Marijuana Real EstateTomorrow, I will co-present a national continuing legal education (“CLE”) seminar for the American Law Institute, titled “Cannabis and Commercial Real Estate.” I will present this 90-minute seminar and webcast with Daniel Dersham, a talented real estate attorney with the San Francisco law firm Wiley & Bentaleb LLP. The seminar is designed for lawyers around the country who wish to assist clients in buying, selling and leasing real estate in the cannabis industry. It is also a great opportunity for non-lawyers to gain insight on how cannabis properties are rented, bought and sold, and to understand how attorneys approach these unique transactions.

Over the past few years, our Oregon, Washington and California offices have advised on hundreds of real estate transactions related to state-legal cannabis. In the Oregon office alone, we are continuously working on these deals, which may range from the negotiation of a 1,500 square foot lease for a dispensary, to the purchase of a 150+ acre property for large-scale agriculture across multiple licenses. Each deal is a snowflake, and each brings unique opportunities and challenges.

Because we are always doing real estate deals, we tend to write about them often. For a recent sampling of work related to this field, including topics that will be covered at tomorrow’s CLE, please see the following recent Canna Law Blog articles:

Like many aspects of the cannabis industry, the central issue that makes real property transactions challenging, unique, and even sort of fun (at least for us cannabis business lawyers), is federal illegality. That issue ripples through pretty much every cannabis real estate deal in myriad ways, and a skilled practitioner with knowledge of the following is required: (1) the dynamic interplay of state and federal law; (2) the intricacies of state and local regulatory programs for cannabis– including zoning and land use laws; and (3) industry standards on achievable deal points for a lease or sale transaction.

Over the next year or two, existing state marijuana markets will continue to mature and new markets will come online. We expect to see a continued emphasis on real estate deals during this period. Buyers, sellers, landlords, tenants and service providers who understand the way this game is played will have a considerable advantage. And for many in the cannabis industry, negotiating a real estate transaction will be the largest decision of all.

I hope that you can join us.

Cannabis real estate lawyersSince licenses to grow, process, or sell cannabis are usually tied to a specific real property location, it is not surprising that cannabis businesses often need real estate help. The following are some basic points we try to convey to our cannabis clients about real estate in a cannabis context.

1. Location. Location. Location. Choosing the right location is important for any business, but this is especially true for a cannabis business. Finding a suitable and state-and-local-law-compliant location for a marijuana business can be difficult. Most states, cities, and counties limit where marijuana businesses can physically operate. States and cities often require cannabis businesses be at least 1,000 feet away from schools and parks because federal criminal law sentencing guidelines tack on extra sentencing time for cultivating, processing, or distributing cannabis within 1,000 feet of a school or park. Local zoning laws can also significantly restrict location options and these can vary greatly from local government to local government. Regulations that limit the number of cannabis stores or grow sites allowed in a given county are also common, as are moratoriums and outright bans.

2. Find a Landlord With Whom You Can Work. Most commercial landlords will not rent out their space to a cannabis business. Because cannabis remains illegal under federal law, landlords can face arrest for violating the federal Controlled Substances Act or, more realistically, losing their property via a civil asset forfeiture. Look what happened to the landlord in the Harborside case. The landlord-tenant relationship can be strained if the landlord is not informed of the nature of the tenant’s business and the risk associated.

3. Make Sure Your Lease Works for the Cannabis Industry. “Boilerplate” lease agreements do not work for cannabis businesses. For example, the typical Commercial Broker’s Association lease states that any illegal activity on the property will constitute a lease default. We usually write our commercial marijuana leases to forbid only those actions that violate state law and federal law with the exception of the federal Controlled Substances Act. Commercial leases also typically contain a provision governing the activities permitted on the leased property. If the tenant is a marijuana retailer, the permitted use provision should explicitly permit the “retail sale of marijuana.” Leaving the permitted use provision vague only increases the chances of the cannabis business tenant being found in breach of the lease for having conducted an activity not permitted on the property.

4. Know Your Property. Our cannabis real estate lawyers are far too frequently brought in on long simmering real estate deals only to have to tell both sides that there will need to be major changes in the deal points for the deal to work at all. Before getting too far down the negotiating path, it is wise to at least secure a real property report. These reports will show ownership history, encumbrances (such as mortgages) on the land, and any easements or other restrictions on property use. For example, if there is an unpaid mortgage on the land, the holder of that mortgage can foreclose on the property, even though the current owner was not the one who entered into the transaction. Even a tenant who is not purchasing the property should be informed of the property’s history and the risks associated with that property.

