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.

Oregon Cannabis SeminarOn June 9, my Portland colleague Will Patterson and I will present at an all-day continuing legal education (CLE) event called The Business of Marijuana in Oregon. This will be my third year presenting at the event and my second year as chair. The roster of speakers lined up for this CLE is better than any year to date, and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past few years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program has begun to hit its stride, with over 2,500 applicants now on file with the state. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has largely stabilized, we have begun to see a second wave of entrepreneurs move in on the local industry. Many of these entrepreneurs bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, with the increase in market entrants, we expect to see a fair amount of market consolidation throughout the Oregon cannabis industry.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on June 9, in order to best serve the Oregon cannabis industry. These concepts include state administrative governance and pending legislation, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry.

We hope you will join us on June 9 for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

TIPSA couple of years ago, I wrote on this blog that we are never not litigating cannabis disputes. As a direct result, we have written dozens of articles on the subject. This year and next, as the adult use market expands into key states like California, the sheer number of cannabis businesses coming online will result in a further expansion of contested matters. We wish that were not the case, but we have been staffing up our Oregon, Washington and California office with litigators, partly in response to growing demand for cannabis dispute resolution services.

Some cannabis business disputes are short and sweet; others protracted and difficult. Common sense would dictate, and we have always found, that the more efficient and disciplined a litigant is, the better the result, from both a cost and results perspective. The most efficient litigants are those who work closely with counsel to take responsibility for their case, set a goal at the outset, and keep that goal in mind throughout the process.

Here are five tips for working with an attorney to resolve a cannabis business dispute.

Hire the right attorneyAs much as we hate to say it, it is easy to hire poorly in the context of cannabis disputes, for a couple of reasons. First, many lawyers who work in this industry come from a criminal law background and rode the wave into legalization. Much like a business attorney would struggle in drug court, attorneys who lack business law experience are ill equipped to handle corporate cannabis beefs. Second, many good business litigators are still unwilling to service the industry, given the status of federal law. And third, many business litigation firms that do wish to work with the industry are new to cannabis law and its steep learning curve. Most cannabis disputes have significant underpinnings of state and local administrative law and policy. These rules run into the several hundreds of pages, are constantly evolving, and generally are supplemented by unwritten agency policies. Even the brightest non-industry lawyers incur significant time and client expense just getting up to speed.

Be Organized. The most critical client-side component to any litigation is organization. When you hire a lawyer, assemble any and all relevant materials in one place (contracts, emails, voicemails, texts, etc.), and transmit these materials in aggregate to the attorney. Supplement them, if you can, by a chronology and/or written summary of your case. This will save the attorney significant time and energy in assembling the facts of your dispute, and will result in less back-and-forth from the attorney attempting to elicit information he or she may need for your case.

Put all of your cards on the table. Don’t shield any information from your attorney that you find embarrassing, or that you think is less compelling than other facts, or that you feel may damage your case. You should feel incentivized to pass along anything relevant, or even possibly relevant, for four primary reasons: (1) everything you pass along will be protected by the attorney-client privilege; (2) anything damaging will almost certainly come out at depositions or elsewhere in the discovery process, anyway, and is best dealt with beforehand; (3) when an attorney lines up the facts of your case with the legal elements of potential claims, minor facts, which you may not find compelling, tend to come out of the woodwork and play a significant role; and (4) trust us, we have seen worse.

Step back. Throughout the arc of any litigation, there will be a volley of correspondence, filings and other developments between the parties – shots across the bow. When a development occurs, you may feel a very strong urge to immediately pick up the phone and offer an extended hot take on the latest item. Most of the time, these conversations are less productive than if both litigant and attorney allow the new information to percolate in advance of a structured conversation. The one exception here is any development that truly requires immediate action, and those developments are rarer than many people think. We realize that stepping back is easier said than done, but taking a measured approach throughout the arc of a contest preserves energy and controls costs. Think of litigation as a marathon, not a sprint.

