Washington State cannabis delivery serviicesAre cannabis delivery services legal in Washington State? 

Strong demand for home-delivery cannabis services in Washington – and particularly Seattle – is apparent, as demonstrated by the numerous delivery services operating in plain sight, as revealed by a simple Google or Yelp search. Yet, such operations remain illegal following the passage and implementation of I-502. In 2016, Seattle proposed a law to permit a pilot project for legal delivery in Seattle (which failed in the state legislature). This year, Seattle officials are pushing for similar legislation, with certain modifications, that they hope will open the door to cannabis delivery throughout the state.

What’s the status quo in Washington State?

Cannabis delivery services are as old as old-school weed dealing itself. The common trope is of the marijuana dealer who delivers late (and stays past their welcome) – and only after multiple calls or texts. Today’s pot delivery services, particularly in states with legal medical or adult-use cannabis, are exponentially more professional operations – yet, in large part, they remain illegal under both state and federal law. Such is the case in Washington State.

What happened with the 2016 proposal?

Last January Seattle city officials supported Washington State House Bill 2368, which would have authorized a pilot plan for home cannabis delivery in Washington in cities with 650,000 or more people – effectively just Seattle.

HB 2368 was seen by as “Seattle-centric” and lawmakers outside Seattle and greater King County did not vote for the bill because it would not directly benefit their constituents. Also, Washington can be a deceptively conservative in general and in terms of cannabis, especially on outside its urban centers and especially on the East side of the mountains. Ultimately, HB 2368 did not become law.

How does the new proposal differ?

MyNorthwest.com reports that Seattle City Attorney Pete Holmes intends to broaden support for the 2017 bill by allowing home cannabis delivery statewide. Such marijuana delivery services would still be subject to county and municipal regulations and prohibitions.

Will it pass?

The bill’s ultimate fate is unclear. City Attorney Pete Holmes said in January that the bill was in the early stages of finding a bill number and sponsor, though he was optimistic going forward. Ultimately, only time will tell if this or a different bill authorizing cannabis delivery eventually becomes law in Washington State. Though it is far from certain, I think pot delivery services will within the next few years become legal in Washington and I say this because the longer Washington legalization goes on without the sky falling down (and I do not foresee the sky falling down), the more Washingtonians will come to realize it is no big deal and the less they will care about restricting it by doing things like forbidding cannabis deliveries.

Why is this important for the future of cannabis reform in Washington State?

Other jurisdictions with legal medical or adult-use cannabis have experimented with home delivery, and “gray market” home delivery operations are thriving in Washington and other state-legal cannabis states since before legalization. This despite many arrests in Seattle.

The demand for cannabis delivery ensures and proves its durability as a market force. Allowing illegal delivery operations to prosper erodes the legitimacy of legal cannabis markets, and undercuts its economic rationale. Our cannabis clients resent having to pay big taxes and be subject to massive regulations while at having to compete with illegal operations that avoid both of those things. The solution is to permit legal home delivery for medical and/or recreational users and to license and treat those cannabis delivery services  as any other cannabis business.

Why is this important to medical patients and adult-use cannabis consumers?

The ability to legally provide home cannabis delivery services is particularly important to medical marijuana patients with limited mobility or other disabilities that make it impossible or unduly burdensome for them to personally go to a dispensary to obtain cannabis. Also, even adult-use recreational patients can benefit from the convenience and added value of a cannabis delivery service. Just look at Amazon Prime.

For its part, earlier this month a Seattle Times editorial endorsed legalizing cannabis deliveries.

 

Cannabis Business LawyersOur cannabis business lawyers are always getting pitched on “creative solutions” to the cannabis industry’s banking problem. Because marijuana is still federally illegal, most banks will not provide financial services to marijuana businesses, even though FinCEN issued guidelines to allow financial institutions to provide bank accounts to the state-legal pot businesses. Many tout Bitcoin as the solution.