For more on cannabis and real estate, check out the following:

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 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.

 

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.

Oregon marijuanaEvery week, without fail, we speak with prospective clients looking to make an appearance in Oregon’s marijuana industry. Some of these entrepreneurs boast impressive business pedigrees; others are decidedly less experienced. Still, one question we regularly field across the board is: “What’s the biggest challenge about starting a marijuana business in Oregon?” My answer is always: “Finding a location.” Once the site is secured, everything tends to fall into place.

We have written before that location is critical in any business venture, but especially so with Oregon marijuana. Currently, the state is a curious patchwork of friendly and unfriendly marijuana jurisdictions, and even in the friendly locales, zoning rules and time, place and manner restrictions may govern where pot ventures can exist. This November, local voters in 47 cities and six counties will decide whether to open those barricaded locales to marijuana businesses. So, the pool of available locations will once again expand. The question is only to what extent, and where.

Our clients who have gone through licensing know that even before applying for any class of Oregon Liquor Control Commission (OLCC) license, the applicant must submit a Land Use Compatibility Statement (LUCS), showing local approval to operate. In certain jurisdictions, and for certain zones and license types, this process may require a conditional use application that even allows for public participation. In other situations, the LUCS involves nothing more than ministerial zoning review, processed over the counter. Once the LUCS is in place, OLCC will assume the location is viable and the applicant can proceed toward licensure.

Although acquiring the LUCS presents an occasional challenge, the main hurdle remains finding a viable site in the first place. Some uses are easier than others: for example, finding land to lease for marijuana production tends to be simpler than acquiring a storefront to sell it. This is because fewer properties around the state are eligible for storefront cannabis development than for agricultural use, especially given the proximity rules (schools, other dispensaries, etc.) applicable to marijuana retailers. As a general proposition, it is also easier to secure a property if you are willing to purchase, rather than lease.

Some common advice we give to new parties is that there is no replacement for research and for pounding the pavement in search of a site that will work. Although we occasionally get leads on properties from realtors, sellers and others, there are a great number of channels that should be explored, from listing sites like loopnet to networking opportunities through organizations like the Oregon Cannabis Association and Women Grow.

Once you find a site you like, it is critical to make sure it complies with the local zoning code and that the relevant city or county does not have any rule-making on the horizon that could affect you negatively. Unfortunately, we have seen people trip on these steps, and it can be devastating. Finally, once your diligence is complete, it is also important to ensure that the timing of the close will work with everything else you are doing: no one wants to sit on an unproductive asset for a minute longer than necessary.

In all, if you are determined to participate in Oregon’s marijuana industry, you will find a location that works. At that point, and unlike with other states, you will not have to worry about residency requirements, high compliance barriers, or a lottery for licensure. Oregon is wide open and it should remain that way for the foreseeable future. The biggest step is finding a place.

There are 48,699 registered marijuana growers under Oregon’s Medical Marijuana Program. Some of these growers grow a couple of plants for a patient or two, and others produce at the program limits of 24 mature plants. There are grow sites with just one or two growers, and others with dozens of growers and 100 or more registered patients.

Buying and selling farmland for cannabis has its own legal rules
Buying and selling (and lending on) land for cannabis has its own legal rules

Under the new recreational program, grow sites will be even larger. Outdoor limits are currently capped at 40,000 square feet in total canopy, per license. That is close to an acre. As we have written here before, marijuana is now an official “crop” in Oregon, protected by the state’s right to farm laws. For these reasons, Oregon marijuana cultivators are buying up land in grow-friendly counties at a pretty good clip.

As with marijuana leases, marijuana land sale transactions are not typical and we are already starting to see documentation drafted by lawyers without cannabis experience that fails to account for this. Bank loans are out of the question, as chartered lenders are unwilling to finance the purchase of an asset that could be seized at any moment under the federal Controlled Substances Act (CSA), 21 USC § 856. That statute, sometimes called the “crack house statute,” provides that using or allowing real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance, is a federal crime. Marijuana is a Schedule I controlled substance under the CSA.

Without access to bank loans, cultivators who are not independently wealthy must deal with hard money lenders, if they can drum up the collateral; or, more typically, convince the property seller to carry a loan. In either case, the buyer gives the lender or seller a promissory note. That note almost always carries a higher interest rate than a standard bank note. Recently, depending on the size of the transaction and the term involved, we are seeing interest rates in the 10 to 12 percent range, but they can be even higher.

