Cannabis estate planningLike many business owners, those who find success in the cannabis industry often want to leave their assets to friends and family at death. Unlike many other business owners, however, successful cannabis business owners’ largest assets are likely to be tied to what the federal government considers an illegal criminal enterprise. Whether you wish to bequeath a large grow operation, an ownership interest in a dispensary, or even a small personal stash, transfers of cannabis-related assets at death present unique challenges for individuals and estate planning professionals. No matter the situation, the basic question remains the same: What happens to my weed when I die?

Law professor Gerry W. Beyer of Texas Tech and Brooke Dacus published a law review article last year that sought to answer this question. It is an essential read for anyone in the cannabis industry considering how to arrange their affairs and the distribution of cannabis-linked assets at death. As is the case with many issues surrounding state-legal cannabis, a critical issue is the differential treatment of marijuana under state and federal law. Even in the realm of state law, however, the use of cannabis – even as part of a state-legal medical marijuana program – can raise issues related to one’s capacity to execute a will or even receive distributions from certain trusts. Beyer and Dacus do an excellent job awill actually be seized, it is impossible to know if that will be the case when it is time for a will to be administered.

What is more, a beneficiary may be criminally liable for possessing illegal materials like cannabis by function of the administration of the will itself. Beyer and Dacus draw a poignant analogy to a case where a beneficiary was found guilty of illegally possessing a firearm by a felon after having been given his father’s antique war-era gun at his father’s death and then keeping that gun unloaded in a closet. The court held that the heir’s possession of the firearm in a space the heir controlled was enough to violate the law. Beyer and Dacus also ask whether and to what extent an executor can administer an estate without exposing themselves to criminal liability. At least one federal court case cited by Beyer and Dacus suggests courts will not permit an executor to administer a will that includes cannabis, leaving the door open to penalties or perhaps even prison for someone who does so. It is important to note that cannabis and cannabis-related assets are subject to estate tax regardless of their legality.

Still other issues cloud the presumptive validity of a will executed by a testator who frequently uses cannabis or is under the influence of cannabis at the time of will execution. Though past habitual “drug use” has been found to interfere with testamentary capacity in some instances, Beyer and Dacus suggest most wills will be valid when an individual who uses cannabis is in fact in a state of mind to make estate planning decisions. Nonetheless, cannabis users and business owners should at least consider taking extra steps to demonstrate their testamentary capacity, such as by using a video explaining their intent, for example.

The wave of cannabis reform in the United States has been a game changer in many arenas, including the seemingly mundane like estate planning. Yet law can often be slow to catch up. Cannabis is a multibillion dollar industry on the cusp of even greater expansion, and those who reap the spoils should consider how to best protect and share their success with future generations.

Who knows, maybe someday cannabis estate planning will be a legal speciality.

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.

Cannabis litigation lawyerThough we are hoping 2017 will bring you nothing but prosperity when it comes to your cannabis business. But if you are headed to court in 2017 or even if you are just just sensing a company dispute stirring, the following five tips will help you avoid or mitigate the negative impact of a business dispute.

