On demand 1h 07s Intermediate

Cannabis and Real Estate – What’s the Deal?

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Cannabis and Real Estate – What’s the Deal?

For the last five years, real estate has been at a premium in the cannabis industry – and so have rental rates. This seminar will review how the market has and has not changed for cannabis tenants and what both landlords and tenants should be concerned with when negotiating their relationship.

Transcript

Good morning. Good evening or hello to everybody and welcome to a Quimbee presentation on cannabis and real estate. Or as I like to ask, what's the deal? My name is Bryan Bergman. I am an attorney in Los Angeles, California, who regularly works with cannabis businesses and ancillary service providers and have negotiated many, many, many leases and purchase agreements between operators and landowners and also helped acquire those land deals and such. So today we're going to kind of do a. Broad overview of cannabis issues specific to real estate transactions. And more than anything, I'm going to be focusing on leases because that's where most of this comes up. But in taking a big picture outlook and everything, we always like to start with, why does real estate matter so much to the cannabis industry? Well, in general, real estate always matters, period, for any business. So nothing has changed with this at all. But in this situation, cannabis industry, it really matters because. Of course, anytime a business owns its property, there's perks to that. But even if they don't own it where they're looking to operate, many jurisdictions have, especially here on the West Coast, have created specific zones or specific areas that are where cannabis businesses are going to be allowed to operate. For instance, California is a permissive use zoning state, which means that if a zone does not specifically permit that use, it's not allowed unless there's specialized permissions from the local jurisdiction, such as the Cup, which is a conditional use permit or similar special permission. But when you're looking at it from an overview, when you own a property, once you have a built out facility and it's in an area that's been quote unquote marked as a green Zone in a particular jurisdiction, well, now you have increased market value because you have a piece of property that is of limited supply and a high demand location with some turnkey components to it. So that obviously really matters. And it also still really matters because when you're having a public or a retail facing business where there's actual public access and everything, what's around you is, you know, for instance, a cultivator or a manufacturer or somebody who either just takes the plant and grows it or manufactures it into a distillate or infuses it into edibles or something like that. If that's all the operation is, it's only supply side. You're not as much concerned about your walk score, for instance, or where it's located. You can probably be in any sort of warehouse, district or otherwise. In fact, for security reasons, it may even be better to be in a situation where it's not easily known that there's a cannabis business going on, or you don't have to worry about odor control issues as much because it's in a industrial area. So it depends on the type of business. But obviously when you're looking at cannabis and you are talking about public facing and you start to think about the idea of entertainment opportunities surrounding such a business, then it becomes a whole ecosystem. Question And so there's always reasons to own a business, but sometimes that's not feasible. And so you need to know. And similarly, if you are a either going to be a landowner renting to a cannabis business or you are going to be owning that cannabis business, we are still talking about something that is still currently, as of the recording of this session, a Schedule one controlled substance at the federal level, which means there's no approved medicinal value or use for the product, and therefore it's still on the highest level of enforcement. If and when there is enforcement that happens at the federal level. Reasons for that that we don't get into in this seminar because it's outside the scope, but it is still federally illegal. And because of that, there are some concerns that many landowners have of, well, if I rent to this state legal business or I'm running a state legal business and it's still federally illegal, what happens if there's a forfeiture? And a forfeiture proceeding is something where the government prosecutor wants to dismantle the criminal enterprise. And so it's not just about seizing whatever evidence is found on the spot. It's about preventing it from happening again. And one of the key tools that many government agencies have in that regard are forfeiture or seizure proceedings, where in order to dismantle the criminal enterprise, they will actually try to seize anything that the criminal enterprise has touched. So taking cannabis, for instance, if you're driving cannabis and transporting it in a vehicle, that vehicle should be seized. Did you put money that you received from that cannabis business venture into a bank account? Well, should that be seized? Did you run it through a particular building or run a business out of that? Should that be building? And that's where forfeiture becomes an issue, because are we taking this increased risk of forfeiture? Similarly, a lot of mortgages and bank loans have some very interesting provisions in place where you cannot conduct any illegal activity, for instance, or you can't rent it for an improper or illegal purpose. And if you have those type of provisions in your mortgage or your loans against your building, then you might have automatically gone for a default that you may have to be concerned with. And so that's something else that needs to be looked at or what if you're trying to refi? So when you talk about those types of issues and you talk about the perks and everything else like that that we mentioned before, what happens is there's a lot of times there's a real discussion about whether or not there should be some additional consideration. That is not normal for a traditional landlord tenant or commercial real estate transaction. And I think that this seminar is going to mostly focus on real estate transactions from the perspective of landlord tenant relationships. Because if you're going to buy the land, then yeah, you're going to absolutely want to make sure that you're doing it and using it for the proper purposes for your cannabis business. But that's more a matter of just going through any of your typical due diligence for purchasing land with this particular use in mind. So for for this seminar, we're going to focus more on what happens when either the landlord is a is part of the business itself and wants to have a separate entity owning the business. Or just when you're trying to rent a third parties and or lease the third party and lease or rent from third parties. So for that reason, when you talk about