Tenants and Landlords in Cannabis: Unusual Partnerships, Unusual Risks
Real estate is an attractive opportunity for investors who want to be involved in the legal cannabis industry without operating a dispensary or grow facility themselves. This is partly because identifying locations that meet the needs of these businesses and also pass zoning and regulatory scrutiny is a major headache for operators. The unique challenges – and high costs – of finding viable locations for cannabis businesses lead to some unusual arrangements between landlords and tenants, and these arrangements pose their own risks to each side.
“Before you tie your fate to a landlord – or a particular cannabis tenant – make sure that you understand the risks they bring with them.”
For example, because marijuana is still illegal federally, landlords renting to cannabis businesses have a heightened risk of asset seizure and forfeiture. Law enforcement can use asset forfeiture to shut down cannabis businesses, and often retains possession of the property seized. As a landlord in this situation, you would suddenly be faced with the loss of your property and anything within it, regardless of your level of involvement with the cannabis business itself.
On the flip side, cannabis tenants should be aware that profit-sharing – through which landlords obtain a share of a tenant’s profits – is a popular but potentially risky arrangement. Depending on the terms of the profit-sharing agreement, your landlord could become a de-facto partner in your business from the perspective of state regulators. If your landlord wants a profit-sharing arrangement, you will want to make sure that you clarify their level of involvement in and control over your business in advance, and may need to ensure that they can pass the same level of regulatory scrutiny as any other partner in your business.
Insurance was a hot topic when we attended the recent New England Real Estate Journal’s Cannabis in Commercial Real Estate 2.0 Summit here in Boston. We heard that conservative insurance conglomerates are requiring in-depth information from cannabis businesses, including often from their landlords, before providing a policy. A landlord with a spotty record could even prevent a business from obtaining insurance.
In essence, the particularities of landlord-tenant relationships in the cannabis industry mean that each side is more exposed to potential misbehavior by the other than in typical industries. Before you tie your fate to a landlord – or a particular cannabis tenant – make sure that you understand the risks they bring with them. Investigative due diligence can go a long way to helping reassure everyone involved that their counterpart has the integrity needed for the partnership to succeed.
This guest post was co-authored by Caroline Lambert. Thanks, Caroline!