Photo of Vince Sliwoski

A well-rounded attorney with experience in areas such as music and trademark law, Vince heads up Harris Bricken's Portland office and is a leading practitioner in Oregon's ever-evolving cannabis industry.

Cannabis lawyersIt is easy to burn through money when starting a business. Expenses like market research and professional fees can kick in almost immediately, and capital expenditures like inventory, property and tools are unavoidable beyond the early stage. In addition to these traditional start-up costs, the state-legal cannabis industry brings regulatory add-ons, like licensing and permit fees, and, in some jurisdictions, requirements for plans by architects and engineers. Like any business, starting a pot business can be expensive. Only more.

In our Washington, Oregon and California offices, our cannabis business lawyers speak daily with entrepreneurs in the early stages of cannabis business planning. Given the recent advent of state-legal marijuana, even our most “seasoned” industry clients and those with industry cachet have operated above board for only a couple of years. Because the regulated cannabis industry is a start-up industry, everyone needs to monitor costs closely. Those costs include professional fees.

At the onset of business planning, it is tempting to engage a range of professionals to handle any foreseeable matter. Like any industry, the cannabis industry has its experts: lawyers, accountants, realtors, vendors and any variety of “consultants.” Many of these individuals can be helpful along the way, if used correctly. The key is knowing when, whether and how to engage each provider in the life cycle of your cannabis business.

Lawyer. Potential clients are surprised when we sometimes send them away. In Oregon, for example, licenses are tied to locations, and unless there is an urgent need for legal services (i.e., the business is being capitalized), we often suggest that would-be clients return after they have sourced a target property. At that point, we can hone in on zoning issues as well as the lease or sale transaction, while structuring the business to boot. Otherwise, with no location in mind, there is a tendency to run up fees unnecessarily, and before the point where a lawyer is truly required.

Accountant. In the cannabis industry, it is critical to have an accountant (as well as a lawyer) who understands the quagmire of IRC 280E. An accountant versed in the cannabis industry will be able to assess the pros and cons of various tax elections in the context of a tax code tilted against pot businesses, and offer ongoing planning advice. Like cannabis business law, cannabis accounting is highly specialized, but the right CPA can make all the difference.

Realtor. Many aspiring pot businesses attempt to find a realtor. Unlike lawyers or accountants, realtors generally do not work for an hourly fee; they typically get paid when a deal closes. In the marijuana industry, realtors are not enthusiastic about pounding the pavement for smaller placements, like a dispensary lease. The commission simply isn’t there. But, if you are looking at a larger transaction—and specifically to buy a building or a piece of property—a good realtor can be a real asset.

Vendors. Most cannabis businesses enlist a couple vendors at the onset of operations. The two most commonly retained vendors are insurance providers and security operators. Regarding insurance, cannabis businesses need the same products as other small businesses. This tends to include property insurance and workers’ compensation, in a highly specialized field. As to security, the cannabis industry is unfortunately still a cash game for the most part. Not only are security providers required for property set up and installation, but they are often hired to transport cash during business operations.

Consultants. There are innumerable cannabis consulting firms nationwide, but many of them do not add value. For this reason, we have cautioned (on more than one occasion) to be wary of expensive consultants, particularly at the outset of business operations. Most of what a consultant can provide can also be obtained for free, from other industry sources. Anything worth paying for can almost always be got somewhere else.

Producer_of_marihuanaIndividuals and companies looking to join the Oregon cannabis market often ask us lawyers whether we know of any licenses for sale. Some of these requests come from states like Washington, where licenses are no longer being issued and are frequently bought and sold. Others come from outside the regulated marijuana space altogether, from people who believe it advantageous to “purchase” a license, rather than start from scratch. Typically, however, Oregon licenses are not bought and sold.

As a preliminary matter, it is important to note that Oregon is a wide-open recreational cannabis market. State licensing fees are relatively cheap, and neither residency requirements nor other challenging barriers to entry exist. Most importantly, there is no cap on the number of licenses issued by the Oregon Liquor Control Commission (OLCC) — a fact that should drive the resale value of licenses down to zero as a basic economic proposition. So, Oregon is an open market where everyone is allowed to compete, and where entrepreneurs, not the state, will determine who succeeds.