Bitcoin is viewed as the world’s first completely decentralized currency. Unlike the Dollar, the Euro, the Yuan, etc., no central government manages or backs Bitcoin. It is also called a “cryptocurrency” — a digital currency that uses encrypted services to generate units of the currency and to transfer funds.  You can read primers on it here and here. Using a Bitcoin wallet enables customers and businesses to engage in transactions without using paper currency and without going through an intermediary institution like a bank. Its chief appeal to the marijuana industry is that allows for currency transfers with little to no need for a bank. There are though significant issues involved with using Bitcoin in the marijuana industry and law enforcement associates Bitcoin with the illegal narcotics trade (see the Silk Road).

At the beginning of January, Washington State Senator Ann Rivers (who was instrumental in securing passage of SB 5052, which essentially wound down Washington’s existing medical marijuana cooperative system) proposed a bill to ban Bitcoin in Washington State’s marijuana marketplace. Senator Rivers says that her proposed bill to ban Bitcoin was brought to her by “an organization” looking to preserve “the transparency that we have in our legalized marijuana system in our state.” The eight-page SB 5264 adds to the definitions section of RCW 69.50.101 (Washington’s Controlled Substances Act) the term “virtual currency,” and then proceeds to ban it for marijuana sales. Under the bill, “virtual currency” would be defined as follows:

a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government. “Virtual currency” does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.

The bill then states that “[a] marijuana producer, marijuana processor, or retail outlet must not pay with or accept virtual currency for the purchase or sale of marijuana or any marijuana product.”

The Bitcoin ban bill was debated at length in Olympia and Senator Rivers’ cited to the Cole Memo prohibiting the “shrouding” of anyone who participates in Washington’s marijuana industry as its justification. Senator Rivers contends that BitCoin can’t meet the 2014 FinCEN transparency guidelines. Tom Parker and Kenneth Berke of PayQwick also testified that Bitcoin does not satisfy FinCEN transparency guidelines and allowing it for Washington State marijuana businesses will invite federal enforcement and thereby harm the cannabis industry as a whole. On the other side of the argument, Ryan Hamlin and Jon Baugher of POSaBIT testified that BitCoin is perfectly traceable, auditable, verifiable, and transparent, and that the state needs to better understand BitCoin transactions before it bans its use in the marijuana industry. James Paribello, legislative liaison for the Washington State Liquor and Cannabis Board, testified that the Board essentially has no opinion on the use of BitCoin or its proposed ban, so long as the Department of Financial Institutions allows it, which it currently does.

Given the uncertainty of the state-legal marijuana industry under Trump and Sessions and the precarious staying power of the Cole Memo and the FinCEN guidelines, Bitcoin may just be too risky for Washington State’s marijuana industry. But if the state can get educated about and comfortable with BitCoin, virtual currency may be here to stay in the Evergreen State’s marijuana industry.

Stay tuned.

Washington state cannabis licenseAdvocates for cannabis reform often point to favorable studies documenting the positive medicinal and wellness effects of marijuana to debunk federal law scheduling of cannabis as a substance on par with heroin. Opponents of cannabis reform invoke statistics that purport to show a relationship between cannabis and crime and violence. What both sides must agree upon, however, is the need for new, in-depth, and nuanced research of legal cannabis’ effect on society. At least if they belive in scientific research over anectdote.

Washington State is  moving in this direction with its cannabis research licenses. Here is what you need to know about these cannabis research licenses.

What is a Washington cannabis research license? Washington’s cannabis research license has been set up to facilitate further study of cannabis’ scientific, medical, and industrial properties and applications. According to Washington statute RCW 69.50.372, marijuana research license holders  may “produce, process, and possess marijuana for … limited research purposes.” The law restricts the scope of permitted research to the generously broad categories of: tests of chemical potency and composition; clinical investigation of cannabis-derived drugs; tests regarding the efficacy and safety of cannabis as a medical treatment; and genomic or agricultural research.