Be Realistic. As attorneys, we like to think we excel at getting efficient, advantageous results for our clients. And we generally do, within the realm of the possible. For example, we may be able to recover your costs or attorney fees in litigation, but only if you have a contractual or statutory basis for doing so. Similarly, we may be able to resolve a dispute with a strong letter or a well-written complaint, but only if the other side is acting rationally. Understanding the strengths and weaknesses of your position will lead to a realistic appreciation of the gamut of possible outcomes. At that point, you and your lawyer can maximize every tool at your disposal to pursue, and attain, the best possible result.

 

Marijuana lawIf you hadn’t noticed, the federal government was set to shut down on Friday due to lack of funding. Thankfully, our House and Senate representatives reached a tentative deal yesterday morning to avoid that. Better still, the budget deal extends the Rohrbacher-Farr Amendment provisions, which prohibit the U.S. Department of Justice from spending money to interfere with implementation of state medical marijuana laws. The legislation should pass later this week.

The new medical cannabis rider will likely be referred to as the Rohrbacher-Blumenauer amendment, or something similar, as Earl Blumenauer (D.-OR) has replaced outgoing house member Sam Farr as a co-sponsor of the rider. Here is the rider’s current proposed language:

SEC. 537. None of the funds made available in this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

By our count, that’s 44 states, plus D.C., Guam and Puerto Rico. For some reason, at least two states with new medical cannabis laws are left out. Those states include North Dakota, where voters approved a medical marijuana ballot initiative in November, and Indiana, whose governor signed a restrictive CBD medical cannabis bill into law late last week. Hopefully these omissions were just an oversight and North Dakota and Indiana make the final cut.

The FY2017 budget deal also extends protection of state industrial hemp programs from federal interference, and prevents Washington, D.C. from spending its own money to tax and regulate marijuana sales. An overview prepared by House Democratic Appropriations Committee members noted that the bill does not, however, include language protecting banks from penalties for working with state-legal marijuana businesses, which some in Congress had pushed for.

Like everything else in the spending bill, Section 537 is not a permanent solution of any sort – it merely kicks the can down the road until September 30, when FY2017 ends. Section 537 also is not the long-term fix medical (and adult use) cannabis businesses need, especially in the era of Jeff Sessions and a brutal executive branch.

Looking ahead, we do know from conversations with Rep. Blumenauer’s office that FY2018 legislation being drafted by lawmakers includes extension of the helpful Section 537 language. We also know that most of President Trump’s large proposed cuts take place in the FY2018 budget, and that his cuts do not include Rohrbacher-Blumenauer– at least for now.

But this is where it gets tricky. If medical marijuana safeguards are not present in the FY2018 House proposal, supporters will have to push for amendment on the House floor or in the Senate Appropriations Committee. That’s a tough slog, because House leadership has begun to restrict the scope of policy riders allowed to come to the floor. Last summer, for example, proposed amendments on banking services for marijuana businesses, and on Washington, D.C.’s ability to spend money regulating cannabis, were blocked from floor consideration altogether.

Note that over the past few years, Rohrbacher-Farr has withstood DOJ challenges and garnered a significant uptick in support. In 2014, the measure was approved in the House by a relatively narrow vote of 219-189. In 2015, the approval margin grew to 242-186. Since the last House floor vote, several more states have enacted medical or adult use cannabis laws, and a number of prohibitionists who opposed those measures have been replaced with freshman supporters.

Today, cannabis reformers are confident that if they can get an FY2018 amendment to a House vote, it will easily pass again. It also appears likely that advocates have the votes to pass a broader amendment protecting all state marijuana laws from federal interference — including those allowing recreational use. A measure along those lines came just nine votes short of passing on the House floor in 2015.

Why Congress won’t just change the law, rather than restricting its enforcement, is a question for another day. For now, though, medical marijuana businesses can breathe a bit more easily, at least until September 30.

Oregon cannabis attorneys lawyersWe often work with Oregon cannabis companies that undergo ownership changes either during the licensing process, or shortly after license issuance. In some cases, this happens by design: the company is structured to take on investors, and the offering process overlaps with the state license application. In other cases, an LLC member or a corporate shareholder may depart due to a buyout or disagreement. Whatever the situation, ownership transitions require careful consideration of the state of the license, or pending application.

