california cannabis consolidation

On Friday, January 10, 2019, the California Bureau of Cannabis Control (BCC) issued an email press release entitled, “Consolidation of California Cannabis Licensing Authorities” concerning a budget proposal released by Governor Gavin Newsom. Per the press release:

  1. Newsom intends to combine all three California cannabis agencies into one single Department of Cannabis Control by July 2021. This new department would have an enforcement branch and would align the current, different sets of regulations. More details will be released this spring.
  2. The state intends to change the point of collection for various cannabis taxes. Under this plan, the first distributor in the chain of distributors would be responsible for remitting the cultivation tax, and retailers would be responsible for remitting the excise tax. The state believes that this will simplify tax collection both for the California Department  of Tax and Fee Administration (CDTFA) and for the industry.
  3. Governor Newsom will consult with the industry and stakeholders to consider reducing the number and/or rates of taxes.
  4. The budget estimates that about $332.8 million will be available for youth education, prevention, early intervention, and treatment; environmental protection; and public safety-related activities in 2020 and 2021.

It’s hard to say just yet how these changes would play out, but here are some of our initial thoughts:

  • Combining all three agencies into one would have its upsides and downsides. It will certainly make life simpler for applicants with multiple licenses who would no longer need to worry about complying with multiple sets of often-different regulations. It would harmonize things like fees and enforcement as well. But this harmonization may bring unintended consequences. The reality currently is that the BCC’s rules are much more aggressive on things like ownership disclosures and the ability to contract with third parties. In this specific case, companies that currently contract with licensees of the Department of Public Health and Department of Food and Agriculture may need to reevaluate what this would mean for them (of course, depending on how the ultimate regs shake out).
  • A unified enforcement arm probably would mean more enforcement. To date, there has not been much. That will probably change in the near future.
  • The transition from three agencies to one will probably be long, drawn-out and complicated.
  • The proposed changes to tax collection should be welcome news for distributors, but less welcome news for retailers. The rules for how and when distributors collect and remit taxes to the CDTFA are very complicated, and these changes would stop the complex process of transferring cultivation taxes through multiple license types. They would also alleviate the burden on distributors to remit the excise tax. But this would just be one more thing for retailers to worry about.
  • I would not hold my breath when it comes to changes to the number or rate of taxes, at least until we have some hard data from the state. A commitment to talk to industry stakeholders does not mean very much just yet, but let’s hope the state mellows out with taxation.

This is all very new news, so please stay tuned to the Canna Law Blog for further updates and analysis.

cannabis receivership california

Succeeding in the cannabis industry is not easy, especially in California. Complex regulation, high taxes, expensive real estate, and competition with the black market are just a handful of factors that challenge cannabis businesses. The majority of players lack sufficient reserves and agility to stay in the game. Due to the substantial upfront costs required to obtain state and local licenses, many don’t even open their doors before cash flow problems lead to unpaid rent and defaulted loans.  We are seeing an increasing number of distressed businesses in the cannabis space.

So, what happens when a cannabis business goes belly-up? A typical business can file for bankruptcy protection, and a court-appointed trustee may liquidate or reorganize the business to satisfy creditors and discharge the debt. Due to the federal prohibition against cannabis, however, cannabis businesses are not eligible for bankruptcy protection, and cannot discharge their debts the same way that other businesses can. Bankruptcy cases are handled exclusively in federal court, and the rationale is that it wouldn’t be possible for a United States Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act. (See here for more on that).

What are the Options for a Distressed Cannabis Business?

One option, if all parties are in agreement, is to voluntarily work out a deal between creditors and the debtor outside of court. While this avenue carries risk due to the absence of any formal court order, and creditors will have to trust that the debtor will follow through with their promises, it could be the most cost-efficient means of resolving a creditor dispute if the arrangement works out.

Another option, which is growing in popularity, is the use of a court-appointed receiver.

What is a Receiver, How is one Appointed and What Does a Receiver Do?

 In California, a receiver is an officer appointed by the court to take possession of and to protect assets for the benefit of all persons who may have an interest in those assets. The receiver is a neutral agent of the court and holds assets for the court, not for the plaintiff or the defendant. A receivership is only a provisional remedy in an action that seeks some other relief by final judgment. In other words, you cannot file a lawsuit for the sole purpose of having a receiver appointed.

The court will outline the powers of the receiver in an order, which typically include temporarily managing the business until it gets back into better financial standing, selling off assets, employing employees and professionals, and entering into contracts or leases, among other powers.

In the context of a cannabis business, a likely scenario would involve the business defaulting on a loan, the creditor suing to recover the money, and then the creditor seeking to have the court appoint a receiver to take over the business during the pendency of the action. As we have written about previously, receivership can be a helpful tool where there is a dispute between business owners, but it is not without risk.

