How to Work With the Marijuana Industry
As more and more states look to regulate cannabis, commercial real estate pros stand to profit. But doing business with pot providers is risky.
November 2, 2018
More than half of states currently have a regulatory plan to decriminalize marijuana possession and sales, prompting pot businesses to pop up all over the country. And entrepreneurs in this new market need partners in commercial real estate.
Trista Curzydlo compared such opportunities for the real estate industry to that of investing in Silicon Valley before the dot com boom. She noted, however, that engaging the marijuana market comes with real potential for jail time. During a Friday session at the REALTORS® Conference & Expo in Boston, Curzydlo, attorney and managing member at C4 Consulting, LLC, in Basehor, Kan., focused on best practices and risk management techniques for commercial agents and brokers who lease or manage properties to businesses such as marijuana dispensaries or producers of cannabis products.
As with any tenant-landlord relationship, the lease agreement is a good tool for minimizing risk. Though it may seem counterintuitive, real estate professionals should explicitly state in their lease agreements that the tenant is a cannabis business, as this is a requirement in most states. But Curzydlo told attendees to avoid using terms like “lawful” when describing cannabis operations. Technically, these businesses are still illegal under federal law, and under state law they’re not legal either—they are simply “regulated” by the state.
Agents may also need to alter their traditional boilerplate contracts; some standard leases include language that prohibits “illegal activities,” which can be problematic because marijuana is still a controlled substance at the federal level. Curzydlo suggested leases include specific language about what types of activity are allowed on the premises—cultivation, processing, or sales—and whether the operation is supplying cannabis for medical or recreational use. Also, be sure to include the full name of the rules or legislation that enables the tenant to do business.
Because most cannabis businesses have difficulty maintaining banking relationships—Curzydlo said Bloomberg recently estimated that only 3 percent of banks were willing to work with cannabis companies in the U.S.—how tenants pay rent is an important consideration in these agreements. “The lease has to address cash,” she said.
Curzydlo also recommended that real estate agents come to an agreement with their own financial institutions. “Prior to leasing, you need to contact your bank. They’re going to want to know: Where did this huge cash payment come from?” It’s not just out of idle curiosity. The Financial Crimes Enforcement Network requires banks to complete currency transaction reports anytime a person conducts a cash transaction of more than $10,000. Curzydlo noted that some banks are not comfortable with that reporting, and “they might choose to end the banking relationship with you.”
The National Association of REALTORS® released a study at the conference on members who work in states that allow the consumption of marijuana for medical and recreational use. The study found that around one-quarter of landlords were unwilling to take cash for rent.
These banking issues have other implications for property use and the structure of your clients’ business. “Anytime you have a cash-based business, you have security issues,” Curzydlo said. She noted that the way most companies decide to mitigate those risks is by hiring armed guards. But if they don’t follow all the gun statutes, they won’t be protected by the Rohrabacher-Farr amendment, which protects such businesses from being pursued by federal authorities. The amendment was enacted as a rider to the budget bill for the Department of Justice that prohibits the agency from using federal funds to enforce the Controlled Substances Act in states where medicinal marijuana is regulated.
Curzydlo also urged attendees to look at different lease considerations, early termination rights, and events that trigger eviction when working with this type of tenant. Instead of the typical 30 days, for example, you may want to include a clause that would allow immediate eviction in cases where the tenant is under federal prosecution. The NAR study found that half of all commercial members surveyed added no additional addendums to leases when the business was related to marijuana. More than one-quarter of commercial members in medical marijuana states and one-fifth in medical and recreational marijuana states did have lease addendums.
Even if you’re not involved in the business, “you could be convicted for conspiring to do these acts,” Curzydlo said. The warning may sound alarmist, but even something as simple as charging a base rent plus a percentage of a cannabis business’s income could mean a landlord is implicated in the tenant’s work. “You could be considered a partner in the business,” Curzydlo said.
The property itself could also be at risk, depending on how the business plans to use it. “The changes you have to make to accommodate a growing operation are huge,” Curzydlo said. Growing marijuana plants can increase risk of mold due to the need for irrigation, and hydroponic water waste needs to be carefully managed. She added that processing the plants into other products can be dangerous.
Though the notion of working with marijuana-related businesses might seem far off for those in states where such regulations are not actively being considered, many in the session were considering or actively working on deals related to the sector. In fact, the NAR study found that 17 percent of commercial members in states where prescription marijuana is legal were already leasing to marijuana businesses.