And then there is the very interesting issue of security. No sensible seller will lend money based only on a borrower’s promise to pay. Like any seller, a seller who finances the sale of real property to an Oregon marijuana cultivator will insist on a first deed of trust. That way, if the buyer misses a payment, the seller can take the land back by foreclosing on the deed. If things are done correctly, the seller will have priority over any other creditor.

A savvy seller may also insist on a security interest in the marijuana “crop” itself. You may be wondering how a non-licensed entity, like a creditor to a marijuana business, could legally seize and sell an acre’s worth of marijuana. The Oregon Liquor Control Commission (OLCC) has considered this, and its draft rules currently provide that “the Commission may issue a temporary authority to operate a licensed business to . . . a person holding a security interest in the business for a reasonable period of time to allow orderly disposition of the business.”

The rules go on to provide for issuance of a “certificate of authority” to the temporary licensee (in this case, the seller or creditor). This means that if a seller has perfected her interest in the marijuana crop by filing the appropriate financing statement, and a buyer stops making payments, the secured seller can actually seize and sell the marijuana. This would be done in addition to taking back the property, if recovery of the property did not cover the outstanding debt. Of course, the seller would have to be willing to seize and sell the marijuana in violation of the federal CSA, but that’s another story.

These are just a few of the more interesting angles on the sale of real property for marijuana cultivation. There is much more on this topic than we have written here, from standard considerations like the form of deed exchanged, to industry particular contract terms, like those related to the failure of a buyer to obtain or maintain OLCC licensure. Both buyers and sellers in these transactions must take special care to ensure that their interests are protected.

As so many of you know, few landlords are willing to rent to marijuana businesses. They are afraid of the very real possibility of losing their property in a federal civil asset forfeiture action. The federal government has been known to seize property being used for cultivating, manufacturing, or selling marijuana. In the last seven years, the Feds have seized  more than a billion dollars in personal and real property allegedly tied to federally illegal drugs, including marijuana in states where marijuana is legalMarijuana Commercial Leases

If you are a landlord or a marijuana business tenant, you should know what you can do to help avoid federal intervention, including asset forfeiture.

Under federal law, forfeitures can be civil or criminal:

The following shall be subject to forfeiture to the United States and no property right shall exist in them … [a]ll real property, including any right, title, and interest (including any leasehold interest) in the whole of any lot or tract of land and any appurtenances or improvements, which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of this subchapter punishable by more than one year’s imprisonment.

Since manufacturing, cultivating, and distributing cannabis are federal crimes, real property that facilitates those crimes is subject to asset forfeiture.

Civil forfeitures of real property are brought as judicial forfeiture actions that require a court to oversee the seizure. In these civil cases, the government has the burden of proving that the property is subject to forfeiture. The government does not need to prove the landowner is guilty of a crime. It merely needs to show a “substantial connection” between the property and the crime.

Federal law does provide what is known an “innocent owner defense” to the forfeiture of real property. This defense provides that property will not be forfeited if the owner can show that it did not know about the conduct giving rise to forfeiture or that when it learned of the conduct giving rise to the forfeiture it did all that it reasonably could to terminate such use of the property.

Here’s the big problem though in states where marijuana is legal for either medical or recreational use. In those states, the innocent owner defense is usually not available because the state typically mandates that the lease explicitly allow for the growing, manufacturing, or selling of marijuana. And, in most marijuana-legal states, having a lease that allows for marijuana activity is also required to receive a state license to operate.

There are though many things that both landlords and tenants can to prevent asset forfeiture or federal intervention altogether, including those discussed below.

Real property leases that involve a cannabis business should include “escape clauses” that specifically list out federal intervention, changes in federal enforcement policy, forfeiture threats, and federal enforcement actions (such as DEA raids or DOJ criminal charges or administrative actions) as defaults that constitute lease violations. This sort of provision will give the landlord fodder for appeasing the Feds.

Commercial leases typically contain a permitted use provision governing the activities permitted on the leased property. The permitted use provision for a cannabis business should specifically identify the activities allowed on the property. If the tenant is a marijuana retailer, the permitted use provision should explicitly permit  “retail sale of marijuana.” Leaving the permitted use vague will likely mean that marijuana tenants run the risk of breaching the lease by conducting an activity not permitted on the property, which itself could invite federal scrutiny.