As with all states that license pot businesses, Oregon has rules around required disclosures before the state will issue a license. The look-see process in Oregon is similar to that for liquor licensing — and both licenses are given by the Oregon Liquor Control Commission (OLCC). In short, Oregon wants to ensure: (1) it is not issuing cannabis licenses to undesirable parties; (2) it can follow the money a cannabis business will generate (or at least try to); and (3) it has satisfied the feds that the state is running a tight ship. The specific disclosure criteria apply not only to license issuance, but to changes, as well.

Compared to other states, Oregon is straightforward when it comes to changing the ownership structure of a cannabis licensee– at least in the minds of us attorneys, and at least under the most recently adopted version of the Oregon rules. Here are two key rules to note:

  • OAR 845-025-1160(4) provides that “[a] licensee that proposes to change its corporate structure, ownership structure or change who has a financial interest in the business must submit a form prescribed by the Commission… prior to making such a change.”
  • OAR 845-025-1160(4)(d) provides that “[i]f a licensee has a change in ownership that is 51% or greater, a new application must be submitted in accordance with OAR 845-025-1030.

Let’s take them one at a time. Read literally, OAR 845-025-1160(4) requires any licensed cannabis business to notify the OLCC before making an ownership change. This would include a business bringing on a minority investor, given the broad definition of “financial interest” elsewhere under the rules. That said, OLCC policy is not to read this rule as written in every case. Instead, if a licensed cannabis business wishes to add a party who does not rise to the level of an “applicant,” it may do so prior to alerting the OLCC. For guidance on who must be listed as an “applicant,” start here.

When the rules around “financial interests,” “applicants” and changes in ownership were revised again in January, we had several Oregon cannabis clients undergoing structural changes. Our lawyers worked with the OLCC to gain an understanding of the new rules and policies in the context of these changes, but we cannot say whether the agency’s policies will remain flexible on the timing of disclosure of non-applicant ownership changes. That is the story today, however, and we are pleased that the OLCC has taken this pragmatic approach.

With respect to OAR 845-025-1160(4)(d) and ownership shake-ups of 51% or more, there is no wiggle room in the “new application” criterion. We have written before that you cannot sell an Oregon license: instead, the OLCC works with the new applicant and the outgoing licensee concurrently. Assuming the incoming party is eligible for licensure, the OLCC arranges with the departing licensee to surrender its papers on the day the new license issues.

Ultimately, we do not recommend that an applicant or licensee make changes of any type to its ownership structure without first alerting the OLCC and we strongly recommend our clients run these changes by us first as well. This ensures the proper steps are taken so as to avoid violating some internal company agreement or governing law and it also ensures that the company paperwork is properly executed, whether it’s a buy-sell agreement, admission agreement, or other species of contract.

Finally, we recommend that thoughtful consideration be given to business structure and composition before applying for licensure. It may be tempting to acquire your cannabis business license as quickly as possible and then sort out your ownership issues on the back end, but this approach creates headaches that may be difficult or even impossible to cure. It’s good to understand Oregon’s change-in-ownership rules, but it’s better not to have to use them.

Buying and selling cannabis businesses We like to blog about buying and selling pot businesses. It’s a rich topic and the transactions can be memorable for both entrepreneurs and attorneys. In our recent posts, we have canvassed subjects from diligence items for buyers to checklist items for sellers. We also have covered important transactional topics such as how much your cannabis business may be worth and what you can actually sell. Today’s entry covers a structural part of many business sale agreements: the earn-out.

An earn-out is a contractual provision that entitles a seller to additional compensation in the future, if the business achieves stated financial goals. Earn-outs are used when the asking price for a business is more than a buyer is willing or able to pay up front. A well drawn earn-out can bridge the valuation gap between an optimistic seller (pretty much all of them) and a skeptical, cash-strapped, buyer (just some of them). It can also provide a buyer with additional financing. In an industry where hard money is the rule and bank loans are not available, that can be compelling.