Receivership can be expensive, and the costs are generally paid from the income stream generated by the receivership estate (AKA the cannabis business). However, when the receivership estate produces no income or produces income insufficient to compensate a receiver (or when equity requires), the appointing court has broad discretion in determining which party to the litigation should pay the expenses of a receivership. Ordinarily, a court will require the party that requested the receiver’s appointment to bear these costs. That means if you are a creditor who sues a cannabis business and asks to appoint a receiver, and the business does not generate enough income to pay the receiver’s fees, you could be on the hook to pay!

How Does Receivership Work in the Cannabis Industry?

The use of receivership in the cannabis industry can yield strong results (the assets of a cannabis business in receivership were recently sold at auction for $8.5 million), but it is a tricky and novel thing to navigate.

While there are California statutes specifically addressing the use of receiverships to transfer the interest of a debtor in an alcoholic beverage license, no such laws exist (yet) relating to receiverships for cannabis businesses. Combine that with the prohibition against transferring state licenses, the different regulations for ownership changes from the BCC, CDPH and the CDFA, the restrictions applicable to a person who engages in management and control of a cannabis business, and local jurisdiction requirements, and cannabis receivership becomes a very complicated endeavor. While the non-license business assets are less of an issue (e.g., the sale of real property and equipment is more straightforward), the management and sale of a business and license are a different story. We expect to see some legislation and/or regulation addressing receiverships for cannabis entities at some point in the future.

Opportunities for Investment in Distressed Cannabis Assets

The cannabis industry’s regulatory framework is extremely complicated to navigate. However, well-capitalized and savvy investors may be able to take advantage of distressed assets in receivership if they are prepared to deal with the uncertainty and risk.

utah cannabis marijuana

As I wrote in a prior blog post, Utah’s cannabis market has special characteristics that you are unlikely to find in other states. This is due in large part to Utah’s hardworking, predominantly conservative, and compassionate culture. Marry those qualities together and the parameters and developments of the Utah medical cannabis and hemp marketplaces make perfect sense. Overall, 2019 was a banner year for Utah’s cannabis marketplaces as it ramped up for 2020. Here’s the overview on 2019 and looking forward in 2020.

Medical Cannabis

Utah’s medical cannabis marketplace is slated to launch this year, with qualified patients receiving medical cards by March 1, 2020 or possibly sooner. After the voter approved initiative passed in November 2018 and was modified by the legislature in December 2018, Utah’s divided proponents of medical marijuana ended up with a medical program that is both patient-centric and internally seen as socially responsible.

Utah’s voters, with the intervening pen of its legislators, approved a non-smokable medical cannabis marketplace with significant government oversight and involvement instead of a full-scale adult-use/recreational market. Questions such as the following were central to the discussion: (a) What are the most efficient delivery systems for medical cannabis? and (b) Which of those delivery systems is most likely to provide health benefits to the consumer without producing negative externalities? (For instance, marijuana smoke can be noxious to those in the near vicinity to the consumer, but eating chocolates, softgels, or gummy bears or rubbing oil on your body is less likely to infringe on others’ comfort and health.)

On September 16, 2019, the Utah Senate passed SB1002, which amended the Utah Medical Cannabis Act. Among those changes were: (a) the number of available medical cannabis pharmacy licenses increased from seven to 14; (b) the division of the state into at least four geographic regions for license issuance purposes; (c) a mandate that Utah Department of Health (“UDOH”) issue pharmacy licenses by July 1, 2020; (d) the state central patient portal will allow patients to submit orders online for medical cannabis; (e) the UDOH may authorize home delivery by medical cannabis pharmacies, which may use medical cannabis couriers for delivery; (f) patients will be permitted to purchase a month’s supply of medical cannabis regardless of the distance they live from a medical cannabis pharmacy; and (g) cultivators are permitted to grow cannabis indoors and outdoors.

Utah cultivator licensing is currently closed at this stage, with only eight cultivators that received licenses out of 81 applications, although the legislature authorized 10 licenses. Seven of the cultivation sites are in rural areas and one is in an urban area. Licensees include both Utah companies and out-of-state companies with Utah ties. Processor licensing opened August 23, 2019 and remains open through August 2024, with an unlimited number of licenses available in two tiers. The application to become an independent cannabis testing laboratory remains open: the criteria can be found here. On January 3, 2020, the Utah Department of Health announced the companies that would receive the 14 medical cannabis pharmacy licenses. Eight of the locations may be open as early as March, with the remaining open as early as July. You can see the pharmacy map here.

