. Here are some general principles to keep in mind as you decide how to move forward:

Be sure you have a written lease. Handshake deals and contracts established by text messages or Venmo emojis are not the foundation of a good lease. You want definite terms in all areas of the contract that are important to you and your lawyer who may have to help you enforce the lease (for landlords) or get out of the lease (for tenants). The less you put in writing now, the more you will have to pay later in attorneys’ fees (so your lawyer can prove the terms of your lease), regulatory fines (see #2 below), nuisance settlements (so your former landlord releases you from the lease), or the expenses of re-leasing real estate (because your tenant terminated the lease early upon terms favorable to them). Many states have default laws that fill in contract gaps, and, depending on which side of the contract you sit, you may not want those rules applied to your situation.

Be sure your lease complies with state and local laws. Real estate is, by its character, tied to local laws. States like to regulate their real estate with their own rules, and those rules can vary wildly, which is why you need a local attorney familiar with both state laws and “the way thing are done around here”. Just ask our California cannabis lawyers how California laws and practices differ from Oregon, Washington, or any other state. The permissions and prohibitions on cannabis, marijuana, and hemp (and their varying stages of cultivation and processing) mean different things to different states. That means if you are going into a new market or even a new town, you need to know what the state laws and regulations are, along with the local zoning ordinances and how they are all enforced. You should assume that what works under one state’s regulatory guidelines will get you into trouble in another state. And because every state is in a different phase of legalizing pot, you need to know the current and proposed laws and regulations so you can roll with the constant changes.

Be sure your lease is tilted in your favor. Leases are contracts, so they are customizable. If someone wants you to sign their “form lease” because it is their “standard practice”, tell them that your standard practice is to negotiate a balanced arrangement that is good for both sides. Then make sure that your lawyer knows what they are doing so they can tilt as many provisions as possible in your favor. The scenarios can vary drastically: if the other side does not use an attorney, that is generally very good for you; if they use an attorney who does not know real estate, that is also good for you; and if they use an attorney who knows real estate but does not know marijuana real estate, that could result in a relatively balanced lease or a painful and expensive experience because you have to pay your lawyer to teach their lawyer about every part of the contract that is cannabis specific. Landlords generally are the ones who have the upper hand in the lease drafting and negotiations. Ensure your cannabis lawyer prepares a lease with all of the provisions tilted in your favor and then insist with your prospective tenant that it is your form lease and you never vary from it.

Be sure you know your position in the leasing food chain and negotiate accordingly. The cannabis industry is maturing, and years ago those people and businesses with land or capital to buy land started recognizing the opportunity to lease real estate to marijuana businesses, which has been hailed as a saving grace for landowners with real estate in economically depressed areas like my old stomping grounds in Maine. The first generation of state-legal pot growers, manufacturers, and retailers have been encountering offers to exit the business via both domestic and international M&A activity, and that means leases are extremely important to a potential purchaser and a smart seller. Savvy first generation pot entrepreneurs know that they can make a healthy profit by remaining in the industry via real estate even after the sale of their business, like the legacy landlords who got into the leasing business early. Real estate can be a stable and profitable income stream. Sellers under a master lease who sublease to the new purchaser, unlike the actual landowner, have no risk of underlying asset forfeiture. The former-tenant-turned-sub-landlord’s (aka a sub-lessor) only risk is in the subtenant, and they will make up for that risk by charging the subtenant triple (or more) what they owe to the landowner under the master lease. Landowners with good legal counsel will ensure that the master lease accounts for this clever business maneuver by either prohibiting subleasing or (better yet) requiring any upcharge in the sublease to be passed directly onto the landowner.

In every industry and in every contract, especially the cannabis leasing space, it is crucial you understand what you want out of the relationship and ensure you have a good legal team to help you get there.