Cannabis attorneysCommercial leases for cannabis businesses are a major concern for many of our clients largely because cannabis businesses operate in an industry prohibited under federal law. Generally, contracts that are illegal are unenforceable and there is an argument to be made that any and all cannabis contracts are illegal, at least at the federal level. But a recent Arizona state court shows that state courts are not always receptive to that argument and that a contract that violates federal law is not necessarily unenforceable.

Green Cross Medical, Inc. v. Gally (April 18, 2017) addressed whether a commercial lease with a medical marijuana grow operation in Arizona was enforceable. John Gally owned commercial property in Winslow, Arizona that he leased to Green Cross Medical to operate a medical marijuana dispensary. Two weeks later, Gally sent a letter to Green Cross revoking the lease. At the time Gally terminated the lease, Green Cross had not received the necessary license to operate a dispensary. However, the lease permitted Green Cross to sublease the property and nothing in the lease stated the lease would be terminated if Green Cross did not receive a license to run a dispensary.

Green Cross sued Gally for breach of contract and attempted to obtain a temporary restraining order to prevent Gally from revoking the lease. Gally argued that the lease was illegal and therefore unenforceable because it involved cannabis distribution. The trial court was persuaded by Gally’s argument and ruled that the lease agreement was indeed unenforceable because violated both federal and state law. Based on this, the trial court did not grant Green Cross the restraining order and it denied Green Cross damages for Gally’s having revoked the lease.

Green Cross appealed the trial court’s decision.  First, the appeals court determined that Green Cross could seek damages against Gally even though Green Cross did not receive a license to operate a dispensary on the leased property because the right to sublease was a valuable property right. As a result, Green Cross was permitted to seek damages for the loss of the lease.

The appeals court also held that the lease was not illegal on under Arizona law. The court stated that the Arizona Medical Marijuana Act (AMMA) protects rights of dispensaries to enter into commercial leases and that dispensaries have a contractual right to enter into lease agreements with landlords. The appeals court concluded that “[g]iven the language of the AMMA, a court may not void or refuse to enforce a dispensary’s lease with a landlord simply because the dispensary would be supplying marijuana in compliance with the AMMA.”

The appeals court also rejected Gally’s arguments that he as the landlord could face criminal liability under state law because he was facilitating marijuana distribution by leasing property to a cannabis dispensary. The appeals court pointed to the fact that Gally agreed to execute the lease understanding that Green Cross intended to operate in Arizona’s medical market:

We emphasize that nothing in the AMMA requires a landlord to rent a property to a proposed dispensary. Gally was free not to enter into the lease if he was uncomfortable with the proposed use of the Property. But once he chose to do so, he was not free to rescind his contractual commitments without facing potential monetary liability. Accordingly, leasing property to a medical marijuana dispensary that is in compliance with the AMMA is not illegal under Arizona law. Thus, the superior court erred when it found the lease was void and dismissed the complaint seeking damages for the breach.

The appeals court then acknowledged that federal law prohibits distribution of marijuana under the Controlled Substances Act (CSA) and that it is, therefore, illegal under federal law for an Arizona landlord to lease property to a marijuana business. However, the appeals court went on to state this federal illegality “does not render the contract in this case unenforceable under all circumstances.” The court cited to several cases where contracts involving medical marijuana businesses were upheld by courts despite being prohibited under federal law, showing that courts balance the federal government’s interest in enforcing the CSA with states’ interest in permitting the medical use of marijuana.

The appeals court weighed the interests of the federal government and the state of Arizona and held that the lease was not unenforceable simply because it violated the federal CSA. The appeals court explained that federal government enforcement of the CSA against state-compliant marijuana operators had been in flux for years and that the Department of Justice (DOJ) had instructed US Attorneys not to prosecute individuals acting in compliance with the Cole Memo. The court also noted that Congress has prohibited the DOJ from using funds to prosecute people distributing marijuana in compliance with state law. As a side note, that spending provision was recently extended.

The Arizona Appeals Court sent the case back to the trial court to reconsider the facts of the case in light of the appeals court having held that the lease was not unenforceable and that Green Cross may recover damages for Gally’s terminating the lease.

You can find more on cannabis leases here:

 

 

California cannabis leaseWe’ve written before on how commercial leasing for cannabis business is a uniquely different animal that requires special attention beyond a boilerplate commercial lease agreement. The new multi-agency rollout of California’s proposed medical cannabis regulations under the Medical Cannabis Regulation and Safety Act (“MCRSA“), as well as Governor Brown’s recent budget trailer bill to harmonize the MCRSA and Proposition 64 (California’s adult use cannabis initiative), highlight just how complex things could become as part of California’s new licensing regime, and why it’s important you have a commercial lease agreement that protects your interests, particularly if you are the landlord.