Marijuana commercial leaseholds should provide for a strict code of conduct for property use. The typical Commercial Broker’s Association lease states that any illegal activity on the property will constitute a default in the lease, so just pulling one of these provisions “off the shelf” is not appropriate. We typically write our commercial marijuana leases to forbid only those actions that violate state law — not federal law.

Your marijuana lease should also include provisions relating to hours of operation, how the tenant treats of its neighbors, odors, loitering, use of hazardous substances, the number of people permitted on the property, and compliance with state and local regulatory rules and with the Cole Memo.

Federal marijuana prohibition coupled with the fluidity of state marijuana regulatory schemes make standard commercial lease agreements wrong for leases involving marijuana businesses. You instead need a lease that deals with the realities of running a marijuana business.

Why do commercial landlords still hesitate to rent to marijuana businesses? In addition to the remote possibility of a landlord getting arrested and prosecuted by the U.S. Department of Justice (DOJ) for violating the Federal Controlled Substances Act, landlords face the very real threat of losing their property via a civil asset forfeiture. The federal government can and does sometimes seize property used for cultivating, manufacturing, or selling marijuana. In recent years, the Federal Government has netted at least one billion dollars from seizing personal and real property used for to manufacture or distribute Federally illegal drugs, including marijuana in states where marijuana is legal. Whether you are a commercial landlord or a marijuana business tenant, you need to know what you can do to help fend off Federal intervention, including asset forfeiture.

First though, a brief overview of how asset forfeiture works. Forfeiture can be either civil or criminal. Forfeiture of real property used to violate the Federal Controlled Substances Act is governed by 21 U.S.C §§ 881 and 18 U.S.C  §§ 983 and 985. Pursuant to 18 U.S.C §881(a)(7):

“[t]he following shall be subject to forfeiture to the United States and no property right shall exist in them … [a]ll real property, including any right, title, and interest (including any leasehold interest) in the whole of any lot or tract of land and any appurtenances or improvements, which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of this subchapter punishable by more than one year’s imprisonment.”

Since cultivating, manufacturing, and distributing marijuana are Federal crimes, real property used to facilitate the commission of those crimes is subject to asset forfeiture.

In civil asset forfeiture cases involving real property, the government actually sues the property itself and the property owner is treated as a third party claimant. Civil forfeitures of real property are initiated as judicial forfeitures, meaning a court with competent jurisdiction must oversee the seizure. The burden of proof is on the government to show by a preponderance of the evidence that the property is subject to forfeiture. Civil asset forfeiture of real property does not require that the government prove that the landowner is guilty of any crime; it is enough if the government shows that there is a “substantial connection” between the property and the crime alleged. By contrast, criminal forfeiture is against a person only after a conviction (beyond a reasonable doubt) for an underlying criminal offense.

Nonetheless, 18 U.S.C §983(d) creates what is known as the “innocent owner defense” to asset forfeiture of real property. “An innocent owner’s interest in property shall not be forfeited under any civil forfeiture statute. The claimant shall have the burden of proving that the claimant is an innocent owner by a preponderance of the evidence.” The term “innocent owner” means an owner who (i) did not know of the conduct giving rise to forfeiture; or (ii) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property (emphasis added).”

In many states where marijuana has been legalized (either for recreational or medical use) the innocent owner defense is usually not available because the marijuana-legal state mandates that the lease explicitly allow for the cultivation, manufacture, or retail sale of marijuana. And, in most if not all, marijuana-friendly States, having a lease that allows for marijuana activity is a requirement to receive an operational license from the state. So then what can landlords and tenants do to prevent asset forfeiture or Federal intervention altogether?

First, as we noted in our post, Marijuana Commercial Leaseholds: Any Resemblance to Regular Leaseholds is Purely Coincidental real property leases that involve a marijuana business should include “escape clauses” listing Federal intervention, changes of Federal enforcement policy, forfeiture threats, and/or Federal enforcement (be it a raid by the DEA or filing of criminal charges by the DOJ) as defaults that constitute lease violations or cancellations.

Leases typically contain a permitted use provision to govern the activities that can take place on the leased property. The permitted use provision for a marijuana business should accurately identify the activities allowed on the property. For example, if a tenant is a marijuana retailer, the permitted use provision should reflect this by explicitly permitting “the retail sale of marijuana.”  If the permitted use is unclear, tenants run the risk of breaching the lease by conducting an activity not permitted on the property, which itself could invite Federal scrutiny.