  1. Make your business relationships crystal clear from the start. The days of handshake deals regarding ownership in a cannabis business are over. You should do no deals of any real size without first getting everything in writing. Operating agreements, bylaws, and shareholder agreements exist to ensure that your company structure and the relationship between its owners is abundantly clear. When starting a company together, you and your fellow owners should have at least some understanding on how your company will be operated and on how such things like equity versus debt, voting rights, sweat equity, preferred returns, owner employment will be navigated. Most of the ownership disputes our cannabis litigation lawyers have handled have been because of badly done initial company contracts and filings.
  2. Perform due diligence on your partners. If you want to increase your odds of avoiding a dispute with your cannabis business partners, the most important thing you can do is to choose your partners wisely. What never ceases to surprise us is how often we are told by a party locked in a life or death ownership dispute regarding a cannabis business is that they barely knew their business partner before they started the business with them. If you are going to start a cannabis business (or any business for that matter), the first thing you should do is find out as much as you can about your putative partner’s financial and business history. You should do this before you sign away your soul and money to joining with this person on a business project. It’s neither rude nor unexpected to ask your potential partners for documentation showing their financial and criminal history–the state licensing regulators will ask for this information anyway. It is even more important to conduct thorough due diligence if you are buying into an existing cannabis business. At minimum, this due diligence should include investigating and analyzing the assets and liabilities of the company and its current owners. Your due diligence should also include confirming the appropriate standing of the company with state and local government regulators, and determining that the company and its principals understand how to comply with state and local laws as well as the Cole Memo. This is routine in every other industry and it must become routine in the cannabis industry as well.
  3. Get your own attorney from the start to protect yourself. More often than not, the company has an attorney looking out for the company’s interests. But it is important to realize that the company attorney is not your personal lawyer and that lawyer will almost certainly be conflicted out of any dispute between you and your business partners and/or investors. For this reason (and many others) you need your own lawyer providing you with your own counsel and protection regarding your role in the company and your ownership rights. This lawyer should also make sure that the written agreements work for you and not against you. This lawyer will also be an asset for you personally if any dispute arises. For more on how to avoid a dispute relating to your cannabis business, check out Five Tips on How to Avoid Cannabis Litigation and How to Avoid Costly Marijuana Business Disputes. For more on how to choose the right lawyer for your cannabis business check out How To Choose Your Cannabis Business Lawyer.
  4. Know your dispute resolution options. Well drafted corporate documents and contracts should cover most possible breakdowns in the business or the relationship and set out the options for handling internal strife. If there is a fight or a tie on a vote, what happens? How are problems resolved and when? Who makes what decisions and how? What about liquidating the business? What about selling an ownership interest and for how much? Can you sell just your membership interest or shares without going through a vote of the members? Can you keep running the business free of your partners if there’s a fight? What about dissolving the company and winding down? What happens if there is a contract breach? All of these things can and usually should be covered in your corporate governing documents or in any other contract you sign, and by doing so, you greatly minimize your likelihood of destructive problems down the road. Your company documents and contracts should also make clear exactly how disputes are going to be handled. Are you going to want your dispute made public in a court, or kept quiet in an arbitration or mediation? It is a lot easier to reach agreement on such things when you are starting your business or your relationship than when you are already in the midst of a hard fought dispute with costly lawyers.
  5. Make sure your lawyer knows what he or she is doing. When hiring a lawyer to help protect you when getting into a cannabis business, you should be sure to hire a law firm with lawyers who know both business law and cannabis law. And when confronted with a dispute involving your cannabis business, you need to be sure to hire a law firm with lawyers experienced in civil litigation (criminal litigation experience does not count here) and cannabis law, if possible. For more on choosing your cannabis lawyer, check out How To Choose Your Cannabis Business Lawyer.

Be careful out there, and have a happy 2017.

Cannabis ContractsOur cannabis clients often face the chicken and egg problem of trying to balance three or four decisions contingent on one another. A classic example is a new marijuana business licensee that wants the state agency to approve a certain location, wants a landlord to execute a lease for that location, and wants an investor to contribute capital to pay for equipment and build-out at that location. The state agency will only approve the location when it has a signed lease in front of it. The landlord will only execute the lease if a state license has already been approved and if the business is properly capitalized. The cannabis business does not want to be on the hook for executing the lease until it knows it has a good source of capital and that the land will be approved by the state for its cannabis business. And the investor will only put money into the cannabis business if there is confirmation the property works and the business has a lease.

Basically, everything is contingent on everything else. It can be a challenging situation for cannabis business owners, but there is a simple solution more companies should use — standard conditional agreements with agreed-upon closing periods. Anyone who has bought a home understands how closing works. You sign a purchase agreement, but you have 30 days to get inspections done to make sure the home has clear title and is adequately constructed. If there are any problems, you can walk away, less your earnest money.

The same structure can be used in startup cannabis business deals. So long as landlords get some earnest money up front, they are generally willing to execute commercial leases that allow tenant cancellation if the state does not approve the cannabis license or if the tenant discovers its cannabis business is not feasible at any point during the first few months of the lease. Similarly, cannabis investment contracts can and should be similarly conditioned. A loan agreement or an equity purchase agreement involving a cannabis business can have any time frame for closing, which can be defined as actually funding the investment or as the moment when the investor is fully obligated to pay the investment over time. Generally, the conditions will be that the company passes some standard due diligence, but it makes sense for the licensing and real estate portions to be added as additional closing conditions.

Using multiple conditional agreements, a cannabis business can ensure everything is aligned before obligations to pay money mature. And if things fall apart, the various conditions will not be met and everyone can walk away with minimum pain. When doing cannabis deals, it is important to think through the various facts that need to be in place before obligations start maturing. If you do this, you will be better able to walk the tight rope that heavily-regulated cannabis businesses on a timeline face during the cannabis licensing process.

