Claiming Your Stake: Real Estate Considerations for Cannabis Companies
Purchasing Real Estate with your Cannabis Company
Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
– Theodore Roosevelt
Most cannabusiness operators would disagree with Mr. Roosevelt. For them, real estate is not the basis of wealth – company cash flow is. Real estate is simply the capital asset that the company needs to create the cash flow. Anybody who has ever sought to purchase or value a cannabis business knows this fact implicitly – the value of the company is dictated not by the assets it owns but by the cash flow and year over year sales it generates.
Although the value of real estate is not the primary driver of business valuation, owning real estate as a business asset offers some positive financial, legal and regulatory advantages, and some of them can be particularly impactful for cannabis businesses. For instance, owning your own property means you do not have a landlord to keep happy. It also gives the business greater flexibility in financing since real estate is viewed as an investment with a virtually unlimited lifespan – so it can be financed with equity, mortgage loans, or sale-leaseback financing.
Some drawbacks are attendant to the ownership proposition as well – buying real estate carries a significant opportunity cost insofar as it could act to make further investment in the business more difficult. These considerations – both the value, the costs, and the opportunity costs – can all be incorporated into a model to help business owners decide what is best for them.
The Cannabis Commercial Lease
A commercial lease to operate a cannabis business is anything but standard – even a standard commercial lease agreement applied to a cannabis business has the potential to be interpreted very differently from what it otherwise would be in the case of another industry. Both landlords and cannabis businesses must take into account the fact that cannabis remains a schedule I controlled substance under the Controlled Substances Act (CSA) and work to mitigate the potential negative outcomes stemming from this fact for both parties in the relationship.
Just one example involves state regulatory compliance. While it varies between states, every state has some level of regulatory requirement relating to the ownership of cannabis businesses. A very popular provision often incorporated into cannabis lease agreements provides for a share of profits to go to the landlord. In some states this profit-sharing arrangement could be seen by regulators as a form of de facto ownership in the business, hence implicating disclosures, background checks, and compliance vetting. Suddenly, landlords who saw themselves as “silent” partners to the business could be subjected to unwanted and invasive regulatory reviews, and leaving the businesses and the valuable licenses they hold exposed.
Potential landmines exist even within the boilerplate language typically found at the end of every commercial lease. Most commercial leases contain a boilerplate clause stating that any illegal use of the property in violation of federal or state law constitutes a default under the lease, and subjecting it to immediate termination. Clearly that clause is not going to work for a cannabis business. I recommend instead that leases use a clause forbidding only activities outside of the scope of those allowed under state – not federal – law, thereby allowing for the intended use consistent with the state license.
Another example involves dispute resolution. Often overlooked in lease agreements and many other types of contracts, a dispute resolution clause stipulates how disagreements between the parties are resolved. Parties need to be sensitive to the fact that some state courts have held that contracts for an activity illegal under federal law are unenforceable and void ab initio, meaning that it is as if the contract never existed. An arbitration clause mandating the parties resolve their differences before an arbitrator rather than a judge could be a feasible workaround.
Location, Location, Location….and Compliance
Regardless of whether you end up buying or leasing, the property that you select has a big impact in determining your eventual success. The right property for you will be determined by two primary considerations – suitability and compliance. Naturally, dispensaries require vastly different properties from cultivation and processing facilities. The former look for accessible retail locations conveniently located nearby target markets, while the later typically seek out industrial or agricultural properties that meet their utility demands while still allowing for conducive supply chains.
Both businesses have to grapple with state regulations and local zoning. Often states and cities require cannabis business be set back at least 1,000 feet from schools, parks and other places that children typically congregate, and it is good practice to stick to this approach even where local laws may allow a shorter buffer. You should have a zoning review showing all local schools, parks, daycare centers, and playgrounds in the vicinity of the target property before beginning any negotiations for lease or sale.
Keep in mind too that a cannabis company moving into the area will attract the attention of neighbors. Be a good neighbor and be sensitive to the concerns and questions coming from the local community. On the whole, cannabis companies that engage their local zoning and neighbors will succeed at a greater rate than those who do not, and this is because local zoning boards and neighborhood associations, hold a great deal of power to make your business life frustrating, impractical, or even impossible.
Cannabis businesses by nature require real estate – either agricultural, industrial, or retail. Your choice of property that fits your business criteria while still complying with the regulatory requirements is essential, and the decision about how to acquire use of the property, will go a long way toward determining the long-term success of your venture.
If you have any questions or concerns about your cannabis business, please contact us
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