It is also prudent for a marijuana commercial leasehold to set out a strict code of conduct relating to the use of the property. The typical Commercial Broker’s Association lease provides that any illegal activity on the property constitutes a default so just pulling one of these “off the shelf” is not the way to go. One reliable way to handle the illegality issue is to write a lease that explicitly forbids only those actions that violate state (not Federal) law.

Moreover, it is important to include in a marijuana lease provisions relating to hours of operation, the tenant’s treatment of its surrounding commercial neighbors, loitering, odors, the use of hazardous substances at the property, the number of people permitted on the property, and constant compliance with any and all state and local regulatory rules and with the recent Cole Memo from the DOJ.

The bottom line: Federal marijuana prohibition and the fluidity of state law marijuana regulatory schemes mean that standard commercial lease agreements are not sufficient to sustain and protect the landlord/tenant relationship involving a cannabis business. You instead need lease that accounts for the realities of running a marijuana business. Or prepare to face the consequences.

 

We’ve been marijuana business lawyers for a long time now and in multiple states, and being on the front lines of this industry means that we have seen a lot of good and bad actors. In this post, we share the Top Ten Marijuana Industry Red Flags so that you know what to look for to protect yourself as you go forth with your marijuana business:

1. Marijuana real estate agents. It is the rare “marijuana realtor” who can be trusted. Let’s be honest, really successful real estate agents are generally not that interested in having to spend the extra time required to handle cannabis properties. Most of the time, the allegedly “marijuana expert” realtors know little to nothing about the state marijuana laws relevant to using a property for cannabis, let alone the local laws, but this virtually never stops them from claiming that they do. We also see too many cannabis realtors who claim to side with the marijuana business, but whose sole goal is to assist landlords in gouging marijuana tenants for above-premium rates.

In vetting your realtor, be sure he or she knows both the state laws as they relate to real estate and any local land use and zoning regulations. Better yet, consider using your own lawyer for this. For our clients, we like having realtors sign non-disclosure agreements so as to minimize the chances of their exposing our clients’ operations for their own benefit. Just by way of one example: you do not want to clue your realtor in on a great property for marijuana and then have him or her tell your competitors about it.

2. Anyone who claims they’re the “next big thing” in the marijuana industry. The “green rush” has given rise to many people who will do anything to make a dollar. You need to be weary of anyone whose goal is to sell you on his or her ability to make it big in this industry or based on some guarantee that they can get you a license.

We stay away from those who are “overly desperate” to be part of “big marijuana,” and you should too, whether it’s a security company, a marijuana licensing consultant, a software company, or even/especially an investment banker. You know the type: they will promise you everything but get really vague when you ask them to explain how it is that they work their magic. Our favorites are the companies that brag about the number of licenses they were able to secure for companies in the states where the licensing process is completely random. Be on particular guard for these people because they like to charge premium prices even before (actually especially before) the licensing process in their state has even become clear.

3. Holding companies. We know how difficult it is to operate a business when banks and credit unions refuse to take you on as a client. Eventually though, things will change for the better. How do we know this? Because we represent financial institutions that are planning to take on marijuana clients soon. In the meantime though, what we can tell you is that running your cannabis money through a holding company and then using that holding company to get a bank account is a very bad way to go about getting a bank account. (Note that this “idea” is a favorite among the very group of people described in paragraph 2 above).

Using a holding company to set up your bank account will attract the attention of both the bank and federal law enforcement and you could be charged with laundering “drug money” and with violating federal law for lying to a a bank. Do not waste your money (or your freedom) on the holding company.

Be honest with the bank and be patient. Please.

4. Ragged and rampant trade organizations. New marijuana trade organizations are popping up as legalization increases. Problem is that most of these new organizations are inert and unorganized and some are flat out corrupt. Many of these groups have been formed with the primary goal of leeching fees from members without any meaningful action. Don’t get us wrong, trade organizations are amazing tools for policy, progress, and protection. But some of the marijuana trade groups we’ve seen lately are incapable of doing anything but wasting people’s money. The most troublesome ones are those set up by lawyers simply to collect legal fees for bringing class action lawsuits that make no legal sense at all.