Hemp

The Agricultural Improvement Act of 2018 (“2018 Farm Bill”) legalized industrial hemp, and Utah responded by amending its Hemp and Cannabinoid Act on May 14, 2019. Amendments included referring to cannabinoid products rather than only cannabidiol (“CBD”) products and requiring the Utah Department of Agriculture and Food to establish requirements for a license to cultivate, process, or market industrial hemp. Utah is currently drafting a state hemp plan to submit to the USDA in accordance with the 2018 Farm Bill. Currently Utah has approximately 175 licensed hemp growers, approximately 30 licensed hemp processors, and over 700 registered hemp products.

But You Can’t Smoke It

Utah has some unique twists to its cannabis marketplace. Smoking cannabis and hemp is not permitted, even with a doctor’s authorization to use cannabis, but diffusing is. Why? As I wrote in two prior blog posts (see here and here), two dominant global essential oil companies are headquartered in Utah: Young Living Essential Oils and doTERRA. Popular ways to use essential oils include ingesting, including in food and beverages, topical application, and diffusion into the air by use of a diffuser. And because Utah is also the epicenter of natural products, especially dietary supplements, ingestion of hemp products (like hemp-derived CBD) by tablet and capsule top the list of the definitions of approved “Medicinal Dosage Forms.”

What’s Turning Heads?

In 2019, Young Living Essential Oils acquired Colorado-based Nature’s Ultra, and now Nature’s Ultra’s ads are prevalent on the digital billboards on I-15 and I-215 in Salt Lake County. Recently, a self-proclaimed “Farmer & Chemist” company began advertising on the I-15 corridor. On December 30, 2019, Nevada’s West Wendover opened its first recreational marijuana dispensary just under two hours west of Salt Lake City. Looking ahead, UtahCann, the primary cannabis trade group in Utah, is preparing to hold its third annual Business Conference and Expo on April 25-26.

The Utah cannabis marketplace will continue to develop with uniquely Utah characteristics. We will keep you updated as the markets mature. I predict that Utah will begin to flex its unique international business connections before too long, especially on the back of its behemoth multi-level-marketing (direct sales) companies.

cbn cannabinol hemp

This is the second of a two-part installment on trending cannabinoids. For the previous post on cannabigerol (CBG), go here.

This post concerns CBN (cannabinol). Like CBD and THC, CBN is among the 100+ molecules in the cannabis plant. CBN comes from oxidation and decomposition of THC, meaning that when THC is heated and exposed to CO2 (oxygen), it converts to CBN. The compound is said to have a mild psychoactive effect, slightly more so than CBD but much less than THC. Specifically, it is said to have a sedating effect on most users and to have promising sleep aid applications, similar to melatonin (among other potential uses).

From a regulatory perspective, the legal status of hemp CBN products (like CBG products) may be less problematic than CBD products. The FDA likes to point out that the 2018 Farm Bill explicitly preserved FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Food Drug & Cosmetic Act (“FDCA”) and section 351 of the Public Health Service Act. But the marketing of CBN as a dietary supplement may be viable nonetheless, provided that no unapproved health claims are made.

Why is that? First, some context. We have explained on this blog that it is illegal to add CBD to many products, in FDA’s view, due to the “drug exclusion rule.” According to FDA, products containing CBD cannot be sold as dietary supplements because CBD was investigated and approved by FDA as a new drug (Epidiolex). If something is a non-exempt “drug” it cannot be placed in the food stream under the FDCA. We wouldn’t mind seeing someone take a run at FDA for this interpretation with respect to CBD, but right now that’s the framework.

Unlike CBD, CBN not been approved as a drug, and FDA itself has acknowledged that “parts of the cannabis plant that do not contain THC or CBD might fall outside the scope of the [drug exclusion rule].” As with CBG, if CBN is approved as a drug at some point down the line, it also seems likely that the drug exclusion rule would not apply: this is because the rule contains an exception for substances marketed as foods or dietary supplements prior to any FDA clinical investigation. People are already marketing CBN products as foods and dietary supplements.

This domestic legal framework, alongside the fact that CBN can be lawfully produced and extracted from hemp under the 2018 Farm Bill, seemingly gives CBN a viable legal runway. Everything is conditioned on manufacturers and sellers steering clear of unapproved health claims, of course.

The international legal framework seems promising as well. CBN is not listed on the schedules set out in the U.N. Single Convention on Narcotic Drugs of 1961 and does not appear to be controlled by any other international treaty. This means that countries are not required to control CBN, making it both legal under international law and potentially ripe for export.