Along with a whole host of other factors, these new cannabis research licenses will help solidify Washington state – more specifically the Seattle area – as a hotbed for cannabis research. Existing Seattle cannabis and biotech and technology firms (almost all of which are quite open to cannabis), along with the city’s vibrant vibrant start-up scene should combine to accelerate worthy cannabis research for a wide range of applications.

What is the latest regarding Washington cannabis research licenses? The Washington state legislature passed a law authorizing licenses for researching cannabis’ medical properties, chemical composition, and agricultural potential last year. Following a rule making period, the Washington State Liquor and Cannabis Board has indicated it will begin accepting applications March 1, 2017. However, absent swift action by the Washington state legislature, this date will probably get pushed back by a requirement in the research licensure law discussed below.

Why might there be a delay in implementing cannabis research in Washington? The law that created cannabis research licenses also mandates that applicants and their research projects be vetted and approved by third-party scientific reviewers. The reviewers are required to audit the research and its reports. This is a an understandable precaution given the state law’s conflict with federal law (which still pretty much makes cannabis illegal for any purpose), and a fair method for ensuring the licenses are being used for their intended purpose.

The problem is that Washington State has not yet approved any third-party scientific reviewers, and no such approvals appear to be forthcoming. Many expected Life Sciences Discovery Fund to serve as a scientific reviewer, but for what appears to be funding reasons, it has not stepped up. Nor unfortunately, have either the University of Washington or Washington State University or any of the other institutions of higher learning in the state. Until a third-party scientific reviewer is approved, applicants will be in limbo.

The new cannabis research law also requires the Washington State Liquor and Cannabis Board select a scientific reviewer to review the research project and determine the merit of its quality, design, and impact; the adequacy of its personnel, expertise, and other functional capacity; and whether the quantity of marijuana cultivated matches the needs of these objectives. No scientific reviewer, no cannabis research.

Why is this important? Lack of legal and high level cannabis research is a classic “chicken and egg” problem for cannabis legalization. Cannabis is illegal in large part because the powers that be claim it to have no legally recognized medicinal or therapeutic value. And yet — surprise, surprise, efforts to conduct high level research that might show the contrary gets suppressed by a lack of legal access to cannabis and by a reluctance by many to fund research that could be shut down as illegal. Something will have to give in order to overcome this impasse, and it is not sure when or how that might happen.

As cannabis lawyers, we find all of this extremely frustrating, as it not only means that those needing cannabis for medical reasons are cheated out of their medicine in states where cannabis is not legal even for medical treatments, but it also means that in cannabis legal states like Washington, far too many patients do not not get the ideal strain and quantities and ingestion method for their particular conditions because there is no high level research on these things. It also means that countries like Israel and Canada will continue to surpass the United States in cannabis research and technology.

Bottom Line: Do not expect your Washington State cannabis research license soon. And that is too bad.

Cannabis regulatory lawyersOur cannabis regulatory lawyers are in the midst of a few different administrative cases right now dealing with violations of marijuana regulations. In Washington State, the Liquor and Cannabis Board treats its regulatory mandates as “strict liability” rules. This means the onus is on the cannabis business to comply, and a business that violates a regulatory mandate is liable even if it did absolutely everything it could have done to prevent the violation. This sort of strict liability for violating cannabis-focused regulations is fairly common across the country and is just another example of how cannabis businesses even in cannabis-legal states are treated differently from other businesses.

The theory behind strict liability for regulatory violations is that businesses are best positioned to make sure violations do not occur. Businesses need to pony up as many resources as it takes to prevent violations. This strict liability is opposed to a negligence standard, where if the business is found to have acted with reasonable care to comply with the rules, it would not be found liable.