California cannabis bankingNow that California will have significant regulation of both its medical and adult use cannabis industries under the Medical Cannabis Regulation and Safety Act and Proposition 64 (the Adult Use of Marijuana Act), respectively, questions are turning to what will happen with California cannabis banking. As the largest state, it’s hugely important California cannabis businesses be able to secure bank accounts (at a minimum). But will they be able to given the federal illegality of cannabis? Despite what we don’t know regarding how California will regulate cannabis businesses, if the FinCEN guidelines from 2014 hold up and if there are some enterprising financial institutions willing to experiment, we think the answer will be yes.

Because cannabis is federally illegal most banks and financial institutions want nothing to do with it. Not only is there potential criminal liability for banks under the federal Controlled Substances Act for aiding, abetting, and conspiracy for taking cannabis money, there may also be liability under the Bank Secrecy Act for money laundering. Until 2014, there was no real banking solution for the cannabis industry because of these federal criminal law issues; if you didn’t lie to get a bank account, it was likely only a matter of time before the bank would shut down your account after discovering that you were engaged in state-sanctioned cannabis cultivation, manufacturing or distribution.

Once Colorado and Washington legalized adult use cannabis in 2012 and the Department of Justice issued the Cole Memo in 2013, the DOJ and FinCEN finally provided some relief for cannabis businesses by developing guidelines for financial institutions wanting to bank the cannabis industry. Those guidelines essentially give a green-light to banks opening accounts for cannabis businesses in state-legal and highly regulated marijuana states so long as they conduct necessary due diligence and monitoring of their cannabis clients and file a Suspicious Activity Report whenever opening such an account.

Since California will have a ton of cannabis regulations under both the MCRSA and Proposition 64, we are confident some California financial institutions will take advantage of the 2014 FinCEN guidelines and open accounts for cannabis businesses. This means that if you receive a California cannabis license under either the MCRSA or Proposition 64 (or both), you will likely be a good candidate for getting a bank account in California.

The main obstacle right now is that bank regulators like FinCEN, the FDIC, and the NCUA will likely withdraw even silent acceptance of cannabis banking if potential U.S. Attorney General Jeff Sessions or President-elect Donald Trump orders the nullification of the Cole Memo. Without support from FinCEN and other federal regulators, state-legislated resolutions on cannabis banking will likely fail. Colorado already tried this with a state-mandated banking cooperative and failed and we do not expect the courts to help on this issue either because of the federal law conflict. And “solutions” like Bitcoin still face a ton of hurdles.

On December 2, California’s State Treasurer, John Chiang, wrote to President-elect Trump, seeking guidance on California cannabis and banking:

Conflict between federal and state rules creates a number of difficulties for states that have legalized cannabis use, including collecting taxes, increased risk of serious crime and the inability of a legal industry under state law to engage in banking and commerce . . . We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict . . . Uncertainty about the position of your administration creates even more of a challenge.

Chiang also wrote in his letter that California may “exacerbate” the banking problem because California’s cannabis economy is going to be so large.

The Department of Treasury has done a commendable job of preserving and defending its marijuana banking guidelines; Treasury Secretary Jack Lew has defended the guidelines to Congress based on public safety and transparency. But Lew isn’t going to be around much longer and last month Trump announced Steven Mnunchin as his nominee for Treasury secretary. I couldn’t find any quotes from Mnunchin on marijuana banking or the FinCEN guidelines, so it’s hard to know whether Mnunchin will support the cannabis banking status quo or not.

Like everything when it comes to Trump’s administration and cannabis, California will just have to stay tuned on the banking front.

Cannabis lawyerWe have run quite a few real estate deals in Oregon, Washington and California cannabis. No two deals are the same, and as we previously have written, buying and selling land for pot ventures is a trip. An obvious reason for this is the lack of banking services, but another big reason is lack of certain title company services, like escrow. If you are hoping to enlist a title company as escrow in your cannabis property sale, we say to you, “good luck.”

Typically, title companies handle all of the paperwork to close a standard real estate transaction. It is probably easiest to think of these services in three distinct parts: (1) receiving, holding and sending money and key documents (escrow); (2) providing a spot for the parties to iron out details toward the end of a deal (including deeds and other formal documents (closing)); and (3) issuing title insurance. By providing this suite of services, a title company can serve as a “one stop shop” for closing most real estate deals.