Before CBN takes off in a major way, two things probably have to happen. The first is that consumers need to take interest. It’s hard to know exactly how that will play out: CBN received a smattering of press in 2019, although it has been covered sporadically in industry media for several years. As with CBG, cannabis companies may now feel incentivized to promote CBN given its potential and the possibility of avoiding FDA entanglements. It is also easier to produce CBN under the 2018 Farm Bill than ever before.

The second development needed is for technology to demonstrate that CBN can be produced at scale. CBN does not present hemp growers with the “Sophie’s choice” of CBG, which requires harvest prior to natural conversion of CBG into other cannabinoids. However, because CBN-rich strains of cannabis do not exist, CBN must be mechanically converted from other cannabinoids–namely, THC. Note that hemp cannot contain more than 0.3% THC by law, making CBN more difficult to produce at scale than CBD or even CBG. That said, recent claims have surfaced of CBN distillation from “full spectrum hemp extracts.”

We will continue to track CBN (and other “minor cannabinoids”) as they are discovered and developed in commerce. For now, it seems that this cannabinoid may have a promising role to play and that hemp industry companies should take a hard look at CBN this year.

california cannabis violation

California cannabis regulators are slowly getting into enforcement mode under the Medicinal and Adult-Use Cannabis Regulation Act (“MAUCRSA”). Ostensibly, enforcement to date has been around illegal sales and/or around the manufacturing of illegal products (like vape cartridges). It’s only a matter of time though before enforcement becomes more sophisticated around licensing, including the state increasing scrutiny around “owners” and “financial interest holders”.

  • Owners are any person or company that owns 20% or more of the licensee or that exercises any management, direction, or control over the licensee (including board members, managers, and officers).
  • Financial interest holders are anyone or any company that owns 19% or less of the licensee or that invest in, lend to, or profit share with a licensee.

For whatever reason (but likely because of a lack of enforcement), many cannabis businesses in California don’t take very seriously the requirement to both accurately identify and timely disclose their owners and financial interest holders. And not all of that is their fault, as all three agencies in charge of California cannabis businesses essentially have different rules and interpretations around the disclosure process (though they should all be applying the same standards for owner and financial interest disclosures across the board).

According to the 2018 Bureau of Cannabis Control (“BCC”) disciplinary guidelines, failure to disclose a change in ownership is a tier 3 violation. Tier 3 violations are recommended for “Knowing or willfully violating laws or regulations pertaining to commercial cannabis activity; and Fraudulent acts relating to the licensee’s commercial cannabis business.”

Tier 3 violations also include the illegal sale of dangerous drugs or other controlled substances, so that category is reserved for the most serious rule violations. In addition, securing a license by fraud, deceit, or misrepresentation also constitutes a tier 3 violation. In my opinion, failure to disclose every single owner as required by MAUCRSA’s regulations can easily fall into a tier 3 violation depending on how egregious the business’s design is, if its intent is to hide certain owners or those in control of the business. The same potentially goes for financial interest holders that may be secretly funding or investing in a California cannabis business as far as I’m concerned. And, either way, under MAUCRSA, the state agencies have as much discretion as they want when deciding what penalties to apply for various violations; the disciplinary guidelines are just that–guidelines–and they’re not binding on the state.

The recommended penalties for a tier 3 violation are significant. At minimum, you’re facing a 45-day suspension or a fine according to a formula set by the state (some of which are staggering depending on license type), or some combination of both of those. At maximum, your license is getting revoked. Again, it’s up to the state to decide how they want to proceed, taking into account relevant mitigating factors depending on the violation at issue.

What I’m beginning to see now are a host of companies that never disclosed various owners or financial interest holders to the state. The state is now making the rounds on annual licensure, or because of changes of ownership, to really determine who the owners and financial interest holders are of a given licensee. Even more so, I’m seeing investors and owners just learning of these disclosure requirements and turning tail in the face of potentially invasive disclosures and background checks, or because they simply cannot comply with the disclosure requirements. For example, some of the investment funds in this space that have hundreds of participants typically have trouble when it comes to full disclosure of those individuals. Certain foreign investors also have immigration-related liability, or liability for cannabis investments in their home country.

Even if an investor or owner (which includes any director, manager, or officer) wants to bail on a cannabis company, if they were never disclosed their departure will not absolve the cannabis company of a major rule violation. Additionally, the investor or owner may face additional, personal liability for failing to adhere to state disclosure requirements depending on whatever shareholder agreement, operating agreement, investment agreement, or governance document they signed with the licensee. Typically, the foregoing agreements are all going to include representations and warranties and other covenants around knowledge of the regulatory process, accepting all requirements to maintain licensure in good standing, and cooperating with the licensee to ensure total compliance around licensing.