Here are a few things you should consider when drafting a medical or adult use cannabis lease in the new frontier of regulated cannabis in California:

  1. Defining the Permitted Use. Since California will have at least 20 different types of cannabis business licenses under the MCRSA and Proposition 64 and since unlicensed activity can lead to revocation or denial of a tenant’s license, your lease should specifically define the business activity the tenant contemplates engaging in on the property and set out an anticipated timeline for the tenant’s license application and eventual licensure. Any deviation from the tenant’s permitted use defined in the lease or any failure to acquire a license should be cause for terminating the lease agreement. Clearly defining the permitted use is also necessary for the tenant as the new MCRSA cannabis regulations require licensee applicants to demonstrate property owner approval for the proposed license type if the license applicant is leasing the space.
  2. Compliance with Local Laws. Though Proposition 64 does not require proof of local approval to qualify for a license, the MCRSA does. And though Governor Brown’s reconciliation bill would require the State work with local governments to determine compliance for both medical and recreational cannabis licensees at some point in the licensing process, if there is no local permitting structure, the cannabis tenant must conduct an Environmental Impact Report (EIR). If the local government does not approve the EIR and/or the EIR determination disallows the tenant’s proposed use, but the tenant has already signed a lease, that’s a problem for both the tenant and the landlord. For these reasons, landlords and tenants need to know any applicable local laws (which change constantly), and their lease for a medical or adult use cannabis tenant should include a provision requiring compliance with specific local laws and setting out what will happen to the lease in the event of a bad EIR.
  3. Compliance with State Laws and Regulations. The MCRSA (in AB 266) mandates that “a person or entity that holds a state license is prohibited from licensure for any other activity … and is prohibited from holding an ownership interest in real property, personal property, or other assets associated with or used in any other license category.” This means individuals with a state license cannot have an ownership interest in any real property held by any other licensee not within their same license category or license combination allowed by the State. Proposition 64 does not have this real property prohibition. And though the State has yet to come out with its Proposition 64 regulations, other existing state regulations must be addressed in a lease for an MCRSA tenant. For example, there are certain security practices and ID badge requirements to which everyone accessing an MCRSA premises must adhere, including the landlord. There can only be one license per location and the licensee in that location cannot sublet to other licensees. MCRSA retailers are only allowed to operate from 6 a.m. to 9 p.m. and their products must be sight-obscured from the public. The premises of MCRSA licensees must have certain security and surveillance and MCRSA licensees must have a general commercial liability insurance policy of at least $1 million. Your MCRSA lease should include provisions addressing all of these state law requirements.
  4. Compliance with Federal Enforcement Priorities. Your cannabis lease should also have provisions requiring compliance with relevant current and future state and federal laws, except to the extent federal law is inconsistent with California cannabis laws. The 2013 Cole Memo is still the most important federal guidance on state-regulated cannabis operators and Attorney General Jeff Sessions has indicated at least some continuing support for it.  Landlords should ensure their tenants comply with the Cole Memo in addition to state and local laws as this best ensures against federal law enforcement action.
  5. Asset Forfeiture and Indemnity. No one can predict how the federal government will approach cannabis enforcement, but one thing is clear: landlords need to do whatever they can to avoid getting caught up in any kind of civil asset forfeiture stemming from a tenant’s federally illegal cannabis activity, even if the activity is otherwise allowed by California law. A prime example of how this can go wrong for landlords is the Harborside case where the landlord was unable to evict her medical cannabis dispensary tenant because it was not violating the lease agreement, which was drafted to be upheld according to California, not federal law. Your cannabis lease should include language requiring that the tenant indemnify the landlord for any enforcement action and making any such action constitute a default under the lease.
  6. Signage and Advertising. Proposition 64 has specific requirements on where, what, and how a cannabis business can advertise and market to the public and a proposed bill would extend these restrictions to medical cannabis businesses under the MCRSA.  Adult use cannabis businesses cannot advertise or market within a 1,000-foot radius of any school, day care center, or playground, nor can they advertise or market “on a billboard or similar advertising device located on an Interstate Highway or State Highway which crosses the border of any other state.” At minimum adult use retail business leases should mandate compliance with Proposition 64’s advertising and marketing restrictions.

Federal cannabis prohibition, coupled with the fluidity of California’s new cannabis laws, makes standard commercial lease agreements dangerous for leases involving cannabis businesses. Your cannabis commercial lease needs to address the realities and multiple legal issues involved with operating a cannabis business and managing a cannabis business tenant.

Marijuana leasing

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

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

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

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

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

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

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.