The problem with strict liability, however, is that it can be unfair to businesses that try to have reasonable compliance programs but still slip up. There is no way to prevent employees from flouting the rules from time to time. It happens at every regulated business throughout the country. Employees often see compliance measures as a hindrance to getting their jobs done, and they look for workarounds. But in a strict liability system, a business whose employee violates a compliance program is treated the same as a business that didn’t have any compliance program at all. There is a certain unfairness to that.

The goal of any regulatory agency should be for businesses to have maximum compliance, and the best way to do that is to encourage self-policing. This is why most federal agencies have dedicated programs for regulatory compliance, self-policing, and self-reporting, where penalties against businesses are greatly reduced or even waived if the business follows certain compliance steps.

Washington State voters mandated the State implement this sort of favoritism for liquor merchants “that try” when it passed Initiative 1183, privatizing liquor sales. Under that program, Washington liquor sellers that implement specific best practices to avoid selling liquor to minors will face reduced and deferred penalties if they accidentally make such a sale. Regulatory partnerships like this benefit businesses by giving them guidelines on how to operate and they also benefit the public as a whole as they will lead to fewer overall sales to minors because businesses are so incentivized to implement effective programs.

For marijuana in Washington, the best that cannabis businesses can rely on are that the regulations allow the Liquor and Cannabis Board to reduce penalties if a cannabis business with violations can demonstrate that its business policies and/or practices will reduce the risk of future violations. And though mitigation like this is helpful, it is not the same as a standardized compliance program responsible companies can join to get across the board penalty mitigation.

Marijuana businesses should band together to demand such a “voluntary” compliance program. As everyone knows, regulatory costs for cannabis businesses are high, and even the most compliant cannabis company will have employee slip-ups or regulatory misunderstandings from time to time. The competitive aspect is also key; so long as cannabis compliance program guidelines are not set across the board, businesses will try to comply with the rules at the lowest cost, to the detriment of the compliance programs. Setting up minimum compliance guidelines will allow participating cannabis businesses to know their competitors are either on the same playing field as they are, or that they are risking harsher penalties for not being part of the voluntary compliance program. It’s a win-win for compliant cannabis businesses and for the state. Yet no matter what sort of state-law program to which your cannabis business is subject, it pays to constantly self-audit your company to work towards full compliance. See Understanding and Managing Cannabis Legal Compliance and Cannabis Compliance Audits.

What are you seeing out there? What are your thoughts on all of this?

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 moratoriumIt’s always a slap in the face to get blindsided by your local government at the 11th hour. And of course the same holds true in the cannabis industry. You’ve worked incredibly hard to secure your cannabis license from the state. You’ve spent a ton of money getting into compliance with state cannabis regulations (that keep on changing and affecting your bottom-line). And you’re likely paying sky-high rent to lease a space that for any other business would be less than half of what you pay. This is all while having to deal with federal marijuana laws that make it difficult to bank and jack up your tax rates. Then to run up against a local moratorium on cannabis businesses or a drastic change in local cannabis regulations after months of operation is yet another bitter pill to swallow.

When I-502 first passed in Washington State, there were debates and lawsuits over what Washington cities and counties could do when it came to opting out of I-502 altogether. I-502 was silent on this point and industry folks argued that cities and counties couldn’t ban marijuana businesses while local governments (and the state attorney general) argued that they could. Ultimately, with passage of HB 2136, the game of chicken between local governments and marijuana businesses came to an end since the legislature decided that cities and counties were free to ban marijuana businesses, though those that did would cease to receive marijuana tax revenues.

The issue of how cities and counties in Washington State may regulate marijuana businesses remains less than clear. Given the local government police powers and the fact that there is no right to have a marijuana business in Washington State, cities and counties see themselves as able to regulate marijuana businesses as they see fit, so long as their regulations are lawful and constitutional and comport with a local government’s duty and power to protect the health and welfare of its citizens.