During the Oregon cannabis license application process, everyone with a “financial interest” in a cannabis enterprise must be disclosed to OLCC. Having pushed through licenses for a while now, and lots of them, it is our experience that OLCC is flexible with ownership changes mid-stream (before a license is actually issued). After a license is out there in the world, however, the analysis is different: for a proposed change in ownership or business structure, OLCC requires submission of a form for its review, and payment of up to $1,000. If the proposed change of ownership is 51% or greater, a new application must be filed. OAR 845-025-1160(4)(d).

Because of the “new application” rule, licenses are never truly sold in Oregon. Instead, when Party A purchases the going concern of Party B, OLCC attempts to coordinate with both buyer and seller so that the old license is surrendered on the day the new license is issued. Note that Party A cannot take its license to a new locale; licenses are fixed to locations. The surrender/issue protocol is a theoretically simple process, although review is never expedited per se. This is because OLCC will want to vet Party B to ensure that nothing has changed regarding the physical space before it issues a new cannabis business license.

Often, it is attractive for new players to enter the Oregon market via acquisition, and our Portland office has vetted and handled pot business sales on behalf of everyone from publicly traded companies to single-member LLCs. The reason for the acquisition approach is because for certain lines of business, namely retail, locations that work with OLCC distance requirements and local zoning rules are scarcer than before. Thus, anyone interested in entering the Oregon pot market as a retailer may be better served to buy an existing operation, than to try to find an unclaimed space.

Altogether, the Oregon pot licensing system means that what is bought and sold in the state is almost always the cannabis business itself (whether that’s an asset sale or a stock sale) and never the license. Sometimes a premium is paid for a desirable location or other intangible item, but not for OLCC paper. So, if you are vetting a pot deal in Oregon and thinking of paying for the license, think again. Licenses are different here.

Help WantedTwo weeks ago, we wrote that the Oregon legislative session would begin this Wednesday, and that 28 proposed cannabis bills graced the legislature’s website. Since that time, we caught wind of SB 301, a tidy little bill that would abolish the right of Oregon employers to fire their “at will” employees for off-duty cannabis use. To our knowledge, Oregon would be the first such state to take this step.

SB 301 is short, sweet and even subtle, as it refrains from mentioning the words “cannabis” or “marijuana” altogether. Instead, it amends an existing statute that prohibits an employer from mandating “that any employee or prospective employee refrain from using lawful tobacco products during non-working hours.” (Our emphasis.) Proposed SB 301 removes the “lawful tobacco products” language, and replaces it with language covering any “substance that is lawful to use under the laws of this state.” Of course, that includes pot.

Like most laws, proposed SB 301 does contain a couple of exceptions. In the first, an employer could require an employee to abstain off-hours when the restriction relates to “a bona fide occupational qualification” (think: safety). In the second exception, employers would still be free to can their employees for “the performance of work while impaired.” Obviously, this could apply to someone who dabs and then walks into work; but it could apply equally to someone who shows up high on prescription drugs, or drunk, or even hung over.

In the case of cannabis, we have written many times—here and elsewhere—about the court-tested right of employers to fire their hapless employees for off-duty use. We have also wondered aloud: why do employers even care? As it stands, Oregon is one of many states that has grappled with these issues: in a well known 2010 case, Emerald Steel v. BOLI, the Oregon State Supreme Court held that even disabled, medical marijuana card holders are not protected from the cudgel of an employer’s zero-tolerance drug policy. Other state courts have ruled similarly.

With SB 301, the Oregon legislature is doing what its citizens should expect: it is considering the effects of state-legal cannabis on peripheral laws, while looking after the civil rights of its citizens. We hope SB 301 passes in something like its present form, and we expect similar changes in other jurisdictions in the coming months and years. If an employee performs her job safely and well, off-duty cannabis use is irrelevant.

