BofA Securities estimates that cannabis sales in the United States will rise by 40% to $25 billion in 2021. If you are a landlord who is thinking of leasing your property to a cannabis business tenant, then you need to be aware of the risks and challenges that come with it. In this blog post, we will give you 10 tips for landlords who are leasing to cannabis business tenants!
With the legalization of cannabis in the United States, landlords are starting to see a spike in tenants who are part of this industry. The cannabis industry sector employs an estimated 321,000 Americans, more than the nation’s dentists, paramedics, and electrical engineers combined.
Key Takeaways
- Understand zoning laws and regulations when leasing to cannabis businesses, as they vary by state and city. You may need special permits or licenses to lease to these tenants.
- Be aware of potential mortgage compliance issues, as traditional lenders are often risk-averse about financing properties housing marijuana businesses due to federal law.
- Protect yourself as a landlord by including specific lease provisions, such as shorter lease terms, escape clauses, detailed tenant use permissions, and landlord access rights.
Table of Contents
1. Understand the Zoning Laws and Regulations
The cannabis industry is growing rapidly, and commercial property owners who lease to tenants in this industry will soon face additional challenges when it comes to managing their properties. The legalization of marijuana has given rise to a new industry that is expected to generate billions in revenue for both states and the federal government.
With so much money at stake, both the property owner and the landlord in this market need to understand how zoning laws may affect their ability to lease space to cannabis businesses. The zoning laws vary from state to state and even from city to city, which means that if you are leasing property in multiple locations, you will need to understand how these regulations work in each location.
In some cases, you may be able to lease your property to cannabis business tenants; this is zoned for commercial use. However, you need to obtain a special permit or license from the city or state to do so.
2. Maintain Mortgage Compliance
Financing properties that house marijuana businesses can be a tricky proposition for landlords, given the complex legal landscape surrounding cannabis. While many states, including California, have legalized marijuana for medical and recreational use, it remains classified as an illegal substance under federal law. This discrepancy creates significant risks for traditional lenders, who are often reluctant to finance properties associated with the cannabis industry.
Landlords who choose to rent their properties to marijuana businesses may find themselves in a precarious position with their mortgage lenders. Most mortgage agreements include clauses that prohibit the use of the property for illegal activities, and since cannabis remains illegal at the federal level, renting to a marijuana business could be considered a breach of contract. This could lead to serious consequences, such as the lender calling the loan due or even initiating foreclosure proceedings.
To mitigate these risks, landlords may need to explore alternative financing options, such as paying for the property in cash or seeking out specialized lenders who are willing to work with the cannabis industry. Additionally, landlords may be required to purchase extra insurance coverage or riders specifically designed to address the unique risks associated with leasing to marijuana businesses.
Navigating the cannabis real estate market in California is further complicated by the patchwork of local regulations that govern the industry. While the state has broadly legalized cannabis, local cities and counties have significant control over the types of marijuana businesses that can operate within their borders. Some jurisdictions may allow cultivation facilities but ban retail dispensaries, while others may impose strict zoning requirements that limit the number of cannabis businesses or dictate their proximity to schools and other sensitive locations.
For landlords and cannabis entrepreneurs alike, understanding and complying with these local ordinances is crucial. Failure to do so could result in fines, legal action, or even the closure of the business. As the cannabis industry continues to evolve, it is essential for those involved in cannabis real estate to stay informed about the ever-changing legal and regulatory landscape at both the state and local levels.
As a landlord, it’s important to be aware of the potential risks associated with leasing property to cannabis businesses. Because cannabis is still illegal under federal law, you could be subject to forfeiture of your property if you violate federal law.
To protect yourself, you should consider amending your lease to include a provision requiring tenants to notify you about any changes in occupancy, including new tenants or subtenants. You should also include language in your lease stating that you are not liable for any unlawful activity that takes place on the property.
In addition, you should provide specific information about the tenant’s permitted use in your lease agreement. For example, if the tenant is only allowed to grow marijuana operations for personal use, you should include language stating this in the lease. By including this information in the lease, you can help minimize the risk of violating federal law.
4. Consider Negotiating a Shorter Lease Term
As the cannabis industry continues to grow, more and more businesses are looking for spaces to lease. And while there can be some challenges that come with leasing to a cannabis business, there are also some potential benefits. For landlords, one of the tips to keep in mind when leasing to certain cannabis businesses, tenant is to consider negotiating a shorter lease term.
Shorter lease terms can provide landlords with greater flexibility and allow them to adjust rent prices more easily in response to changes in the market. In addition, shorter lease terms can help to protect landlords from any potential legal issues that may arise from renting to a cannabis business. So if you’re considering leasing to a cannabis business, be sure to comply with the cannabis law, and this tip in mind.
5. Escape clauses should be considered
Cannabis laws are ever-changing, and what is legal today may not be legal tomorrow. As a result, landlords who are considering leasing to cannabis businesses should be aware of the risks involved. One way to mitigate these risks is to include escape clauses in the lease agreement.
Escape clauses give landlords the right to terminate the lease if the law changes in a way that makes the business illegal. This can help to protect landlords from liability if the business becomes illegal and also gives them the flexibility to end the lease if they no longer feel comfortable with the business. While escape clauses may not eliminate the risk of leasing to a cannabis business, they can help to reduce it.
