We’ve seen this movie before: a city gets excited about commercial cannabis opportunities and passes an ordinance allowing indoor medical cannabis cultivation. After the law goes into effect, neighbors complain about odors or aesthetic issues or just because they don’t want anything to do with cannabis in their neighborhood. Sooner or later, the right neighbor complains to the right city council member and cannabis suffers a major setback with a restrictive ordinance or even a moratorium. The city declares the “offending” cannabis business use to be nonconforming and issues a notice and order to abate. The cannabis business finds itself hundreds of thousand dollars in debt on its construction/build-out project without a path forward for being able to operate and a permit it can’t take elsewhere because it runs with the land.
How then should a would-be cannabis tenant or purchaser avoid this risk, or at least mitigate against it, before jumping into a huge investment for improving the land? A development agreement is one solution.
A development agreement is essentially a contract between a property owner/developer and a municipality that specifies how a given parcel will be improved and used for a certain finite period of time, and specifying how the planning and zoning laws for that parcel will change or not change during that time. Municipalities benefit from development agreements because by reducing risk they encourage development and increase property tax revenues. The property owner/developer benefits by having much greater certainty regarding the uses to which the property may be put.
The added certainty of stable zoning makes developers and their investors and lenders more willing to invest their time, effort, and financial resources into improving the land. Without a development agreement, developers typically must risk paying architects, engineers, and contractors before they can obtain a building permit from the municipality. Developers and municipalities often end up litigating over vested rights and the permitting process. Under California’s vested rights doctrine, only after developers obtain the building permit can they be certain their parcel will remain unaffected by future zoning law changes — and even this isn’t always a total certainty, as California courts have found exceptions that allow zoning changes, depending on the circumstances.
Given its unpredictability and its huge potential, California’s commercial cannabis industry is a prime candidate for development agreements, yet they are still rarely used for cannabis business land development. I see this as due to a combination of things, ranging from local government reluctance to tie land within city limits to uses the federal government still deems unlawful, to cannabis lawyers (especially those who only recently switched from representing cannabis criminal defendants) simply not knowing about development agreements. See How To Choose Your Cannabis Business Lawyer.
Whatever the reason, less certainty in already uncertain times is bad for all parties involved.
Cities want to attract responsible, experienced developers to improve land and public infrastructure and increase property values and tax revenues. Developers and their associates seek certainty that the improvements they pay to add to their land may be legally utilized. Cities that pass ordinances to allow cannabis business activities, as well as would-be purchasers and developers, should be considering development agreements as part of their commercial cannabis development plans.