Because of this, Washington State licensed marijuana businesses are finding themselves in situations where their local governments are re-thinking local regulations or just deciding to get rid of certain (but not all) marijuana businesses. Already this year, Douglas County banned and then re-regulated its cannabis producers and processors because of odor and neighbor complaints. Also this year, Chelan County opted to ban all marijuana producers and processors that were not actively operating on or before September 29, 2016.

Now Spokane County joins this list with its November 29 emergency moratorium on any new or expanded outdoor cannabis cultivation, citing multiple odor complaints received by the Spokane Regional Clean Air Agency and claiming that its existing outdoor marijuana producer rules and zoning do not “adequately mitigate the impacts associated with the outdoor production of marijuana.”

So long as Spokane County holds a public meeting on this emergency moratorium within 60 days of its passage, due process (i.e., notice and a hearing) challenges to this change are not likely to be viable. Spokane County can even extend this outdoor production moratorium to one year so long as it develops a working plan in that time leading up to final resolution of the issue.

The sad reality is that cities and counties in Washington State can usually get away with using well established laws to preserve the integrity of their zoning plans through interim zoning or via a moratorium and by pointing to allegations of immediate threats to public health and safety. If Spokane County eventually decides to attack existing outdoor cultivation, the chance of a legal attack against the County isn’t made any better due to the law of non-conforming uses.

We would like to see Spokane County go the way of Douglas County and find a way to keep new or expanded outdoor cannabis cultivation alive while balancing the interests of irritated neighbors. In some ways, an even bigger concern for these outdoor cannabis cultivators may be private legal action by their neighbors to stop all outdoor cannabis farming. For more on NIMBY and marijuana odor cases, go here, here, and here.

In any event, be sure to stay tuned to see what Spokane County does with outdoor cannabis cultivation.

Washington State cannabis lawyers
Washington State cannabis laws. Very very good.

This is proving to be a big year for cannabis. As a result, we are ranking the fifty states from worst to best on how they treat cannabis and those who consume it. Each of our State of Cannabis posts will analyze one state and our final post will crown the best state for cannabis. As is always the case, but particularly so with this series, we welcome your comments. As a result of the overwhelming success of many cannabis initiatives this November, all the remaining states in this series have legalized the adult use of recreational marijuana. This week we cover Washington, who along with Colorado, was the first to legalize recreational marijuana.

Our previous rankings are as follows: 4. California;  5. Alaska; 6. Massachusetts;  7. Maine; 8. New Mexico; 9. Nevada; 10. Hawaii; 11. Maryland; 12. Connecticut; 13. Vermont; 14. Rhode Island; 15. Kentucky; 16.Pennsylvania; 17.Delaware; 18. Michigan; 19. New Hampshire; 20. Ohio; 21. New Jersey; 22. Illinois; 23. Minnesota; 24. New York; 25. Wisconsin; 26. Arizona; 27. West Virginia; 28. Indiana; 29. North Carolina; 30. Utah;  31. South Carolina; 32. Tennessee; 33. North Dakota; 34.Georgia; 35. Louisiana; 36. Mississippi; 37. Nebraska; 38. Missouri; 39. Florida; 40. Arkansas; 41. Montana; 42. Iowa; 43. Virginia; 44. Wyoming; 45. Texas;  46. Kansas;  47. Alabama;  48. Idaho; 49. Oklahoma;  50. South Dakota.

Washington

Recreational marijuana. Washington State legalized the recreational use of marijuana in 2012 when its citizens voted to pass of Initiative 502. Under Washington State law, adults over the age of 21 can legally possess up to one ounce of marijuana flower, sixteen ounces of marijuana-infused product in solid form, seventy-two ounces of marijuana-infused product in liquid form, or seven grams of marijuana concentrate. The Washington State Liquor and Cannabis Board regulates Washington’s cannabis market, creating and enforcing rules regarding marijuana.

Washington’s marijuana market mainly consists of three different license types: producer, processor, and retail licenses. To a certain extent, cannabis licensees cannot vertically integrate because an individual cannot have an interest in all cannabis licensing types. A retail license holder may have no interest in a producer or processor license. However, a licensee may possess both a producer and processor license. To qualify for any Washington State cannabis license, one must have at least six months of residency in Washington State.