6. Specify Landlord Access Rights in the Lease
As a landlord, it is important to be aware of the evolving cannabis industry and the potential impact that cannabis businesses could have on your property. One way to safeguard your interests is to specify landlord access rights in the lease. This will ensure that you can inspect the property and make any necessary repairs. In addition, it is important to consider the type of business that will be operating on your property.
Cannabis businesses can range from small, home-based operations to large-scale commercial growth. If you have concerns about potential damage to your property or increased foot traffic, you may want to consider leasing to a cannabis business that has a proven track record. By taking some simple precautions, you can help protect your investment and ensure a smooth leasing experience.
7. Comply with the Cannabis Tenant Licensing Process
While the use of cannabis for medicinal and recreational purposes is now legal in many states, landlords must still take care to comply with all applicable laws when leasing to cannabis-related businesses. One of the most important compliance considerations is the licensing process for cannabis tenants. In most jurisdictions, cannabis businesses must obtain a special license to operate.
As such, landlords should require their cannabis tenants to provide proof of licensure before signing a lease. In addition, landlords should verify that the license is valid and up-to-date on an ongoing basis. By taking these simple steps, landlords can help ensure that their cannabis tenants are operating legally and in compliance with all relevant regulations.
8. Improvements To The Premises Should Be Addressed In The Lease
As a landlord, you may be interested in leasing your property to cannabis tenants. However, this can be a risky move because of the uncertainty surrounding the future of this industry. One of the main issues that landlords have with leasing their properties to cannabis tenants is that they may not be able to find out if their tenant’s business will be successful until after they have already signed a lease. This can lead to financial losses for landlords who are unable to find other tenants once they realize that their previous tenant failed.
Therefore, it’s important for landlords to carefully consider if leasing their property to a cannabis business is the right move for them. One way to protect yourself as a landlord is to include clauses in the lease agreement that address improvements to the premises. This will ensure that you are compensated for any damage caused by the tenant or improvements made by the tenant that you don’t approve of. By taking these precautions, you can minimize your risk when leasing your property to cannabis businesses.
9. Obtain a guarantee from cannabis tenants for the lease
Most banks will not finance a property where there is a cannabis tenant because of federal laws, so it’s important to have some type of protection in place in case the tenant defaults on their lease and can’t pay rent. The best way to protect yourself as a landlord is to have the tenant provide you with a guarantee from an outside source such as their bank or another financial institution that will pay your rent if they fail to do so.
This way if they default on their lease and cannot pay rent, you can still collect money from them through the guarantor. However, it’s important to ensure that the guarantor is a credible source who can pay your rent if necessary. Otherwise, you could end up being stuck with an empty property and no rent money coming in.
Overall, obtaining a guarantee from cannabis tenants is a critical step for landlords to take to protect themselves financially.
10. Check your bank’s policies on the handling of cannabis-related funds
If you’re a landlord considering leasing to a cannabis business, one of the first things you should do is check with your bank to see what their policies are regarding handling funds from these types of tenants. While marijuana is still illegal at the federal level, more and more states are legalizing it for both medical and recreational purposes.
As a result, there is a growing industry of legitimate cannabis businesses, ranging from dispensaries to growing operations. However, because of the federal laws, many banks are hesitant to do business with these types of companies. As a landlord, you need to be aware of your bank’s policy on this issue so that you can make the best decision for yourself and your property.
Leasing To Cannabis Business Tenants FAQs
Leasing to cannabis businesses is a hot topic right now, and the market is quickly evolving. I’ve compiled answers to some of the most common questions we hear from landlords who are considering leasing to cannabis tenants.
How can I get a license to operate a cannabis business in unincorporated LA County?
To operate a cannabis business in unincorporated LA County, you must obtain a license from the county. The Los Angeles County Board of Supervisors approved a motion to develop and implement a commercial cannabis licensing program on February 15, 2022. Until the licensing program is fully implemented, commercial cannabis activities remain unpermitted and no applications for licenses are being accepted at this time. The first quarterly report on the progress of the licensing program is expected to be submitted to the Board of Supervisors in May 2022.
What are LA County’s regulations and laws on commercial cannabis activity?
Currently, LA County’s regulations and laws on commercial cannabis activity are very restrictive. If you are located in an unincorporated area of the county, all cannabis businesses and activities are prohibited. This includes cultivation, manufacturing, distribution, testing, and retail sales of both medical and adult-use cannabis.
The only exception to this rule is if you have a valid permit from the Planning Department. However, these permits are very difficult to obtain and are typically only granted to non-profit organizations.
As a result, the vast majority of people who wish to start a cannabis business in LA County are unable to do so. This could change in the future, as the state of California continues to loosen its restrictions on cannabis.
However, for now, LA County’s regulations remain some of the most strict in the state.
Can I open a business now and get a license later?
Opening a business without a license is illegal, and if you are caught doing so, you may be subject to harsh penalties. Marijuana is a controlled substance. Not only could you be fined, but you could also have your business shut down. In some cases, you may even be subject to jail time.
It’s simply not worth the risk to try to operate a business without the proper licenses. Obtaining a license may seem like a daunting task, but it’s necessary to operate legally.
The process may vary depending on the state in which you plan to open your business, but it typically involves submitting an application and paying a fee. Once you have obtained your license, you will be able to operate your cannabis business without fear of being penalized.
Conclusion
All in all, if you’re a landlord with a property that could house a cannabis business tenant, it’s important to understand the risks and rewards involved. By following these 10 tips, you can maximize your chances for success while minimizing any potential headaches down the road. Have questions? Give me a call or schedule a free consultation today—I’d be happy to help!