 

 

 

 

Oregon Cannabis researchLast week, our client, Newcleus Nurseries, made headlines with the launch of the Oregon HUB, alongside Phylos Bioscience, an agricultural genomics firm focused on cannabis. The HUB is billed as “a cutting edge research, development, and innovation campus.” It seeks to follow the path of Oregon’s disruptive wine industry, which brought quantitative analysis to an artisan approach. We are pleased to be a part of the HUB endeavor: due to federal policies related to cannabis, there is a severe shortage of scientific research on the plant. If that is going to change, private actors must step in.

Today, nearly all federally sponsored cannabis research is conducted by the National Institute on Drug Abuse (NIDA), under a mandate from the Drug Enforcement Administration (DEA). If you are disappointed that a research institute named for drug “abuse” is leading the charge on cannabis, and that all research is overseen by a law enforcement agency (the DEA, no less), we are too. Sadly, it is also easier for researchers to gain federal permission to study heroin and other Schedule I drugs found in the federal Controlled Substances Act, than to study cannabis. That remains true despite a slight softening in DEA policy last year.

Interestingly, the marijuana studied by NIDA is grown at the University of Mississippi, which historically has produced about 40 pounds a year. NIDA maintains a monopoly over that marijuana, and routinely refuses to supply it to researchers who have obtained all other necessary federal permits. (Those permits in turn come from other agencies with no apparent game plan or incentive to assist on this issue.) The more one explores this, the stranger it gets: as of 2011, NIDA was distributing marijuana (joints) to exactly four people for personal use.

Needless to say, the federal system for cannabis research remains an embarrassment. Even if the federal government were freely granting access to third-party researchers with respect to the NIDA weed (which it most emphatically does not), that crop likely represents a limited perspective on the plant. Because of hybridization and other factors, today a virtually limitless selection of cannabis genotypes and phenotypes exist. Scientists should have the ability to canvass them freely.

It has been observed that expanding research should be promoted by cannabis advocates, prohibitionists and everyone in between. Advocates should welcome the opportunity for scientific inquiry to validate their position that the plant has medicinally valuable effects, or is benign; while prohibitionists should seek validation of their view that pot is a gateway drug, or has no medical value. Ultimately, if one does not ascribe ulterior motive, it is difficult to understand the federal government’s mulish resistance to research.

Given the lay of the land, it is up to states and private actors to take the lead on cannabis research. The opening of the HUB campus in Oregon is one promising development, as is proposed Oregon House Bill 2197, which directs the Oregon Liquor Control Commission “to enter into an agreement with a nongovernmental entity that conducts or funds research on cannabis and cannabis-derived products.” Given all of the roadblocks at the federal level, we applaud the handful of states and private actors who have taken the lead on cannabis research — just as they have in all other aspects of ending prohibition.

Oregon Cannabis lawsThe 2017 Oregon legislative session begins two weeks from tomorrow, on Wednesday, February 1. Already, there are many proposed bills, measures and resolutions posted on the legislature’s website, ranging from marquee bills to tackle the state budget shortfall and its gun registry loopholes, to resolutions naming an official state horse (the Kiger Mustang) and a dog (the Border Collie). For our faithful readers, there is also a generous helping of cannabis bills. We count 28 of them.

Back in October, we wrote that issues surrounding public consumption, like cannabis cafés and special event (temporary) licenses, would be up for discussion. As shown below, that has proven to be true. We have also written time and again (and again and again) about the need to merge Oregon’s medical and recreational marijuana programs. That appears to be up for serious consideration as well. Finally, we have written about the state’s burgeoning industrial hemp program, which is also addressed.

Below is a compilation of the 28 introduced cannabis bills, sourced from the Oregon legislature’s website. Each bill is linked to its summary page, and you can click through to the text of any proposal of interest. When reading a bill, it’s important to understand that any text in bold letters would be new, while language in [italics and brackets] would be removed from existing law. It’s also important to note that each proposed bill has a specific enactment date: some are “emergency” laws, effective on passage, while others would take effect at a future date. Finally, some of these bills would sunset after a certain period; others are proffered as evergreen.