The primary objective in an earn-out is to allow the buyer to make payments over time. The earn-out may also require the seller to step into a consulting role post-sale, and actually “earn” the post-transaction payments. In those cases, it is important to clearly outline the parties’ expectations. This scenario makes for a less clean break, but sometimes a seller has invaluable expertise and experience—particularly in a local marijuana market—that can be passed along with the sale.

In addition to seller support, there are many factors to consider in negotiating an earn-out agreement. Five important ones include: (1) the earn-out period; (2) payment structure; (3) payment schedule; (4) performance matrices; and (5) accounting standards. Earn-out payments may also be capped or uncapped, and the parties can stipulate that future events (like federal enforcement action, for example) will offset earn-out payments. Depending on the type and size of the deal, and the parties’ personalities, an earn-out can be simple or extremely complex.

If the goal is to keep things simple from both a payment and audit perspective, the parties will choose an easy-to-peg accounting and payment metric. For example, sellers often suggest an earn-out based on sales, because this line item is never disputed and the calculation is simple. A buyer, on the other hand, may push for an earn-out based on net income, as this metric accounts for all nuances of a business’ operations. A middle road would peg the earn-out at a multiple of EBITDA, usually over a certain number and in each relevant year. Ultimately, simpler calculations mean fewer disputes.

Given the nature of federal law, the earn-out metric for a pot business must also consider factors mainline businesses needn’t entertain. One of these is the oppressive effect of IRC 280E, the tax code provision that cuts into marijuana business profits. Another is licensing implications at play in the relevant state: readers of this blog know that states have strict rules on who can hold a financial interest in a pot business, and how that interest may be postured.

At the end of the day, many deals in the cannabis industry are structured to account for a lack of institutional financing. Like the marijuana sale-and-leaseback or the ubiquitous seller carry, an earn-out may be a way for a cash-light market entrant to gain a toehold in state-legal cannabis. We expect that earn-outs will remain an attractive option for the industry until things change at the federal level. Given the current shape of things, that could be a while.

Happy 4/20.

Oregon cannabis lawyersLast month, the Oregon State Police Drug Enforcement Section published a report titled “A Baseline Evaluation of Cannabis Enforcement Priorities in Oregon.” It’s a great read. The big takeaway, as reported by The Oregonian, is that Oregon remains a top source for black market pot— despite our legal cannabis programs. Those familiar with the industry have long known this fact, of course, and the problem has been exacerbated as of late for various reasons. These include: state and local regulatory hurdles, high start-up costs, and increased federal uncertainty.

We have been been writing about the unsanctioned Oregon market for quite some time. To be clear: there has always been a black market in Oregon, and will be for a while. There is also a dark gray market, an off-white market, and many shades between. As a general concept, the further that weed gets from the grower, the darker the market. This is especially true in poorly regulated systems like the Oregon Medical Marijuana Program.

Right now, Oregon probably grows four or five times the amount of cannabis that is consumed in-state. (It’s not that consumers aren’t trying; there’s just too much pot.) The Oregon State Police study estimates that just 30 percent of all pot transactions are state-approved. Much of the surplus weed goes from sea to shining sea, but especially to hubs like Illinois, Minnesota, New York, and Florida. Because Oregon weed is an excellent brand, demand is high nationwide.
The lion’s share of Oregon’s exported weed is grown in two southern counties: Jackson and Josephine. And much of that weed is straight-to-black market—e.g., a pound of local weed may sell for $1,000 here, and re-sell somewhere like Texas for $7,000. Other transactions may be grayer and comparatively benign—e.g., a pound of weed grown under the medical program may be sold to the cardholder’s friend, at friendly prices.
As with any commodity, the blacker the market gets, the higher the price for cannabis. This is because buyers compensate dealers for increased risk of arrest, the cost of turf, and so on. One day, when pot becomes legal nationwide, the black market will probably look similar to those for other controlled substances, like tobacco and booze. Today, a few people still buy loosies and moonshine, but most of us go to the store.

