Last month, in California Commercial Cannabis: Beware the Residential Farm Purchase, I discussed some of the risks inherent in buying a residential farm for commercial cannabis operations. In this post, I expand on that a bit by addressing some broadly applicable pitfalls for anyone looking to buy land on which to conduct a licensed commercial cannabis activity in California (or just about anywhere else). This post focuses on some land use pitfalls unique to cannabis that our real estate lawyers often encounter during the due diligence phase of land purchase deals involving cannabis.
- Easements. An easement is generally a right to access or travel across real property that belongs to someone else. Cannabis businesses need to look out for easements that benefit the purchasing owner’s dominant estate by allowing access to a neighboring property but are subject to express conditions such as “compliance with all laws” (which would include federal law). If the purchased parcel includes an express easement for parking on a neighboring property subject to “compliance with all laws,” the neighbor could seek to prevent access to the easement as long as the cannabis use remains federally illegal, which could jeopardize the business’s operations. A title analysis during the buyer’s due diligence phase should include not just the usual searches for recorded and non-recorded easements, but it also should also account for the implications on these property rights that a cannabis use might present, which would not necessarily present with a routine property due diligence.
- CC&Rs. Though covenants, conditions, and restrictions are normally associated with residential property (think homeowner associations), they are also common in the commercial real estate industry. CC&Rs typically are binding on future purchasers. Restrictions that might not normally be thorny or even applicable to typical business uses can present unique problems when it comes to cannabis. Common examples of this are restrictions on odor and waste emissions, use/manufacture/trafficking of “illegal drugs,” and the pervasive “compliance with all laws” mandate. Because cannabis is still illegal under federal law (notwithstanding its legal status in California and other states), a beneficiary of a “compliance with all laws” restriction could seek to enforce the CC&Rs against a cannabis operator. Consequently, due diligence for cannabis land purchases should include both a thorough review of CC&Rs and creative thinking on how those restrictions could potentially be interpreted against a cannabis use.
- Zoning and local cannabis ordinances. A buyer looking for land for commercial cannabis operations has usually narrowed the search to jurisdictions with some form of commercial cannabis ordinance (See our California Cannabis Countdown series, which tracks updates in cannabis legalization by locality). Though many California cities and counties have passed legislation to accommodate new zoning requirements for cannabis uses, the burden is on the buyer to confirm that the parcel it seeks to buy will be suitable for its intended use, and, ideally, that it will stay that way. This means conducting due diligence on the local cannabis ordinance and on other related zoning laws and local land use restrictions. This also often means working with the locality to put in place a development agreement (sometimes required by the local ordinance anyway) to make sure the zoning laws won’t change.
- Geographical vicinity and state regulatory requirements. In addition to local zoning requirements, cannabis operators must consider state laws when deciding where to locate. California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) requires cannabis businesses maintain at least a 600-foot distance from schools and other youth gathering places. Local cannabis ordinances commonly include geographical buffer requirements that mirror current state requirements, but they can (and they sometimes are) be stricter than MAUCRSA’s. This means that your search for land suitable for your cannabis operation should include an analysis of local and state geographical buffers and any other local restrictions.
- Neighbors. The importance of maintaining good neighbor relations cannot be overstated in the commercial cannabis industry. You should assume any neighboring landowner who opposes your business operation would have no trouble finding a legal basis to challenge it. They can (and often do) seek to enforce land use restrictions or lobby to change local zoning laws to the detriment of cannabis businesses. Or they might just bring an old-fashioned nuisance lawsuit against you, claiming the smell from your property or the number of people who visit it are damaging them. Your due diligence should, therefore, include gauging the potential risks coming from your future neighbors, particularly if the land you are considering is close to residential zoning or urban areas, where NIMBYism is likely to be more acute.
Due diligence on a real estate purchase is always important, but the unique characteristics and legal status of cannabis make it even more important for commercial cannabis businesses.