As in the 2016 short session, many of the bills listed below will fall by the wayside as the senate and house convene and begin to knock heads. Others will be revised, consolidated or otherwise modified, but it is altogether certain that we will see some changes in Oregon cannabis law this session.

Draft Senate Bills

SB 56. Authorizes Oregon Liquor Control Commission to require cannabis-related licensees, certificate holders and applicants for licenses and certificates to submit information related to persons who hold financial interest in business operating or to be operated under license or certificate.

SB 108. Modifies certain definitions for purposes of regulating cannabis. Imposes tax on retail sale of marijuana seeds. Conforms terms throughout statutes governing regulation of cannabis.

SB 130. Waives fees for obtaining a medical marijuana card for veterans who have total disability rating of at least 50 percent as result of injury or illness incurred or aggravated during active military service, and who received discharge or release under other than dishonorable conditions.

SB 300. Establishes Oregon Cannabis Commission to fulfill duties, functions and powers relating to medical use of marijuana. Directs Oregon Health Authority to transfer duties, functions and powers relating to Oregon Medical Marijuana Act to commission. Makes commission operative January 1, 2018.

SB 302. Removes provisions related to marijuana offenses from Uniform Controlled Substances Act. Moves crimes, penalties, defenses to crimes and procedural provisions in Uniform Controlled Substances Act that apply to marijuana offenses to Control and Regulation of Marijuana Act. Adjusts penalties for certain crimes. Makes corresponding changes to statutes referencing controlled substances to clarify applicability to cannabis and cannabis-derived products.

SB 303. Amends, clarifies and creates consistency in statutes setting forth prohibitions and procedures related to minors possessing, purchasing, attempting to purchase or acquiring alcoholic beverages or marijuana items.

SB 304. For purposes of laws regulating cannabis-related businesses, standardizes language with respect to issuing, renewing, suspending, revoking or refusing to issue or renew licenses.

SB 305. Clarifies law requiring notice to Oregon Liquor Control Commission when person licensed by commission to engage in cannabis business is convicted of violation of state law or local ordinance of which possession, delivery or manufacture of marijuana item is element.

SB 306. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor Control Commission.

SB 307. Provides for regulation by Oregon Liquor Control Commission of consumption and sale of marijuana items at temporary events, including licensure of premises on which temporary events are held. Provides for regulation by commission of consumption of marijuana items at cannabis lounges, including licensure of premises where cannabis lounges are located. Prohibits licensing temporary events or cannabis lounges in cities or counties that have not adopted ordinances allowing for the consumption of marijuana items at temporary events or cannabis lounges. Excepts from prohibitions on public use, including restrictions set forth in Oregon Indoor Clean Air Act, consumption of marijuana items in designated areas of premises for which temporary event or cannabis lounge license has been issued. Applies current law regulating licensed marijuana producers, processors, wholesalers and retailers to new types of licensees. Makes certain exceptions.

SB 308. Establishes Task Force on Social Consumption of Cannabis.

SB 319. Authorizes local governments to allow medical marijuana dispensaries and marijuana retailers licensed by Oregon Liquor Control Commission to be located within certain distance [500 feet] of schools.

SB 342. Clarifies total number of mature marijuana plants and immature marijuana plants and total amount of usable marijuana, medical cannabinoid products, cannabinoid concentrates and cannabinoid extracts that patients and caregivers registered under Oregon Medical Marijuana Act may possess.

SB 570. Creates crime of intentionally administering marijuana item to body of person who is under 18 years of age. Punishes by maximum of 20 years’ imprisonment, $375,000 fine, or both. Creates crime of knowingly administering marijuana item to body of person who is under 18 years of age. Punishes by maximum of 1 year’s imprisonment, $6,250 fine, or both.

Draft House Bills

HB 2151. Allows property tax exemption for food processing machinery and equipment newly acquired by persons engaged in business of producing cannabinoid edibles, alcoholic beverages and alcoholic liquors.