It will be a while before Idaho, Texas, and other miserable states change their laws, so Oregon attempts to moderate the black market in three primary ways: law enforcement, supply, and taxation. Oregon needs to improve its enforcement, and turkeys like Jeff Sessions point to this as evidence that the program must end altogether. This argument ignores the demand side, though, where federal prohibition has created an irrepressible national market for Oregon weed.

On supply, the state is doing better. The goal here is to have enough legal weed so that no Oregonian needs to go off-system. Oregon is close on that one, but issues with state-mandated testing and license approval have caused temporary shortages. Recently, we have seen a spike in client requests for requirements contracts that cover the sale of cannabis even before it is grown—at least in the OLCC system. This should even out by 2018.

As for taxation, the goal is to generate revenue but keep prices low. When prices drop and stay below the black market, the black market disappears. The last people to leave will be the heaviest cannabis users, who are generally most price-sensitive and accustomed to informality. When all of those folks are finally going to the store, the black market will be gone—at least for Oregon sales. When the national laws change, the black market will dissipate altogether.

Over the past few months, our clients who have weathered the storm and resisted the urge to retreat to black and grey markets–and thereby remained our clients–have reaped dividends. Demand for state-sanctioned weed is robust among Oregon consumers, and we expect prices to remain high throughout the supply chain for a while. The Oregon Sate Police report is a helpful snapshot of where the state of the market today. Where it goes next is the fun part.

Editor’s Note: A version of this story originally appeared in the Portland Mercury’s “Ask a Pot Lawyer” column, also by Vince Sliwoski.

Marijuana policy Oregon Washington CaliforniaYesterday, the governors of Oregon, Washington, Colorado and Alaska submitted a brief, plainspoken letter to two federal officials: Attorney General Jeff Sessions, and Treasury Secretary Steve Mnunchin. The letter requests that the Trump administration respect states’ rights, and engage with the governors “before embarking on any changes to regulatory and enforcement systems” related to state-legal marijuana. You can view the letter here.

Anyone following the story of weed in America knows that Jeff Sessions holds retrograde views on cannabis. Mnunchin has been more circumspect, stating only that FinCEN guidance on banking pot businesses is a “very important issue” and that he would “work with Congress and the President to… ensure that all individuals and businesses compete on a level playing field.” Unlike Sessions, Mnunchin has not shown his hand on cannabis policy to date.

The governors’ letter is not the first communication by any of these states with the new regime regarding cannabis. On February 15 Governor Jay Inslee of Washington wrote to Sessions requesting a meeting on the cannabis issue, which appears not to have been granted. The next week, Governor Kate Brown of Oregon attended a meeting with several other governors and President Trump, who purportedly wanted to give “more flexibility to the states”— at least in a general sense, and at least on that particular morning.

Other key players, like Washington Attorney General Bob Ferguson, have taken a less conversational approach, and promised to fight the feds on cannabis. (If you are wondering how that may pan out, see our analysis here and here.) This combative approach has been echoed by Oregon Attorney General Ellen Rosenblum, as well Oregon U.S. Senator Ron Wyden and Representative Earl Blumenauer, dependable cannabis advocates who have been busy charting a Path to Marijuana Reform as well.

So, which approach is best? Maybe all of them. It is clear that state governors, officials and representatives are not going to rest while the threat of federal enforcement looms. Private industry has also banded together, with lobbying groups like the New Federalism Fund, which consists of marquee industry players (including Canna Law Group clients), rising to the fore. The April 3 governors’ letter is only the latest in a series of salvos by states and the industry. Expect more to come.

Tribal CannabisOver the past couple of years, we have written about tribal cannabis and the efforts by various tribes in Oregon, Washington and elsewhere to roll out marijuana programs. Last week, at the Cannabis Law & Policy course I teach, we had the great pleasure of hosting Pi-Ta Pitt from the Confederated Tribes of Warm Springs here in Oregon. Mr. Pitt is the tribe’s Cannabis Program Coordinator, and he offered some valuable insights for tribes rolling out cannabis programs. Based on that discussion, here are some key takeaways for tribes.