You need to vet your trade groups thoroughly. Who is really in charge? What’s the goal? What will you really get for your membership dues? What’s the group’s track record on achieving its goals? How loud will your voice be in the group? If you can’t get these questions answered, you should probably decline that membership invite. We have found the best groups to be the really big ones with a national presence and the small local ones that were formed organically by its marijuana business members to achieve particular and well-defined goals.

5. Publicly traded marijuana companies. We blogged about the issues with these companies in Publicly Traded Cannabis Stocks. Watch OutPublicly Traded Cannabis Stocks. Be Careful Out There and again just last week in Publicly Traded Pot Stocks. Watch Out, but we cannot resist again emphasizing how careful you need to be when contemplating investing in a publicly traded marijuana company. Virtually none of the publicly traded companies are anywhere near to being profitable and it seems like every week the media comes out with a new revelation about the sordid background of a company founder. Be doubly suspect of any publicly traded company that provides licensing consulting.

6. Anyone who doesn’t know what the “Cole memo” is. There are certain things that instantly tell us as cannabis business lawyers that we are dealing with people unfamiliar with this industry, and having no clue about the Cole memo is one of those things. The Cole memo gives critical insight into the federal government’s marijuana enforcement strategies and for someone not to know this is usually quite telling. Even more so if they do not even realize that marijuana is still illegal under federal law. These people usually talk about doing business between states as though the federal government is irrelevant. It isn’t.

7. Marijuana airport seminars, consultants, and “colleges.” We previously wrote about pot colleges in Buyer Beware: Pot College and Canna Consultants and we mention them again because they seem to be proliferating out of control, especially in those states (like Florida) believed to soon go legal. We constantly hear horror stories from people who attend these and we have a hard time respecting any lawyer connected to one. We refuse to speak at any of these because we do not have time to vet them and because we suspect about 90 percent of them are a joke at best.

We spend at least twenty percent of our time with new clients cleaning up the messes these companies were told to create by these colleges and consultants. Having run a pot delivery service in California or having worked at a dispensary in Colorado does not make you an expert in anything or everything related to pot in Florida or in Oregon. Please think twice before hiring an allegedly “expert” consultant or acquiring a “degree” from fill-in-the-blank Marijuana University.

8. Anyone who claims they can get you a “regional trademark.” Your brand is often your company’s most valuable asset and usually the best way to protect your brand is by securing a trademark for it. But because the federal government does not usually allow federal trademarks for marijuana related products, trademarks — which are complicated enough — become more so.

There are two ways to get around this federal prohibition. One is to secure a federal trademark for something other than cannabis, which works well in some circumstances and horribly in others. The other is to secure a state law trademark, which works well in some circumstances and horribly in others.

We leave trademarks to one of our attorneys who has been doing almost nothing but trademark law for more than a decade, but far too many former criminal lawyers (who now call themselves cannabis lawyers) are talking about trademark law without having any clue at all. And lately many of these criminal lawyers are pitching talking about “regional trademarks” and wrongly claiming that a trademark in one state will protect you in other states in the same region. This is just not correct; if you want to be assured of protection in any given state, you should either register for a federal trademark or register for a state trademark in each state that you operate in.

If you want a real trademark (one that will actually work), use a real trademark lawyer. It is that simple.

For more on the importance of protecting your cannabis brand by doing your cannabis trademark correctly check out the following:

9. Criminal defense lawyers turning into business lawyers overnight. Would you have your business lawyer argue your DUI case? Of course not, which is why our law firm does not handle criminal cases. Using a criminal defense lawyer to do your business work is equally absurd. Criminal law and business law have a completely different set of laws and one is done in court (criminal) and the other is done in an office (business).

Good criminal lawyers are still valuable in this industry (unfortunately) but as criminal lawyers, not as newly minted business lawyers who are seeing their bread and butter practice of defending marijuana defendants evaporating. Call a criminal lawyer if you are raided by the feds, but for something like your company formations, your trademarks, your real estate transactions, your employee contracts, or your safety compliance, use a business lawyer.

10. The federal government. The federal government is THE big red flag because despite the progress being made by the states, the Feds loom large as marijuana remains a federal crime. Avoid those who tell you not to worry about federal laws because the Feds are inactive or unwilling to enforce, as this is just flat out wrong. Marijuana remains a Schedule I drug and possessing or selling it is still a federal crime and if you do not comply with all state and local laws, your risk of being raided, arrested, and convicted in a federal court will go way up. It is a mistake for you not to be ever mindful of this.