5 CONSIDERATIONS WHEN LEASING COMMERCIAL PROPERTY TO CANNABIS TENANTS

All indicators show that the cannabis industry is thriving in the state of California. As the cannabis industry continues to grow so does its needs for commercial property to lease for cultivation, manufacturing, testing, retail, offices, etc. If you own or manage commercial property leasing to a cannabis tenant can be a win-win scenario; however, there are a few items to pay special consideration to prior to signing the lease agreement that may not arise with a non-cannabis related tenant.  

1. Zoning Regulations:

Cannabis is illegal under Federal law and is classified as a Schedule 1 drug. The state of California has legalized cannabis but has given the local governments the ability to regulate cannabis in their jurisdiction. Therefore, it is important to determine what the specific laws and zoning rules are for cannabis in your city or county. For example, a city could allow cultivation, but no retail, or retail only or nothing at all. Your lease should include specific use provisions and expressly spell out what is and what is not a permissible use.  

2. Building Access & Security:

Cannabis is a valuable commodity and retail outlets typically operate in all cash. Therefore, it is important to have prudent and thoughtful security measures in place at your property to discourage any criminal activity. If you are leasing to a cannabis retailer it may be necessary for the tenant to have an armed guard on staff.

3. Loans on Property Could Prohibit Cannabis Activity:

If your property is subject to a loan, mortgage or other financing, you should review the loan documents to ensure that they do not expressly prohibit cannabis activity on the premises. A traditional commercial bank or lender may prohibit you from leasing to a business that will be using the premises for something that is illegal under federal law.

4. Guaranty of the Lease:

Your typical cannabis tenant will be a start-up company in the sense that it probably won’t have a long financial history you can review to determine the tenant’s future ability to pay rent. Moreover, the tenant’s legal entity, e.g. “ABC Greens, LLC”, may be a relatively new entity with little or no assets. Therefore, it is important to obtain a guaranty of the lease in the event the tenant defaults and vacates the premises without notice. Without a guaranty in place you may have no meaningful recourse to recover damages or lost rents.

5. Negotiating the Lease Term:

Typically landlords prefer to have long term leases; however, with a cannabis tenant, it is usually safer to have shorter lease terms, i.e. 3 or 6 months. Moreover, you should also negotiate an “escape clause” in the lease that requires the tenant to vacate the property immediately in the event there is any threat from law enforcement or a governmental authority for criminal or civil penalties, which could include asset forfeiture.

Cannabis laws are in a constant state of change at the state, county, and municipal level, so it is important to stay up to date and seek the advice of a licensed attorney to understand your legal rights. Contact the Blake Law Firm if you have any further legal questions. You can call or text us at (858) 523-8221 or email steve@blakelawca.com.