  1. The Wilkinson Memo is still in effect, and confusing as ever.

Way back in October of 2014, the federal Department of Justice issued its “Policy Statement Regarding Marijuana Issues in Indian Policy.” Like the Cole Memo before it, the Wilkinson memo provides that eight enumerated federal priorities “will guide United States Attorneys’ marijuana enforcement efforts in Indian County,” including where “sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country.” It all comes back to prosecutorial discretion, and the current administration has yet to comment on the Wilkinson Memo specifically.

In the past few years, federal attorneys have watched warily as Warm Springs and other tribes have explored the cannabis space. While these attorneys have seemed tolerant, to an extent, of the tribal initiatives, the take on cannabis events on tribal lands seems to have touched a federal nerve. Because events are disfavored, tribes looking to legalize cannabis production and sale may wish to steer the focus away from festivities.

  1. Tribes subject to Public Law 280 have a tougher go.

Public Law 280 is a federal statute allowing states to “assume jurisdiction over reservation Indians.” The Act mandated a transfer of federal law enforcement authority within tribal nations to state governments in six states: California, Minnesota (except the Red Lake Nation), Nebraska, Oregon, except the Warm Springs Reservation), Wisconsin (except the Menominee Indian Reservation), and, upon its statehood, Alaska. Other states were allowed to elect similar transfers of power if the affected Indian tribes consented. Since 1953, Nevada, South Dakota, Washington, Florida, Idaho, Montana, North Dakota, Arizona, Iowa and Utah all have assumed some jurisdiction over crimes committed by tribal members on tribal lands.

Tribes not subject to Public Law 280 don’t have to worry about states attempting to shutter their cannabis programs. Although it may behoove those tribes to have good relationships with their neighboring states, local enforcement is not a possibility – even if the adjacent states are anti-cannabis. Tribes subject to Public Law 280, however, may face immediate local barriers, in the form of law enforcement.

  1. Conversations are key.

Even where Public Law 280 is not at play, it is critical for tribes to dialogue with the states, along with federal officials. The Warm Springs Tribe and the Suquamish Tribe, for example, each have entered into an inter-governmental compact with Washington and Oregon, respectively, regarding their cannabis efforts. This is critical for any distribution of pot off of the reservation, which is where the tribes stand to reap significant economic benefit, but also where states regulate cannabis commerce extensively.

Federal conversations may be even more important. Most tribes already are very familiar with local U.S. attorneys, but conversations around the topic of legalizing cannabis are unique. Any tribe considering a cannabis program would be wise to dialogue with the relevant U.S. attorneys, and to get a read on how that office may respond. To this point, U.S. attorneys may view a tribal program as more “legitimate” if the program is borne of a referendum taken within the tribe itself. And that’s yet another, local conversation.

  1. This could go any number of ways.

Twists and turns are inevitable during the design and implementation of a sovereign’s cannabis program. It happens with states; it happens with tribes. Like states, tribes need to maintain flexibility and build coalitions as they attempt to launch a pot venture. Tribes also need to be realistic about timelines and the roles of current collaborators. For example, what will the tribe’s current bank or credit union think of the effort? What about its other stakeholders?

In all, cannabis can be incredibly attractive to tribes as a revenue source and job creator – especially to those tribes on resource-poor land, and to tribes far from interstate highway corridors, which are unable to contemplate casinos or tourism. In all, cannabis may present a unique opportunity for certain tribes, given the right approach.

Marijuana leasing

Everyone who grows cannabis needs real estate. Some growers start with a small piece of land, but others require acreage to accomplish their goals. New growers, in particular, tend to over-reach on the land piece. As business operations proceed, and harvest dates are pushed back for any number of reasons, the grower may wish it had held back some cash for operations, rather than dropped so much on the land. That’s where the sale-and-leaseback comes in.