Washington State requires residency compliance from anyone who qualifies as a “True Party of Interest,” which means anyone who either exercises “control” of the cannabis company (control is not defined) or who receives or is entitled to receive either net or gross profits from a licensee. By way of a couple examples, True Parties of Interest include anyone who holds stock in a corporation and it includes the spouses of any stockholders. Every True Party of Interest in a Washington State cannabis business must be vetted by the Liquor and Cannabis Board and must have resided in Washington for at least six months, same as a cannabis licensee.  Failure to disclose a True Party of Interest leads to instant cancellation of a license.

The Washington State Liquor and Cannabis and Cannabis Board  is not currently accepting applications for cannabis producer, processor, or retail licenses. This means Washington’s cannabis market is currently closed to newcomers seeking a new license, but it it not closed to those seeking to get into the Washington State cannabis industry by buying outright or by buying into an existing licensed Washington State cannabis business.

Medical Marijuana. In November of 1998, Washington voters approved Initiative 692, providing legal immunity to patients using medical marijuana. In 2011, the Washington State Legislature passed SB 5073, allowing patients to possess up to 15 cannabis plants and 24 ounces of usable cannabis. The bill required the Washington State Departments of Health and Agriculture to register and license cannabis dispensaries. However, those provisions and various other provisions relating to dispensaries were vetoed by then-Governor Christine Gregoire. What was left was a semi-legal gray medical marijuana market.

I-502 created a legal recreational cannabis market independent of the existing medical market. This dual channel cannabis system radically changed in 2015 when the Washington State Legislature merged Washington State’s medical and recreational cannabis markets by passing SB 5052 and HB 2136. Among other things, these two new laws required both recreational and medical marijuana in Washington State be produced, processed, and sold by licensed cannabis entities.

Today, Washington State retail cannabis stores must obtain a medical marijuana endorsement to sell medical cannabis, though there is no legal distinction between recreational and medical cannabis itself. Instead, the distinction between recreational and medical cannabis is “in the eye of the beholder,” meaning that if a medical patient who obtains authorization from a health care professional uses cannabis to treat his or her ailment, it is medical.

The amount of medical marijuana a patient can possess depends on whether the patient decides to register with the state’s medical marijuana database. Medical cannabis patients who register in the medical marijuana database may purchase the following amounts of cannabis, free of sales tax, from a medically endorsed retail store:

  • Three ounces of usable marijuana
  • Forty-eight ounces of marijuana-infused product in solid form
  • Two hundred sixteen ounces of marijuana-infused product in liquid form or
  • Twenty-one grams of marijuana concentrate

Patients in the Washington State medical marijuana database are also allowed to grow from six to fifteen plants, as recommended by their doctor, and possess up to eight to sixteen ounces of marijuana produced from those plants. Patients who elect not to enter the Washington State medical marijuana database may purchase only the amounts allowed for recreational users and grow four to six plants for medical use and possess up to six ounces of usable marijuana from those plants. These patients also do not get to purchase their cannabis (even if for medical use) free of sales tax.

Bottomline. Washington is a pioneer in the movement to reform marijuana laws. Though it has a one of the most sophisticated marijuana markets in the country and really good cannabis laws overall, Washington does not quite rise to the very top of our state cannabis ranking. This is because the two remaining states, Colorado and Oregon, have implemented legal marijuana in a way that is more patient-friendly and that allows for greater competition among licensed marijuana entities and generally lower prices to the consumer. But the difference between Washington and the remaining two states is minuscule, as all three of these states (Washington, Colorado and Oregon) have extremely favorable cannabis laws, that truly are considerably better and more established than any of the other states. Washington State’s excellent marijuana laws and its overall tenor of enforcement make Washington number three in our State of Cannabis series.