Pot deals, of course, are different.

In our experience, title companies generally will close a cannabis deal, and they will even provide title insurance in most cases. However, they generally will not facilitate the exchange of funds. This seems strange initially, but it relates back to banks, and the fact that many banks refuse to service businesses even indirectly involved with cannabis. That includes title companies. Thus, title companies often have formal policies against serving as escrow in cannabis deals, especially where the land already is being used for a pot-related purpose.

Fortunately, it is possible to close a real estate sale without a title company performing escrow services. In those transactions, the buyer and seller will usually engage an attorney to serve as escrow, and the attorney will take instructions on how and when to distribute funds. Though attorneys tend to be more expensive than title companies for this purpose, they are safer than fringe operators offering escrow services, and an attorney worth her salt should be able to run the exchange efficiently.

With respect to title insurance, title companies generally will issue these policies on the rationale that the insurance product relates to land ownership, rather than to the activities taking place thereon. Of course, most title insurance policies in marijuana-related transactions will expressly exclude coverage for governmental actions, including civil and criminal forfeiture under the federal Controlled Substance Act. Before purchasing title insurance, we strongly recommend that the buyer disclose their intended use of the land. Otherwise, the title company has an argument not to pay on claims.

In the coming months, we expect to handle more and more real estate deals for pot businesses and also sellers. The California land grab will heat up in that state’s pot friendly counties, and our Oregon office has seen another spike in land deals from November’s local election results. Our Washington cannabis lawyers are also seeing an increase in land sales, mostly attributable to growers who got in early, but now wish to sell.

Ultimately, the laws around the purchase and sale of commercial real estate tied to cannabis are complicated, and vary state by state. An experienced cannabis attorney with commercial real estate chops will be able to facilitate the purchase or sale of real estate for pot commerce, from title examination through recording the deeds. The attorney will know how to work with the parties’ chosen title company to push the deal through, and how to navigate the unusual aspects of these transactions, like escrow.

 

Cannabis real estate lawyersThe Denver Post ran a story Sunday on the high rents marijuana businesses have to deal with nationwide. In Portland, for example, rental property that typically goes for five dollars per square foot goes for three times that amount for cannabis businesses. Though rents for cannabis businesses in Washington and Colorado are stable, they are still well above the market rate. Real estate investors looking to lease to cannabis businesses are gambling that this trend will continue.

There are several things pushing up cannabis rents, many of which are discussed in the Denver Post article, all of which decrease the available supply of cannabis real estate. Any property with an existing deed of trust or mortgage held by a financial institution runs some extra risks. The vast majority of mortgages contain a clause mandating that the property only be used lawfully. If a property has a cannabis business use on it, the bank can call the loan in default and accelerate the principal so it’s all due immediately and giving the bank right to foreclose if the borrower cannot find alternative financing. Many cannabis businesses are at locations with mortgages now, and banks are tacitly accepting the businesses so long as the legal climate doesn’t change. If the legal climate does change and federal law enforcement becomes a real threat, the banks holding notes on cannabis properties could well use the legal changes as their opportunity to call their note in default, either getting their money back or allowing them to foreclose. Because of this threat from banks, most cannabis businesses prefer to lease property owned outright (without any bank note), and most landlords with financed property prefer to lend to businesses that are federally legal.

The hodge-podge of state and local cannabis regulations also tends to drive up the price of cannabis business real estate. State laws that limit how close cannabis businesses can be to a school, a park, a church, or another cannabis business also limits the number of properties available to cannabis businesses. When you add in local zoning codes that often push cannabis businesses to heavy industrial areas and building codes that often require cannabis production facilities to have full fire suppression and air quality systems in place, the list of available properties for the marijuana industry plummets even further. With so many marijuana businesses fighting for so few spaces, it is no wonder real estate prices skyrocket.

Finally, there is still a ton of money being invested into cannabis real estate from out of state and foreign investors. Many marijuana licensees lack sufficient capital to build out growing facilities, and they look to turn-key real estate opportunities, often with deferred rent, where they are expected to pay out the nose when they start making revenue. These higher-priced turn key facilities tend to increase the price ceiling even for landlords that only offer bare warehouse space. Hardly a day goes by where one of my firm’s cannabis business attorneys does not get a call from someone on the East Coast asking us about cannabis real estate opportunities in Washington, Oregon, or California. Even public companies are involved in the turnkey cannabis real estate market, including Innovative Industrial Properties, Inc., a cannabis related REIT that did an IPO on the NYSE just a few days ago.