HB 2197. Directs Oregon Liquor Control Commission to enter into agreement with nongovernmental entity that conducts or funds research on cannabis and cannabis-derived products. Specifies terms of agreement. Requires public dissemination of data, information, analysis and findings procured pursuant to research.

HB 2198. Changes name of Oregon Liquor Control Commission to Oregon Liquor and Cannabis Commission. Changes composition of Oregon Liquor and Cannabis Commission by adding commissioners from cannabis retail industry. Specifies that Oregon Health Authority may not register marijuana grow sites, marijuana processing sites and medical marijuana dispensaries. Creates within authority, for purposes of administering Oregon Medical Marijuana Act, Medical Use of Cannabis Board. Becomes operative June 30, 2018. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor Control Commission. Makes other technical changes to laws regulating cannabis. Creates alternate registry system administered by State Department of Agriculture for growers that produce marijuana for registry identification cardholders. Directs Oregon Liquor and Cannabis Commission to coordinate with department for purpose of regulating marijuana producers.

HB 2199. Eliminates provision indicating that cannabis-related business licenses may be for term other than one year. Qualifies provision providing that cannabis-related business license expires upon death of licensee.

HB 2200. Changes name of Oregon Liquor Control Commission to Oregon Liquor and Cannabis Commission. Changes composition of Oregon Liquor and Cannabis Commission by adding commissioners from cannabis retail industry. Directs commission to coordinate with State Department of Agriculture for purpose of regulating marijuana producers. Makes other technical changes to laws regulating cannabis. Specifies that Oregon Health Authority may not register marijuana grow sites, marijuana processing sites and medical marijuana dispensaries. Repeals provisions regulating marijuana grow sites, marijuana processing sites and medical marijuana dispensaries on June 30, 2018. Updates and creates provisions providing for licensing of marijuana grow sites, marijuana processing sites and medical marijuana dispensaries by Oregon Liquor and Cannabis Commission.

HB 2201. Corrects and conforms definitions for “cannabinoid concentrate” and “cannabinoid extract” in laws regulating cannabis.

HB 2202. Modifies statute under which lien may be imposed against building or premises used to illegally produce, process, sell or use marijuana items.

HB 2203. Changes distribution of moneys collected by Department of Revenue as tax imposed on retail sale of marijuana items.

HB 2204. Changes statutory limitation on local government’s authority to impose local tax or fee on retail sale of marijuana items. Specifies that if electors of city or county approve ordinance imposing tax or fee, governing body of city or county may amend ordinance, without referring amendment to electors, to adjust rate of tax or fee.

HB 2205. Directs State Department of Agriculture to solicit proposals from third party vendors to create for producers of cannabis efficiency standards for energy and water consumption and certification protocols for meeting those standards.

HB 2371. Specifies that, for purposes of statutes regulating seeds, agricultural hemp seed is flower seed. Directs Director of College of Agriculture and dean of College of Agricultural Sciences of Oregon State University to establish program for labeling and certification of agricultural hemp seed.

HB 2372. Establishes Oregon Industrial Hemp Commission.

HB 2556. Restricts sale and delivery of marijuana paraphernalia. Creates violation for unlawful sale or delivery of marijuana paraphernalia. Punishes by maximum of $2,000 fine.

Altogether, the index above seems to support the sentiment that Oregon is committed to getting it right with cannabis. We will continue to offer updates as events unfold. In the meantime, please let us know if you have comments on any of the specific bills listed above, or on the Oregon legislature’s approach to cannabis this session.

Cannabis lawOn Tuesday, we wrote that Jeff Sessions’ confirmation hearing had begun, for the post of U.S. Attorney General. In that piece, we expressed our hope that one of the committee members would “drill down from civil rights to marijuana legalization, and specifically, to enforcement of the Federal Controlled Substances Act.” The hearing concluded yesterday and no one did exactly that. No one turned the screws.