Leaseback deals are a time-honored way for companies to access capital. In short, a leaseback is just a financial transaction where an entity sells a piece of property and immediately becomes a tenant, leasing that property “back” for a significant term. The selling entity is often cash-strapped but wishes to continue in its line of business, and at its present locale. The seller therefore finds a buyer, and works with that buyer to negotiate a long-term sale and lease. On paper things look different; but on the ground, everything stays the same.

We have worked on a series of leasebacks in cannabis of late, and we expect more of these transactions going forward. The leaseback model is in many ways ideal for an industry where traditional financing is unavailable. For example, if a marijuana business has stretched its budget by buying real estate, making improvements, and preparing the land for its cannabis operations, that parcel may be sucking up cash. That said, it may also have real liquidation value. With limited options for fundraising, companies can look to the land.

Leasebacks are not only attractive to cash-strapped enterprises. We have handled leasebacks for producer clients that are profitable but wish to free up cash to start operations at a second location, with an eye toward increasing their market share. In jurisdictions like Oregon, where a single entity can hold multiple cannabis licenses, aggressive operators see the leaseback as a unique leverage option. In the eyes of these operators, freeing up cash for a second or third site is a crucial head start in a burgeoning industry.

We have also handled leasebacks for companies built for the sole purpose of entering these transactions. Formally, these companies may be structured as partnerships, LLCS, or even real estate investment trusts (REITs). Once a leaseback partner is identified, a typical approach is to structure the transaction as a sale and triple-net lease, which targets investor preferred returns upwards of ten percent based on those rents, and increasing property values. These companies prefer to invest in highly regulated states, like Oregon, Washington, Colorado and, hopefully soon, California.

We predict leasebacks will continue to be more prevalent for grow sites than for retail or other uses, because of the size and value of the properties at issue. We also predict that as industry competition intensifies, operators will increasingly turn to leasebacks as a way to move money from real estate holdings to core business– namely, growing and selling pot.

Government cannabis lawyersYesterday, the Washington Post ran an illuminating and sad little story on government marijuana, which is pot grown under the oversight of the National Institute on Drug Abuse (NIDA). The government marijuana photographed and featured in the story is a sample distributed to a researcher for use in ongoing clinical studies for treatment of military veterans suffering from PTSD. The marijuana in question looks a lot like green tea: it is blanched and dry, stems and leaves. It does not resemble cannabis.

We have written before about the embarrassment that is our federal system for cannabis research. When the Drug Enforcement Agency (DEA), which oversees NIDA, says things like “[r]esearch is the bedrock of science, and we… support and promote legitimate research regarding marijuana and its constituent parts,” you must forgive the industry for rolling its eyes. The DEA clearly has no interest in studying anything that resembles the plant anyone actually ingests.

In addition to the dismal aesthetics of the government weed (reported to also lack smell), the WaPo story reports that the strain at issue tested out at 8% THC, which is less than half the average concentration found in commercial grade marijuana. The government weed also tests high in common contaminants, like yeast and mold, which would mandate its destruction in states with cannabis consumer safety laws (like Oregon, Washington or Colorado). In all respects, it would be difficult to mistake government cannabis for actual cannabis.

According to researchers, the quality of the NIDA cannabis makes highly controlled medical experiments next to impossible. One example of such an experiment includes the very experiment for which the cannabis was provided. After wending through a labyrinthian 7.5 year approval process and amassing a budget of $2,156,000 (based on a grant from the State of Colorado), it seems like a shameful waste of time and resources to test this “cannabis” on military veterans suffering from PTSD. If the government cannot grow real marijuana, it should at least know where to acquire it.

We have written before that given the lay of the land, it is up to states and private actors to take the lead on cannabis research – just as they have in all other aspects of ending prohibition. Constituent parts of the cannabis plant have real medical value, but they must be investigated properly to explore these promising features. Journalism like the WaPo piece, showing the NIDA shake, is helpful in pushing back on DEA claims that the law enforcement agency is a champion of science that “promotes legitimate research.” It does not. Really, the pictures say it all.