So, is the upward trend in cannabis real estate likely to continue? Real estate investors are showing signs of skepticism. Innovative Industrial Properties didn’t have the strongest IPO, raising $67 million when it hoped for $175 million. The media has tended to blame President-elect Trump’s choice of Jeff Sessions to run the Justice Department, which is a real concern for everyone, but there may be other factors at work.

In Washington State, cannabis businesses that are renting warehouse space in heavily populated King and Pierce counties are facing fierce competition from outdoor growers from eastern Washington. Outdoor grown marijuana has long been perceived to be inferior to indoor-cultivated product, but outdoor growers are rapidly developing techniques to increase the quality and consistency of their products. The continued trend toward oils and other concentrates also puts downward pressure on the relative value of crafted indoor product.

Outdoor spaces, especially in rural counties, tend to be significantly cheaper than urban or suburban warehouse space. If more growers see those areas as real alternatives, warehouse prices may fall. And even if the Trump-Sessions administration makes policy choices that decreases the availability and increases the price of cannabis real estate, the long-term trend is still toward legality, with cannabis looking more like other businesses. As the cannabis industry “normalizes,” we should expect  lease rates for cannabis businesses to fall more in line with lease rates for other businesses. Real estate investors should be careful not to overpay based on their assuming the current cannabis leasing market will last forever.

What are you seeing out there? What are your thoughts on where cannabis real estate is heading?

Cannabis business lawyersWe’re in that time of year when at least some of the licensed cannabis producers in Washington tend struggle. A short-term glut of marijuana on the market makes it harder to stand out and make sales, and businesses that aren’t competitive on price or quality get left behind. I bring this up because it is also the time of year when financiers come to my firm’s cannabis business lawyers looking for a way out of deals they fear will never pay off.

“Financiers” in the Washington marijuana system generally refers to debt investors that get a set interest rate of return rather than a profit-interest in a business. Mark Cuban once said that only a moron would start a business on a loan, but the limitations on out-of-state equity ownership leave many newish cannabis businesses cash-strapped, so they turn to debt. We have also seen that many of the creditors involved in the local marijuana industry are not seasoned small-business investors. They are people looking to take advantage of an industry that seems to be printing money. Debt feels less risky than equity, so they throw some money into a cannabis business or two, believing they will be able to get 10%-20% interest annually.

Because so many of these investors are new to small business investing, many don’t protect themselves. Lenders have a lot of tools to make sure they get paid. Security interests in real, personal, and intangible property provide avenues for seizing assets. Marijuana inventory is complicated to secure, but most marijuana businesses have at least some high dollar capital equipment. Personal guarantees from major players put personal assets on the hook as well, and signed confessions of judgment make the process of obtaining a judgment on the debt significantly easier. Most loans do not involve all of these protections, but most smart lenders are not willing to provide completely unsecured capital to brand new businesses without any way to get a return if the business folds.

If you are one of those unsecured investors and the cannabis company to whom you loaned money defaults on your loan, what can you do? If you want any chance of recouping your investment, you really only have two options. First, you can renegotiate the debt. In most well-drafted promissory notes, an uncured event of default causes the debt to accelerate and mature. This means that if your cannabis borrower misses a payment and doesn’t make a late payment by the cure date, its entire debt becomes due. Once this happens, it is just a matter of negotiating an extension on the note. During that extension, you as the creditor have significant leverage to extract concessions from your cannabis borrower, such as personal guarantees, security interests, or even pledges of ownership interest in the cannabis company. The reason you as the creditor have leverage is because your only other viable option would be to obtain a judgment against the borrowing company and that judgment will likely be a nightmare for your borrower. If you are wiling to brave the legal fees and get a judgment against your borrower, you can then use that judgment to begin levying on the cannabis business’s assets as though you had a security interest in the property to begin with. In most states, once you get the judgment, at least some of what you spend collecting on it, including your attorneys’ fees, will be collectable as well.