Still, Sessions fielded questions from a few different Senators related to marijuana and the Controlled Substances Act (CSA). Below is a close reading on Sessions’ pot-related testimony, beginning with the opening question, when Senator Patrick Leahy (D-VT) asked if Sessions would use federal resources to prosecute sick people using marijuana in accordance with state law. Sessions responded: “I won’t commit to never enforcing federal law, Senator Leahy, but absolutely it is a problem of resources for the federal government….”

This comment is interesting in a few respects. First, and unfortunately, Sessions keeps all options on the table as to CSA enforcement. As we have mentioned, that could mean suing states to block implementation of state marijuana programs, or, more narrowly, wielding the CSA’s asset forfeiture provisions against specific cannabis businesses and related parties. That probably sounds ominous, but two years ago, current Attorney General Loretta Lynch said this (in response to a question by Sessions himself, at her own confirmation hearing): “I can tell you that not only do I not support the legalization of marijuana, it is not the position of the Department of Justice currently to support the legalization. Nor would it be the position should I become confirmed as attorney general.”

We all know that states have largely proceeded with impunity on cannabis during Lynch’s tenure, even though the country had far less state-sanctioned pot activity than it does today. Sessions’ reservation about “never enforc[ing] federal law” seems benign by comparison. Regarding the second part of Sessions’ quote, and the “problem of resources for the federal government,” he concedes a key point: even if it were the Trump administration’s number one goal to eradicate state level marijuana, there are likely too many people involved and too much money to revert to the past.

In the hearing on Tuesday, Sessions continued by discussing the Cole memo and the factors considered by the current administration regarding prosecution of state-level marijuana programs:

The Department of Justice under Lynch and Holder set forth some policies that they thought were appropriate to define what cases should be prosecuted in states that have legalized, at least in some fashion marijuana, some parts of marijuana…. But, fundamentally the criticism I think was legitimate is that [the policies] may not have been followed. Using good judgment about how to handle these cases will be a responsibility of mine. I know it won’t be an easy decision, but I will try to do my duty in a fair and just way.

Again, Sessions leaves open the possibility of enforcing federal cannabis prohibition. His talk of “using good judgment about how to handle these cases” is a euphemism for using prosecutorial discretion, something he misleadingly claimed he didn’t have in a subsequent response to Sen. Mike Lee (R-UT):

One obvious concern is the United States Congress has made the possession [of marijuana] in every state and distribution an illegal act. If that’s something that’s not desired any longer, Congress should pass a law to change the rule. It is not so much the attorney general’s job to decide what laws to enforce. We should do our job as effectively as we’re able.

Here Sessions appears to have forgotten his earlier reference to prosecutorial discretion. His disingenuous argument that “my hands would be tied” by Congress, compelling enforcement action, should not be taken seriously – especially because Congress has sheltered state level medical programs for the past few years, and is likely to do so again. Sessions’ point, however, that Congress should pass a law if it permanently wants to prohibit federal enforcement actions, is probably a fair one, and only reinforces the need for us to secure federal legalization of cannabis.

In all, the hearing could have been better, could have been worse. Sessions was far less retrograde in his statements toward marijuana than he has been in the past. He played his cards closely, as nominees are wont to do, and — like it or not — he is going to be confirmed. This means cannabis operators will simply have to wait and see, which has been the name of the game for a while now.

 

 

 

Cannabis lawyerThe confirmation hearing for Alabama Sen. Jeff Sessions, Trump’s nominee to serve as the U.S. Attorney General, begins this morning at 9:30 a.m. ET. You can view the live feed here. Sessions is opposed by civil rights groups and championed by law enforcement, which, together, signal poorly for marijuana. On the specific issue of federal marijuana prohibition, we wrote on his nomination day that the Senator has been hostile to marijuana for a long time.

If each member of the Senate Judiciary Committee votes with his or her party, Sessions will pass by a vote of 11 to 9. That seems likely, as there have been no reported signs that any Republicans will defect, either in the committee or on the Senate floor. Still, Democrats have the opportunity to ask some tough questions on a variety of topics. It is our sincere hope that somebody takes the opportunity to drill down from civil rights to marijuana legalization, and specifically, to enforcement of the Federal Controlled Substances Act (CSA).

