Location, Location, Location: Navigating Cannabis Real Estate By Robert Hoban

Legalizing cannabis has created a land rush. The first step in any new cannabis market, or towards any commercial activity in cannabis, always begins with the question of where – the real estate. Finding a suitable property is probably the most difficult piece of putting a business together in this industry. Locating such properties has created a whole new niche market for lawyers, consultants, and real estate brokers in aiding the marijuana industry’s entrepreneurs as they locate a properly zoned location. In addition. cannabis industry businesses require a great deal of real estate for uses such as cultivation sites, retail outlets, testing laboratories, extraction facilities, storage facilities, and kitchens. These varied real estate needs carry with them a morass of state and local regulations, and navigation requires professional assistance.

While traditional real estate principles tend to govern, these issues are uniquely twisted to adapt to the cannabis industry, or in many case, where the cannabis industry has to adapt to these fundamental items. Make no mistake, it is not easy to navigate cannabis leases, zoning, and licensing regulations. Brokers who specialize in this area tend to be very helpful. However, an entire level of additional items emerge concerning “takings,” taxes, distance requirements, and mortgage “illegality” clauses, just to name a few. It is important to note that cannabis licenses are often tied to (or even required to be tied to) a piece of real estate. Once zoning issues are addressed, the next items to examine include site plans, security, and other site specific concerns related to licensing.

Furthermore, there are issues specific to landowners and landlords. These difficulties include obtaining mortgages and financing, title insurance problems, marketability issues (for example, there are fewer institutional buyers due to legality covenants), rent, percentage rent (landlords must ask themselves if the property is this an unlawful unlicensed economic interest), and IRS Section 280E. Often times, landlords cannot lien cannabis products due to licensing concerns. While tenants tenants and operators have other concerns such as legality covenants in leases, payment of rent in cash rather than check or wire, cannabis fixture treatment (for example, does specialized lighting revert to the landlord at end of lease), special requirements for power, water, HVAC systems, and other special concerns for indoor cultivators and manufacturers and processors.

Lastly, we have seen a substantial rise in real estate capital formation in the cannabis industry. These take the form of real estate investment trusts (REITs), publicly traded REITs (like Innovative Industrial Properties: IIPR and Power REIT: PW), private REITs (like Treehouse and Inception), real estate lending opportunities, and sale leaseback transactions, equipment leasing and other financing strategies.

With all of the foregoing issues critical to understanding and evaluating options and legal confines, it is essential that you consult with an experienced real estate attorney with cannabis law experience. An attorney experienced in real estate law alone will not suffice. There have been too many unnecessary law suits caused by experienced real estate attorneys who did not understand or evaluate the impacts of the myriad of cannabis regulations. This can easily be avoided with the assistance of experienced cannabis counsel.

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