Last yr, I wrote a publish entitled “Cannabis Leases: Eight Important Tenant Considerations“. The publish outlined eight of the extra vital concerns for tenants getting into into hashish leases. Today, I wish to concentrate on a number of the high concerns for landlords in leasing to hashish tenants.
1. Compliance with Mortgages
Landlords that don’t outright personal property will in all probability have a a lot more durable time leasing property to hashish tenants. If landlords have mortgages on their property and the lender is a financial institution, that may usually be an enormous roadblock to those leases. Mortgages usually enable lenders to name a mortgage if the property is getting used for criminal activity, which needed contains hashish exercise given the truth that hashish continues to be unlawful underneath federal regulation. This might result in dramatic penalties from the owner and its mortgaged property.
2. Who is the Tenant?
We’ve obtained plenty of calls over time from landlords excited to lease to hashish tenants, solely to seek out out shortly into the decision that the property at situation is in a metropolis that fully bans hashish actions with no exception. In these circumstances, the would-be tenant would overtly violate native regulation (and thereby state regulation) if it opened a hashish enterprise, which might result in publicity for the owner. Even if a tenant opens up store in a “legal” metropolis however doesn’t comply with the foundations or get all required permits or licenses, that might result in publicity for the owner. For these causes, hashish leases usually look quite a bit completely different from run of the mill leases. They embrace issues like categorical necessities to get totally licensed earlier than commencing operations, and permitting for fast termination if the owner discovers foul play.
3. Profit-Sharing Rent Structures Can Lead to Regulatory Issues
Landlords could also be tempted to ask for a proportion of a hashish enterprise’ earnings or revenues along with mounted hire. This raises two key points. First, landlords who share in hire improve their publicity for federal felony violations. If there may be ever a change in federal enforcement priorities (although there might not be), landlords who share within the earnings of a hashish enterprise might theoretically face extra publicity as they’re extra intimately linked with the hashish enterprise than landlords who simply passively get mounted hire every month.
Additionally, landlords sharing within the earnings will in all probability must be disclosed to state, and in some circumstances, native authorities. In California, any type of profit-sharing renders a landlord a “financial interest holder” requiring disclosure to the state. If profit-sharing hits sure thresholds, a landlord might be thought of an “owner”, and far more important disclosures could be required. It is essential to know this second level on the outset. It’s a lot simpler for a landlord who doesn’t wish to be disclosed to know the right way to deal with this from the outset moderately than attempting to reform a lease later.
4. Tenant Improvements
I don’t assume I’ve ever seen a scenario the place a hashish tenant applies for a license and isn’t required to make not less than some modifications to the premises. This is vital for landlords as a result of nearly all leases dictate how alterations and tenant enhancements are made and what sort of consent and oversight landlords have. Understanding that tenants are principally assured to want to make enhancements can dictate simply what these provisions say.
In many (if not most) circumstances, would-be hashish tenants are newly fashioned entities with no working historical past and no financial institution accounts at first. Even a bigger hashish firm that negotiates a business lease will usually kind a brand new entity for the leased premises, with a view to keep away from liabilities and for different authorized and sensible causes. Landlords usually due to this fact need ensures both by company associates of the tenant (e.g., the mother or father firm with an precise working historical past) or private ensures from homeowners of the tenant. In some circumstances landlords insist on each. Without this, landlords would possibly find yourself with very restricted choices within the occasion a tenant defaults.
6. Addressing Unknowns
Landlords might not perceive the complexities of acquiring a hashish license for a tenant. The course of isn’t assured and might take a big time. Many tenants might get some type of conditional use allow or different land-use entitlement, then spent months and even years finishing buildouts, getting native regulatory licenses or permits, after which getting state licenses. This means many months might cross between lease graduation and operations. And in some circumstances, operations might by no means begin. This is nice to know for landlords who don’t need their property sitting vacant for a protracted time frame, and is an efficient start line for talks about early termination provisions within the occasion a tenant can’t get a license.
These are quite a few points which will impression potential hashish landlords. The precise components will probably change considerably from lease to lease and jurisdiction to jurisdiction. It’s a good suggestion to work with a seasoned hashish actual property lawyer to find out what lease provisions are finest in for a particular tenant and jurisdiction.
The massive takeaway right here needs to be that drafting and negotiating hashish leases is hard and that left unchecked, hashish tenants can find yourself making life tough for his or her landlords. Please keep tuned to the Canna Law Blog for extra developments on hashish leasing regulation, and within the meantime take a look at the posts linked under.