In the end, failing to disclose owners and financial interest holders can leave a cannabis business without a license and at the same time create significant personal liability for the owner or financial interest holder that doesn’t want to–or now cannot–disclose themselves to the state. As a result, all would-be owners and financial interest holders need to intimately understand the state’s disclosure requirements (and the timing around those requirements) and be prepared to perform accordingly. The alternative is to decide to stay in the ancillary space and spare themselves this step).

Any cannabis company still playing around with disclosure is going to find itself hurting when the state kicks into more robust enforcement around these owner and investment concepts.

cbd label fda

A year ago, we discussed a shift in nomenclature for hemp-derived cannabidiol (“Hemp-CBD”) products. Many CBD companies have swapped the word “CBD” for the terms “hemp extract” and “full spectrum hemp” in hope of mitigating the risk of FDA and local enforcement actions.

As we previously explained, the main impetus behind this movement seems to have stemmed from a 2001 court decision regarding the status of lovastatin, a compound found in red yeast rice, which was historically used for healing purposes. The holding of this case suggests that a compound that has long been used as a food or dietary supplement for therapeutic reasons does not meet the definition of drug, and thus, may be lawfully sold and marketed in interstate commerce without the approval of the Food and Drug Administration (“FDA”). The caveat is that the compound in question must be found in its “naturally occurring form”.

Because hemp extract, which includes CBD and many other compounds, has been used for hundreds of years for its medicinal values, many in the industry have concluded that it could be lawfully sold and marketed in interstate commerce regardless of the FDA’s position on the sale and marketing of these products, specifically foods and dietary supplements. If you recall, the FDA approved Epidiolex, which contains CBD isolate (i.e., not occurring in its natural form). Nevertheless, the agency deems any CBD a drug ingredient, which means it cannot also be sold as a food or a dietary supplement without first being approved by the FDA.

Although there may be some solid parallels between Hemp-CBD and the red yeast rice case, this position is purely speculative in that it has yet to be litigated. Moreover, given the wide variety of hemp strains currently on the market, no one knows with certainty how to determine what the levels of the naturally occurring compounds would be. And even if we could make that determination, CBD companies would still be required to comply with marketing/advertising laws that would further complicate this issue.

Indeed, both federal and state laws impose some sort of labeling/packaging and marketing laws that require, in part, that the product label not be “misbranded” or “misleading.” Generally, under the Federal, Drug and Cosmetic Act (“FDCA”), a product is deemed misbranded if its labeling is false or misleading in any particular way or if it does not bear required labeling information.

So, if a company were to use the term “hemp extract” or “full spectrum hemp” when in fact the product does not contain the hundreds of compounds in their purest, most natural form, then said company would likely be found in violation of the FDCA. In addition, such marketing practice could put a company under the radar of the Federal Trade Commission (“FTC”), which works closely with the FDA on policing unfair or deceptive advertising in any medium.

There are also state marketing and labeling laws that apply. Many jurisdictions have adopted labeling and packaging rules that specifically pertain to Hemp-CBD products. For example, New Mexico is proposing new hemp rules that would require the inclusion of the content of CBD in milligrams on hemp finished products. Other states like Colorado mandate that labels list the CBD content found in a finished product only if CBD is added as an isolate.

While the industry’s inclination to mitigate the risk of enforcement actions against CBD products makes sense, it is worth pointing out that most enforcement actions are taken against CBD products that contain unfounded, egregious health claims or that are sold in jurisdictions that have expressly prohibited the sale of these products. Therefore, if a company makes the business decision not to use the term “CBD” on a product label, it should only do so: 1) if a company can corroborate that the substance found in the product is in fact “hemp extract” or “full spectrum hemp” (which is an unclear and challenging undertaking); 2) if the laws of the states in which the product is sold and marketed don’t specifically request the use of the term “CBD”; and 3) if no health claims are made about the product.

For more information on this issue, please contact our team of regulatory attorneys.

new hampshire cannabis marijuana

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA.

This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday, we summarize a new state in alphabetical order. Today, we cover New Hampshire.

In 2019, the New Hampshire legislature passed HB 459, a piece of legislation aimed at establishing hemp cultivation in New Hampshire. HB 459 defines hemp as an agricultural product that may be cultivated in New Hampshire. The law requires that growers, processors, and “commercial traders” of hemp to be registered with the USDA. The law also established a committee to study the administrative mechanisms for permitting growing hemp in New Hampshire consistent with the 2018 Farm Bill, as well as the labeling requirements for hemp products sold in the state.

