New York Real Estate and Cannabis: Part 1

10 May New York Real Estate and Cannabis: Part 1

Here at the Canna Law Blog, we had intended to start our series on the real estate implications of the Marijuana Regulation and Taxation Act (MRTA) with a discussion of issues faced by each license type. But after reading The New York Times’ recent article on the real estate “rush” caused by the MRTA, we felt compelled to address some statements that could mislead prospective applicants when evaluating their license options.

As a brief refresher, the MRTA’s adult-use licensing provisions indicate that applicants will need to demonstrate that they either own or are under contract to possess (by lease or management agreement) the physical location in which the applicant will operate during the applicant’s initial 2 year license. Across all license types, location is one of the most important considerations for applicants.

For those on the production side (cultivators, processors, and distributors), finding suitable real estate at the right price is critical to being able to operate a successful business. For retail applicants (including on-site consumption applicants), identifying and securing the right space in the right area may be the difference between financial success and failure. As we like to say in New York: location, location, location.

The New York Times’ article states that many landlords will not lease to cannabis companies, “either because of the risk in having a tenant violate federal laws or the unsavory reputation that still clings to weed.” The article then declares that landlords willing to lease to cannabis companies “have been able to charge premium rates,” implying that New York’s leasing market will be prohibitively expensive for cannabis companies. From both a technical perspective and practically speaking, the article is at best misleading.

Many commercial landlords cannot lease to cannabis companies under the terms of their mortgage agreements, not because of inherent risk or “unsavory” reputation. For any commercial landlord that has a mortgage issued by a federally insured bank, their loan documents will include a provision in the “Representation and Warranties” section that prohibits leasing to illegal businesses and will often expressly preclude allowing a cannabis business to operate in the mortgaged property. The provision will look something like this:

Borrower hereby covenants and agrees that it shall not commit, permit or suffer to exist any illegal activities (whether or not such illegality is determined by local, state or federal law) or activities relating to controlled substances (as determined by local, state or federal law) at the Property (including, without limitation, any growing, distributing and/or dispensing of marijuana (whether for medicinal, recreational or other uses)).

It may not seem like much, and it may not even stop certain landlords, but the difference for applicants is critical and important to understand. Until federal banking laws are changed, many landlords will simply be unable to lease to a cannabis business because doing so could cause a default under their loan documents and trigger a host of repercussions, including potential foreclosure.

For adult-use applicants in New York, the key will be finding commercial landlords who either: 1) own their property outright or 2) obtained a loan from a non-federally insured bank or an alternative source of financing (of which New York has many); or 3) are willing to run the risk of a loan being called for leasing to a cannabis tenant. Connecting with the right commercial real estate broker will be critical.

Which leads us to the practical inaccuracy in the article. In our experience in representing commercial landlords and real estate developers, landlords who are not contractually barred from leasing to cannabis businesses would welcome the opportunity. The impact of the COVID-19 pandemic on New York’s retail real estate market (including restaurants and bars) has been well-publicized. A short walk down any of New York City’s historic retail districts is now a jarring sight, as “vacant” signs appear in countless windows. Landlords are eager to find paying commercial tenants in any way they can and the potential for overflow foot traffic benefiting neighboring locations only increases the appeal of cannabis tenants.

This is not to say that it will be easy for cannabis applicants to enter into lease agreements. The MRTA’s requirement for an executed lease upon application filing will require creative contracting and (likely) significant capital, as applicants will not know if they are licensed before entering into a lease agreement. But that is a solvable problem and we expect that many commercial landlords will collaborate with cannabis tenants to find mutually beneficial solutions.

Will some landlords avoid cannabis tenants even if they don’t have to? Yes. But those landlords will likely be in areas that choose to opt out of the MRTA and, even then, may change their minds once New York’s cannabis industry gets going.

All in all, securing real estate will be a challenge for New York’s adult-use cannabis applicants, but not for the reasons The New York Times suggests. On the whole, we think New York’s commercial real estate industry will welcome cannabis tenants and we are excited to help navigate the complex issues. Stay tuned for more on the MRTA and its real estate implications here at the Canna Law Blog.