As it stands, a hostile, Sessions-led Department of Justice (DOJ) could attempt to kneecap marijuana policy reform nationwide. Its options would include everything from suing states to block implementation of marijuana programs, to leveraging the CSA’s asset forfeiture provisions against pot businesses and related parties. These actions would likely be massively unpopular, but they would be well within the power of a hostile administration – even one that ostensibly supports limited government and states’ rights.

Fortunately, there is a bipartisan majority in each chamber of Congress that appears interested in seeing states, and not federal law enforcement, lead on the issue of cannabis legalization. If Congress continues to prohibit the DOJ from chasing state medical marijuana actors, it may be hard for Sessions to keep the jails as full as he would like. There is also a possibility that as much as Sessions dislikes pot, he may have other priorities, at least to start.

As of today, there is probably more uncertainty than at any point in the past few years with respect to enforcement of federal prohibition. Anyone interested in federal marijuana policy would be well served to tune into today’s hearings, and to closely monitor the hearings of other Trump nominees like Georgia Rep. Tom Price, who has been nominated to serve as Secretary for Health and Human Services (and also has a very poor record on pot). Mr. Price is set for hearing next week.

Stay tuned.

Cannabis mortgages and bank loansMy law firm represents a large number of cannabis operators in Oregon, Washington and California. Some of these operators own the land they trade on; others simply lease. Whenever we are lucky enough to meet the client before the onset of cannabis activity, our first question is often whether the target property is mortgaged, or if it is owned free and clear. If the property is mortgaged, we ask “by whom?” If the answer is “a bank,” we tend to say, “let’s talk about that for a minute.”

Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct “illegal activity.” Lenders won’t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible. If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running a risk of foreclosure, to say nothing of allegations of fraud.

When a bank discovers that cannabis is being grown, processed, held or sold on its mortgaged property, it has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owing on the spot. In practice, if a loan is in good standing it won’t always get called; but if a bank learns that cannabis is being traded on the property, a real possibility exists that the mortgage will get called. And refinancing with the lender will be all but impossible.

Although banks typically do not troll their commercial loans looking for pot merchants, many loans require borrowers to inform lenders about tenants and new leases on the property. When a bank decides to call a loan due to cannabis activity, the bank may give the mortgagor a limited window of time to cure the defect (stop the cannabis activities), or to find alternative lending. Given the realities of business investment and operations, the strictures of leases and the high cost of private lending, this can cause tremendous headaches.

There is no work-around for the “illegal activities” issue in institutional lending, but that hasn’t stopped some folks from trying. Among other creative ideas, we recently saw one owner give a second, unrecorded mortgage to a cannabis operator as “insurance” against the first loan getting called. Not only would this approach fail to prevent the first mortgage from getting called, it would typically allow the first mortgagee to declare the balance of its loan payable immediately, as “due on sale.” Such an action could wipe out the junior, unrecorded mortgage interest in any subsequent foreclosure.

Finding a cannabis property is not always easy, but it’s important to understand how the property is financed (or otherwise encumbered) before you sign a lease or begin operations. If you intend to purchase a cannabis property and cannot pay cash, seller financing is a popular option we have written about elsewhere. Otherwise, it’s hard money or trying to fool the bank. Neither of those is a good business plan.

Oregon Cannabis lawsThis week marks the end of the early start program for medical marijuana dispensaries licensed by the Oregon Health Authority (OHA). As of Sunday, January 1, OHA licensed dispensaries will only be allowed to sell marijuana to adults who hold a valid medical marijuana card. These dispensaries will no longer be allowed to sell marijuana at retail to non-medical cardholders, as most had been doing since October 1, 2015. Going forward, only Oregon Liquor Control Commission (OLCC) licensed dispensaries can sell pot at retail to non-medical cardholders. And that is where the money is.