The committee was supposed to have reported its findings by November 1, 2019. However, it looks like that report has not been made as the committee was only relatively recently formed and thus the state is not yet fully open for hemp production. Just a few weeks ago, however, the legislature introduced HB 1658, which if passed will create a hemp registration program in Hew Hampshire. However, this is unlikely to pass for at least a few months as it goes through the normal legislative process, so for now the state is left with HB 459.

As to Hemp-CBD, a guideline issued by the New Hampshire Liquor Commission in 2018 and revised in June 2019 states that Hemp-CBD may not be added to foods or alcohol products in New Hampshire. It does not appear that any state agency has weighed in on other classes of products, but because the above guideline incorporates the Food and Drug Administration’s (“FDA”) position on Hemp-CBD foods, it’s safe to assume that the state would follow the FDA’s position on other products.

That said, in December 2019, the state legislature introduced HB 1581, a bill that would regulate the sale of Hemp-CBD products. The law would require that such products be manufactured in New Hampshire, would impose testing and labeling requirements on the processor, and would require that any hemp product produced in New Hampshire be registered with the state Department of Agriculture, Markets, and Food (“NHDAMF”). The law also gives NHDAMF, after consulting with the department of health and human services, the authority to regulate Hemp-CBD products.

For now, the law’s not well-settled in New Hampshire. If these new proposed laws pass, there will be big changes in the state. However, since these laws were only just introduced, it is difficult to anticipate whether they will pass or, if they do, what changes would be made in the legislative process.

Stay tuned to the Canna Law Blog for updates on New Hampshire Hemp-CBD. For previous coverage in this series, check out the links below:

cannabis lease audit abstract

In a cannabis business, like most other businesses, “location, location, location” means everything and dictates whether you have the optimal growing, manufacturing, processing, or retail location. Once you find your perfect location, having a great lease and understanding your lease are two crucial parts in solidifying this important business foundation. In this post, I share the starting point for my lease audits so that when you or your attorney audit your lease you will be able to recognize your lease’s strengths and weaknesses. I also provide some practice pointers to help you think more strategically about your marijuana leasing relationships.

I am a transactional attorney, which means I thrive on putting together and executing a great business deal for my clients that is tilted as much as possible to their advantage. I live and die by my data points, and I often use Excel so that I can crunch the data and identify trends. The more data I have about my client or the opposing party, the better deal I can put together. In a recent transaction I reviewed about 15 leases for a client as part of the due diligence in an acquisition, and for each lease I filled out the following chart, which we call a lease abstract. This chart can also be useful in negotiating a lease at an entirely new location or with a new landlord or tenant.