 

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?

Oregon cannabis lawDespite all that has been going on with the Clinton-Trump-Johnson-Stein race, voters interested in how cannabis will be treated in their states need to look at down ballot races as well. November’s state-level elections carry particular importance to the medical and recreational cannabis communities, who rely on friendly state law in the face of federal prohibition. Even in a state like Colorado, where cannabis is enshrined in Amendment 64 of its state constitution, state governments can act to substantially facilitate or frustrate reforms. To help voters assess the candidates and elected officials in their states, the National Organization for Reform of Marijuana Laws (NORML) released its 2016 Governor’s Scorecard grading all 50 governors from A to F based on their stance towards marijuana. Today we will assess how NORML graded the governors in major cannabis states and take a look at what earned one state’s governor the scorecard’s sole A+.

Washington. Democratic Governor Jay Inslee, who is up for re-election this November, received a B- grade from NORML. According to its scorecard, NORML docked points for Governor Inslee’s veto of a bill that would have allowed limited licensed hemp production (the veto was eventually overridden). Governor Inslee gets credit for allowing adults to purchase high-THC concentrates and extracts. There is surprisingly no mention of Governor Inslee’s testimony to Congress in favor of relaxed access to banking for cannabis businesses, worth at least half a letter grade boost given the huge challenge banking presents to the industry. NORML notes that Governor Inslee strongly advocates a comprehensive federal solution for cannabis reform. For more on Washington’s cannabis laws overall, check out our Washington cannabis blog posts here.

Oregon. Democratic Governor Kate Brown, also up for re-election this year, received an A from NORML. Here, NORML’s reasoning is fairly straightforward. Governor Brown adopted progressive cannabis policies in the early days following passage of Measure 91. Governor Brown signed legislation allowing medical dispensaries to sell edibles, extracts, and concentrates to adults in the lead up to recreational licensing. She also signed the bill to remove the 2 year residency requirement to acquire a cannabis license, which has proven to be a boon to cannabis investment in the state. For more on Oregon’s lack of a residency requirement, check out Oregon Opens Its Cannabis Industry to Non-Residents and for more on Oregon’s cannabis laws overall, check out our Oregon cannabis blog posts here

California. Democratic Governor Jerry Brown received a C grade from NORML. Governor Brown was criticized for his hesitance towards recreational cannabis. Governor Brown said he supports states like Washington and Colorado experimenting with recreational cannabis, but mused “how many people can get stoned and we still have a great state…?” Governor Brown is likely to become a part of that cannabis experiment soon whether he likes it or not, as California looks poised to approve recreational cannabis this November. Governor Brown was also knocked for having opposed recreational marijuana as Attorney General. NORML did give Governor Brown credit for signing a bill to reform California’s often disorganized medical marijuana program and for supporting the ability of medical cannabis patients to obtain organ transplants. For more on California’s cannabis laws overall, check out our California cannabis blog posts here.

Colorado. Democratic Governor John Hickenlooper received a B from NORML. Most notably, Governor Hickenlooper was quoted shortly after the passage of recreational cannabis that if he had a “magic wand” he would use it to undo legalization. When asked the same question after having had more time to experience the many benefits legal cannabis has brought to Colorado, he backtracked and said he may not wave his magic wand after all. For more on Colorado’s cannabis laws overall, check out our Colorado blog posts here.

The Best of the Best: Vermont. Democratic Governor Peter Shumlin of Vermont received NORML’s only A+. Governor Shumlin approved an expansion of Vermont’s medical marijuana program to make access easier and increase the number of qualifying conditions. But what sets Governor Shumlin apart is his approach to recreational cannabis reform. Governor Shumlin supports legislative legalization of cannabis. He argues this is crucial to fix the implementation issues of voter-driven initiatives and to create a sophisticated, well-regulated market. To this end he (sadly unsuccessfully) pushed legislation to legalize recreational cannabis in 2016.