Companies that owe debts to third parties and realize that they are about to go under sometimes look for ways to avoid paying the debt. This is a good time to bring up fraudulent transfers. As defined in most states, a fraudulent transfer occurs in a few different ways, the most common of which is when an insolvent debtor transfers property without receiving a reasonably equivalent value in the exchange. If an “insider” — someone connected to the company like a director or a director’s spouse — is involved in the transaction, showing fraudulent transfers becomes far easier. For example, if a debtor  company has a bunch of equipment and transfers it to the company owner’s brother, that is potentially a fraudulent transfer, and the property can be clawed back for creditors.

The stickiest situations come when there are multiple debts. A company is not necessarily breaking any laws if it chooses to pay one creditor before it pays other creditors. Unless the creditor is an “insider,” the company can generally choose which of its debts to pay unless it is in a formal bankruptcy (probably not available to marijuana businesses) or a state receivership proceeding. In certain circumstances, multiple debt investors have signed promissory notes in which the company promises not to pay the notes proportionally and not to provide any payment preference. If the debtor company does pay one holder disproportionately to the others in that circumstance, the creditor left-behind may be entitled to a clawback of the payment.

These collections matters don’t usually end with either side truly happy. Attorneys make some money, and investors can often recoup a portion of their investments, but debt litigation against a business is an unpleasant affair. If you are looking to lend to a cannabis company, make sure you know what your plan is if things turn south. It’s better to have a security interest up front than it is to fight the company and other creditors in court to get the right to levy.

lease-agreementIn states with legal cannabis programs, most licensed cannabis businesses fall into three broad categories: producers, processors and retailers. Some states offer more exotic classes of licensure for activities like testing, research and even wholesaling marijuana, but a substantial majority of pot entrepreneurs are trading in the basics. Whether you are on the landlord or tenant side of the transaction, though, marijuana leases are anything but basic.

Unlike with standard commercial leases, pot landlords and tenants must account for the status of federal prohibition, the strictures of state-level programs, and the peculiarities of local zoning laws. These considerations are separate and distinct from baseline commercial lease considerations, which can themselves be complex and run into the dozens of pages. Without getting too far into the weeds, here are ten items to consider specifically in your marijuana lease.

1. Profit Sharing. We have seen many, many pot leases drafted by parties where a landlord agrees to take a cut of business profits over and above base rent. This type of transaction is typically frowned upon by regulators, who may view anything beyond ordinary, arms-length payments as de facto license ownership, subject to disclosure and vetting. Both parties should check local rules before entering into any sort of profit sharing arrangement, even if it is a small percentage of rent overall.

2. CSA Indemnity. Savvy landlords will often push for an indemnity requirement from tenants on general liability issues. The experienced marijuana landlord will also require indemnity on the specific issue of civil forfeiture under the federal Controlled Substances Act. This stipulation requires a marijuana tenant to defend a landlord and absolve the landlord of wrongdoing if the federal government takes enforcement action against the landlord for renting to the pot business.

3. Licensing Cooperation. Most marijuana licenses are tied to locations. A marijuana tenant will want to ensure that its landlord is obligated to assist if new administrative rules impose unforeseen requirements on them during the lease term. If a tenant is forced to move, the chances it will be able to drag its license from one place to the next are low. And if the property contains any peripheral attributes relevant to cannabis licensure, like a state-approved water right, the tenant will also want to ensure that the landlord is obligated to maintain that feature.

4. Access. States have strict rules about who may enter onto a marijuana licensee’s premises, and when. The right of the landlord to enter onto a premises should be clearly outlined, and it should dovetail with the provisions contained in any relevant statute or administrative rule regarding entry by anyone other than the licensee.

5. Occupancy and Commencement Dates. A typical cannabis lease will provide that a tenant will abide by all state and local laws, which includes a requirement not to begin any marijuana related activity on the premises prior to licensure. Sometimes, this creates a chicken and egg problem for a tenant, who needs a lease to get licensed, and also needs a license to operate under its lease. The parties should plot out a realistic timeline for licensure, and discuss whether rent will be abated or reduced prior to licensure.

6. Outs. Both parties will want a series of cannabis-specific “outs,” or escape clauses, drafted into the lease. These outs may accrue in situations ranging from federal law enforcement action, to local cannabis license denial. The landlord may also want outs for a tenant’s noncompliance with state or local cannabis laws.

7. Environmental Concerns. This is a big one in production and processor leases. Landlords and tenants will want to address fertilizers, herbicides and pesticides used and stored at the premises, along with the disposal of cannabis products and byproducts. States have both general environmental laws and cannabis specific laws that govern these issues and a properly drafted cannabis lease will take them into account.