Lease Term Comments
Property Address: (fill in Lease section to reference here and in all parentheses below)
Premises: ( ) Your leased premises may only be a portion of a larger property (like a strip mall) and may include other portions of the property (like dedicated restrooms or storage areas).
Property Use: ( ) Even if your lease or proposed lease does not specifically exclude your contemplated use, you should ensure that the location is zoned and the lease explicitly permits your planned activities.
Landlord: ( ) Make sure the landlord’s full legal name, entity type, and state of formation is used and not some unregistered dba or incorrect name.
Tenant/Subtenant: ( ) If you are the landlord, make sure the tenant’s full legal name, entity type, and state of formation is used and not some unregistered dba or incorrect name.
Lease Term: ( ) This is the length of time for the lease’s initial term.
Lease Commencement Date: ( ) This is the date the lease “starts.” Often a lease will be negotiated in advance and have a commencement date in the future after certain preparations (the buildout) are made by landlord or tenant.
Lease Expiration Date: ( ) This is the date the initial term ends.
Base Rent: ( ) Some leases include base rent only; some include percentage rent based on some financial metric; and others incorporate base rent plus percentage rent.
Rent Due Date: ( ) This can be the 1st, 10th, 15th, or whatever date makes the most sense based on when the landlord’s mortgage payment is due.
Late Payment Penalty: ( ) If you are the landlord, you want the late payment penalty to apply without any notice from the landlord to tenant that the rent payment is past due. If you are the tenant, you want a long payment window without any late payment penalty.
Rent Increase: ( ) Most rent increases occur on a set schedule, either in straight dollar increases or a percentage increase, often pegged to one of the consumer price indices (CPI).
Gross Lease Amount: ( ) This lets both landlord and tenant (or their CFOs) to see at a glance the value or cost of the lease over the life of the lease.
Security Deposit: ( ) This becomes important at the lease termination or upon sale of the underlying real estate when the lease is still in force.
Utilities: ( ) Determine which utilities are tenant’s responsibility and which are landlord’s, as well as who will actually remit payments.
Taxes: ( ) Determine which taxes are tenant’s responsibility and which are landlord’s, as well as who will actually remit payments.
Tenant’s Responsibilities: ( ) These could include maintenance, cleaning, garbage removal, snow removal, and structural and nonstructural repairs to the leased premises.
Landlord’s Responsibilities: ( ) These could include maintenance, cleaning, garbage removal, snow removal, and structural and nonstructural repairs to the leased premises.
Parking: ( ) Reference whether tenant has any dedicated parking, which can be extremely important for retail locations.
Tenant Improvements: ( ) Include whether the tenant is permitted to make improvements and which improvements will be considered (a) fixtures that become part of the leased premises or (b) non-fixtures that the tenant can (or must) remove at the end of the lease term.
Lease Extension Provisions: ( ) Indicate whether the lease can be extended only by mutual agreement of the landlord and the tenant or whether the tenant can unilaterally extend the lease.
Lease Extension Notice Date: ( ) Even if the lease can be unilaterally extended by the tenant, often lease extension notice is required three, six, or 12 months prior to the end of the lease.
Tenant’s Holdover: ( ) Some leases treat the tenant’s holdover at the end of the lease term as an automatic lease renewal; others expressly exclude the tenant’s holdover and apply a 2x or 3x rent multiplier to discourage the tenant from holding over.
Termination Provisions: ( ) Include who can terminate the lease and how the lease must be terminated, especially the termination notice date and method of giving notice.
Termination Notice Date: ( ) This date is as crucial as the renewal notice date.
Assignability: ( ) Often leases can be freely assigned by the landlord and sometimes by the tenant. Other times the landlord requires notice of the tenant’s assignment, including subleasing.
Guarantor(s): ( ) Most landlords require the owners of tenants that are new companies to personally guarantee the lease.
Landlord’s Contact: ( ) If the landlord uses a managing company or other third party, or if the landlord is an entity, you will want to know who to contact and have reliable contact information, including a cell phone number for emergencies.
Landlord’s Notice Address: ( ) This notice address becomes extremely important to the tenant if the landlord does not timely perform its lease obligations, such as snow removal or other maintenance or repairs.
Landlord’s Payment Address: ( ) Often the location of where to pay rent differs from the landlord’s primary business address.
Additional Information / Issues: ( ) Include anything here that may be relevant to negotiations or to responsibilities under the lease that do not fit in any category above.

 For more helpful information on leasing, see:

cbg legal

Looking back, 2019 was the year of cannabidiol (CBD) in the cannabis industry. CBD continued to make its way into countless consumer products, from sodas to sports bras. The CBD craze was a long time coming: we began covering that cannabinoid back in 2015, when industry began promoting CBD products in earnest and the FDA fired off warning letters (a time-honored tradition at this point) telling people to stop making health claims, and to stop selling this stuff altogether.

Recently, another cannabinoid has begun getting a lot of buzz inside the cannabis industry, much like CBD before it. That cannabinoid is CBG (cannabigerol). Like CBD, CBG is among the 100+ molecules in the cannabis plant. From a scientific perspective, CBG is unique for the “precursor” role it plays in synthesizing other cannabinoids–including THC and CBD–and in synthesizing the overall chemical composition of the plant. From a regulatory perspective, the legal status of CBG products may be less problematic than CBD products.

Why is that? First, some context. We have explained on this blog that it is illegal to add CBD to many products, in FDA’s view, due to the “drug exclusion rule.” According to FDA, products containing CBD cannot be sold as dietary supplements because CBD was investigated and approved by FDA as a new drug (Epidiolex). If something is a non-exempt “drug” it cannot be placed in the food stream under the Food Drug & Cosmetic Act. We wouldn’t mind seeing someone take a run at FDA for this interpretation with respect to CBD, but right now that’s the framework.

Unlike CBD, CBG has not been approved as a drug, and FDA itself has acknowledged that “parts of the cannabis plant that do not contain THC or CBD might fall outside the scope of the [drug exclusion rule].” If CBG is approved as a drug at some point down the line, it also seems likely that the drug exclusion rule would not apply: this is because the rule contains an exception for substances marketed as foods or dietary supplements prior to any FDA clinical investigation. People are already marketing CBG products as foods and dietary supplements.

This domestic legal framework, alongside the fact that CBG can be lawfully produced and extracted from hemp under the 2018 Farm Bill, seemingly gives CBG a viable legal runway. Of course, everything here is conditioned on manufacturers and sellers steering clear of unapproved health claims.

The international legal framework seems promising as well. CBG is not listed on the schedules set out in the U.N. Single Convention on Narcotic Drugs of 1961 and does not appear to be controlled by any other international treaty. This means that countries are not required to control CBG. The cannabinoid is likely legal under international law and potentially ripe for export.