For the past few months, our Oregon cannabis lawyers have prodded, poked and cajoled many of our clients to submit their OLCC paperwork to ensure a timely and successful transition into the adult use market. In our experience, OLCC has prioritized retail applicants, and for anyone without local hang-ups the transition has been fairly smooth. Still, the OLCC reports that just 104 of 494 retail applicants have been licensed to date. (The numbers for processors are even worse, with just 23 of 208 applicants approved.)

If you are an OLCC licensed retailer, you will be sitting pretty on January 1, assuming you can find product to sell while everyone else scrambles toward licensure. The situation is less than ideal for consumers, who will no longer have access to many outlets, and also less than ideal for the State of Oregon, which could see a hiccup in sales tax revenues. We have written that the rollout of state level cannabis programs is an uneven course, and hard deadlines tend to showcase that observation.

Note that although the January 1 deadline may seem to decouple Oregon’s medical and adult use marijuana programs, the reality is more nuanced. OLCC licensed entities are allowed to opt in to medical marijuana activity, and almost all of them do – whether through production, processing or retailing. In the retail context, this means that OLCC licensees will be allowed to sell marijuana to medical marijuana cardholders along with anyone else (but tax-free), subject to tracking and reporting requirements. A year from now, we expect very few OHA dispensaries will be standing.

The Oregon early sales program was a good idea, and we believe it achieved its goal of diminishing black market sales. It is our hope that the testing bottleneck and a lack of licensed OLCC operators will not reverse that trend. In any case, starting January 1, Oregon dispensaries without an OLCC license will face a $500 fine, per violation, for selling to retail customers. All of this should make for an interesting start to 2017.

 

Oregon CannabisLast week saw a triad of notable marijuana law and policy developments in Oregon, and our Portland office has been busy fielding questions from clients on a few of these changes. Rather than devote a full blog post to any one item, we have decided to present a round-up of last week’s key developments around the state. Enjoy.

New Pot Testing Rules

On Wednesday, December 14, the Oregon Health Authority released yet another set of temporary testing rules with the intention of “relieving some of the testing burden on producers and processors.” These rules improve on the temporary rules issued on December 2, which were designed to do the very same thing. We wrote that the December 2 rules were still pretty tough, so we were glad to see some progress.

The new rules took effect on Thursday, December 15, and still apply to both medical and retail marijuana items. Batch and sample size requirements are now friendlier to licensees, and the reporting deadlines for labs have been kicked out to January 31, 2017. For an overview of these developments and more, the OHA published a summary bulletin here. If you are an Oregon cannabis producer, processor or lab, we recommend you acquaint yourself yet again with the revised testing regime.

Portland Pot Delivery?

We have never had nice things to say about the City of Portland’s marijuana regulatory program, and our clients’ experiences with its Office of Neighborhood Involvement have been uniformly dismal. When a detailed report surfaced last week indicating that the program is driving people out of business, we were not surprised. That said, if you want to run a delivery service in Portland next year, you probably can!

Marijuana delivery is allowed under state rules with a retail license, although Portland had forbidden it. Last week, the City unanimously approved amendments to its existing regulations to allow for delivery under a “marijuana retail courier” license. Portland has also extended the hours of permissible operation for marijuana business, and now seeks to license microbusiness entrepreneurs (unfortunately). We expect these amendments to be formally adopted by the City Council this week, and hope the City shows some much needed improvement.

Banks Get a Boost

Given the state of federal law, banking is a seemingly intractable issue in the cannabis industry. The Oregon legislature, however, has done everything it can to encourage local banks and credit unions to service cannabis merchants. Last week, a new public poll showed 87% of Oregonians would approve of their bank working in cannabis, a significantly higher approval number than for big box stores (75%), oil (59%) or tobacco companies (52%). This poll should alleviate any remaining “optics” worries Oregon banks might have about working with local cannabis operators. And with Oregon sales tax receipts well ahead of projections as of November 30, we can only hope that Washington D.C. will begin to yield to public opinion on this crucial issue as well.