8. Lease Term. Commercial leases often extend five or ten years at minimum, and a tenant may have one or more options to renew its lease beyond the initial term. In cannabis, parties tend to agree to shorter lease terms with fewer renewal options, because of the uncertainty inherent in cannabis laws and markets. Each party should weigh its desire for contract stability against the risk of market disruption, before committing to a term.

9. Dispute Resolution. The default rule in commercial leasing is that disputes are settled in court. Landlords are accustomed to expedited court proceedings designed to deal with FED (“forcible entry and wrongful detainer”) and courts are well versed in the summary eviction process. With cannabis, however, there are compelling arguments to be made for arbitration when it comes to contracts, including leases.

10. Federal Illegality. As with any cannabis contract, a well drafted cannabis lease should stipulate that federal illegality is not a valid defense to any claim arising from the lease, and that the parties waive the right to present any such defense related to the status of cannabis under federal law. Otherwise, a court could throw out the lease entirely, causing some serious headaches.

The above list is not exhaustive, and every marijuana lease will be different, depending on the parties, activity, state and location. Above all, it is important to note that marijuana leases, like other marijuana contracts, are unusual agreements that require expert attention.

imagesOn Friday, Reason magazine published a well-researched article titled “Oregon Charts an Uneven Course Toward Legal Marijuana Sales.” Anyone who cares about the Oregon cannabis market would do well to read it. The article breakout offers that “overregulation of the industry keeps cannabis business owners in limbo.” This thesis is somewhat predictable, as Reason has a libertarian bent as the self-proclaimed circular “of free minds and free markets.” Still, the article makes its points in a fair-minded manner and it echoes our longstanding observation that although Oregon is as good as it gets for a pot market, it is paradoxically overregulated.

The Reason article features a few different cannabis entrepreneurs, including the owner of a state-shuttered cannabis café, to drive home the point that cannabis in Oregon is not yet “normalized” from a rule-making standpoint (whatever that could mean, given federal prohibition). Reason critiques many changes the Oregon legislature made in implementing Measure 91, the initiative that legalized recreational marijuana in the state. The article casts blame on Oregon for imposing “incredibly onerous” cannabis testing guidelines, which it argues have caused a supply chain bottleneck.

Though we agree that the Oregon state rules on testing are tough, we see a few things going on here. First, it has been apparent for months that too few laboratories had applied to test marijuana in Oregon, regardless of the testing strictures. There simply seem to be fewer people out there with the wherewithal to test cannabis than to grow it. Second, Oregon had a pretty bad scare with tainted cannabis products as recently as last year. In reaction, the state adopted strong public health and safety regulations. (On this point, it is worth noting that though the federal government expects states to regulate their cannabis programs comprehensively, it offers virtually no guidance on these issues.) Finally, it is clear that Oregon has tried to thread the needle between maintaining high standards and moving the program forward, mostly through temporary rulemaking. Reasonable minds can disagree on the success of each administrative tactic.

As cannabis lawyers who deal with the state almost daily on cannabis issues, we echo observations in the Reason article that Oregon wants its pot programs to work, that its hiccups are mostly growing pains, and that the Oregon Liquor Control Commission (OLCC) in particular has done yeoman’s work with an eye toward long-term success for cannabis in the state. As for the Oregon Health Authority, that agency seems to be on its way out, and we have suggested the state would do well to relieve it of its duty in the next legislative session. With respect to cannabis program entrepreneurs, we continuously remind our clients that they need to pull their weight, too. That includes getting OLCC applications in as soon as possible, so as not to be left out in the cold come 2017.

The cannabis testing bottleneck in Oregon has already begun to clear, and it is possible that Oregon, like Colorado, will allow for public marijuana consumption as soon as the next legislative session. In the meantime, we may see other market challenges, like a possible shortage of licensed OLCC processors, or something entirely unforeseeable. Absent any affirmative federal interference, however, the state and its entrepreneurs will continue to work together as we move through these issues.

One lesson to take from all of this is that implementation of a state cannabis program is never a smooth ride. States tend to operate in a reactionary manner with respect to marijuana, beginning on Day 1, when their legislatures are tasked with implementing programs by their forward-thinking residents. That process has been bumpy in Washington, Colorado and Oregon, and it will be no different in California and each of the brand new cannabis states. The course is “uneven,” but it’s the only course we’ve got.