Before CBG takes off in a major way, two things probably have to happen. The first is that consumers need to take interest. It’s hard to know exactly how that will play out, although industry may feel incentivized to promote CBG given its clear potential and the possibility of avoiding FDA entanglements. It does appear that CBG, like CBD, CBN, and other cannabinoids, contains promising medical applications– even if they should not be advertised. The U.S. National Center for Complimentary and Integrative Health, for example, announced its intent last year to research CBG for pain management. Industry white papers have been written on CBG research as well. (For a comprehensive offering by Hemptown USA, go here.)

The second thing that must happen is for CBG to be grown at scale so that prices drop. CBG genetics are coming into refinement, but CBG distillate remains about six times the price of CBD distillate at wholesale. High prices are often good for farmers, but certain producers may hesitate to move in, given that: 1) CBG is also more expensive than CBD to extract, and 2) plants must be harvested early to produce pure CBG (before it synthesizes into other cannabinoids). Ultimately, the early harvest requirement may not be all that bad given today’s alternative– namely,  growing hemp for CBD and dealing with the very problematic “total THC testing protocol” recently adopted by USDA for finished hemp products.

We will continue to track CBG as this story plays out in 2020 and beyond. For now, it seems that this cannabinoid may have a promising role to play and that hemp growers and processors should take a hard look at CBG this spring.

hemp cbd fda

2019 was, to put it lightly, an intense year for the hemp and hemp-derived cannabidiol (“Hemp CBD”) industries in the United States. We saw the implementation of the 2018 Farm Bill,  strongly worded statements by the Food and Drug Administration (“FDA”) that Hemp CBD was unlawful in many products followed (amazingly) by almost zero enforcement, the issuance of interim hemp production regulations by the United States Department of Agriculture (“USDA”),  and the development of hemp cultivation and Hemp CBD bans, regulations, and/or gray areas in nearly every state in the union (see the Canna Law Blog’s ongoing 50-state survey series that we post every Sunday).

Though 2019 was indeed busy, the U.S. hemp and Hemp CBD industries are far from normalized. The next few years will continue to be equally busy and we expect there to be dramatic changes across the board, both good and bad. Here are our top four predictions for 2020.

1. State Hemp Production Rollouts

For anyone who isn’t deeply familiar with the 2018 Farm Bill by now, it set up a system where states and tribes were required to come up with hemp production plans for approval by the USDA. Some states submitted plans to the USDA immediately, but it only began its substantive review after issuing its interim regulations. As of today, numerous states and tribes have submitted or are in the process of submitting plans (you can see the actively updated list here), but only a small handful have actually been approved. In 2020, we expect that the USDA will approve most of the plans, or force states or tribes to change their plans up to comply with the USDA’s rules. Either way, state-level production is expected to kick into full gear under the 2018 Farm Bill.

2. FDA Enforcement

To date, the FDA hasn’t really done much about Hemp CBD products it claims are unlawful. Until late November 2019, all the FDA did (sometimes in concert with the FTC) was issue a small handful of warning letters to companies it claimed made unlawful products or advertised products in an unlawful way. But on November 29, it sent 15 warning letters simultaneously. While, to date, the FDA has not initiated any kind of public enforcement proceeding or litigation, the fact that it went from just a small handful of letters over 11 months to 15 in one day signals that the FDA is shifting into enforcement mode. 2020 may be the year where we see actual enforcement or litigation.

3. Hemp CBD Importation

Over the last few months, our hemp attorneys have fielded numerous questions about importing raw hemp or Hemp CBD products, mostly from South America and Europe, but even from Asia or Africa. Importation can trigger the jurisdiction of a number of agencies, including Customs and Border Protection, the FDA, and/or the USDA. I say “and/or” because importing products usually involve multiple agencies. For example, in this ruling, CBP noted that some Hemp CBD products were also subject to federal laws that are administered by the FDA. To boot, importation also involves the consideration of laws in the country from which products are being imported and, in some cases, international treaties. Notwithstanding the extreme legal complexity of importing hemp and Hemp CBD, we expect to see a huge uptick in 2020.

4.  FDA Regulation of Hemp CBD

2020 may be the year that the FDA picks up the pace and does something clear with Hemp CBD. After all, Congress has been admonishing the FDA to speed things up for months now, and just recently an appropriations bill was signed that apparently directs $2 million to the FDA to finish its Hemp CBD regulations. Still though, at this point, FDA regulations on Hemp CBD are more of a hope or wish than an expectation. If they do come out in 2020, things we expect to see are testing requirements, packaging and labeling rules, advertising restrictions, Hemp CBD concentration limitations, etc. Hopefully, we will have more clarity in the next few months.