different types of consideration, rental rate is usually a big one, especially here on the West Coast. We're seeing sometimes anywhere from 2 to 5 times market rate per square foot for properties. We also see that even in a traditional gross relationship where a tenant is only supposed to be responsible for the typical stuff of the use but not the actual maintenance of the building itself and otherwise that even it might be a modified gross proceedings or even a true triple net proceeding or otherwise, where we're actually trying to create a transaction relationship where the tenant is more responsible than usual, including for getting things that only benefit a landlord such as the in order to operate and the other conditional use provisions or whatever to be able to operate or get a new use zoned in by the city. And that's all at the tenant's expense, even though that will run with the land and benefit the landlord. So. That's all things that really come into question and have added to some increases in the deal that are being made. And you're seeing some pretty obscene rental rates because of that, amongst other things. But what's interesting to note in 2023 is this was something that was kind of derived as the market model and the late teens like 2017, 2018, 2019, um, when all this was going on and this originally started for this way, at least on the West Coast. And what was very interesting is that a lot of those concerns about forfeiture and mortgage default and refinances, many of those things have not come to pass on any meaningful or large scale way where it looked like it has to be the standard. And for those that are listening on the East Coast where those markets are still maturing, it's something to consider as well, because one thing that is very clear and that I've seen in my practice is I won't say it's the number one, but I say that one of the biggest reasons that the cannabis industry operators are having a hard time succeeding on the West Coast right now is because of the incredibly unfavorable leases they're in that are incredibly difficult for them to maintain in which they can't restructure with the landlords because the landlords are not motivated or incentivized to do so. And so because of all that, we're in a situation where tenants are trying so hard to keep their building that they can't even make payroll or pay taxes or other issues because of overregulation and otherwise. That is affecting their business and we're seeing a very high rate of failure. So that's a major symptom of that right now is the unfair lease that doesn't get modified. So it's something to consider when you're negotiating leases on behalf of your client. Does the landlord care? Maybe not, because they feel they've got a good thing here. But on the other side, if they want a long term tenant, it might make sense to try and work with them more. So some of the other issues that come up with this that we talked about here include also many jurisdictions require transparency of ownership. So if you're going to want to own a piece of a cannabis business, you're going to have to disclose that. And many real estate owners don't want that. On the flip side, though, they they do have to explicitly acknowledge that they know that they are leasing to a cannabis operator and that they're allowing it under penalty of perjury. And so because of that, when you have these types of situations that are running up and down, it becomes a real discussion to know that it's not just about getting into a lease. It's about dealing through these concerns from federal illegality and from state local regulatory requirements and including disclosures and whether or not there's proper zoning in place. And then also many local jurisdictions have what are known as sensitive use buffers, which are essentially you've heard some of the famous ones like where a cannabis dispensary or retail store cannot be within 1000ft of a school or where young children may congregate. Sometimes they put in sensitive use buffers that you can't be within X amount of feet of another dispensary or similar business. Other times there may be churches or other gathering grounds or, you know, alcohol or drug therapy centers. It's each jurisdiction has their own sensitive uses that they determine. And these all become a major concern and something that needs to be dealt with. And also for each local jurisdiction is their zoned use or their particular area for this business or what is the process for getting this area? If it's not zoned for cannabis activity to be able to be allowed to do it? So those are some of it does matter and it becomes a much bigger deal. When you're talking about real estate, it's usually one of the first components, especially because for many jurisdictions you can't even obtain a cannabis business license unless you show you have a piece of property where you've either rented or owned it and the landowner has agreed to you doing so. And without that secured property, you can't even get a license because those licenses are typically tied to the location in which they're applied for. For instance, again, in California, if you would like to move and relocate your license, many local jurisdictions or cities may allow for that permission. But at the state level, you actually have to cancel your existing license and apply for a new state license at the new location because licenses are non-transferable and they are tied to a piece of property. So the long and the short of this summary of this very long first slide is there's a lot of major overarching concerns that need to be looked into and discuss when you're even deciding whether or not to lease to a cannabis tenant or to own and purchase a piece of property where you're going to operate a cannabis business and understanding the layout of the local and state jurisdictional rules and what sort of federal issues are at play. These are the types of things that could very well come into effect and be something that needs to be dealt with before you make a decision to purchase or lease. So again, we kind of touched on it for a brief moment, but really, what are cannabis related tenants? They're broader than you think. There's obviously the two that I already mentioned, which are cultivators and manufacturers, and some states even differentiate the types of solvents that are used for the manufacturing. And what I mean by that is you can usually distill or extract pure cannabinoids such as THC or others from the cannabis process and make it into a oil for vaping or to ingest or into a topical or to insert it into food with all of the plant particulate matter. And you can do so with with chemistry to varying degrees of potency and success. Well, it also sometimes matter what types of solvents you use. And if you use a flammable solvent or like such as butane or something, well, that's going to help you really get some very purified distillate from your extraction processes. But at the same time, you're using a volatile and dangerous substance. And so now, you know, there usually needs to be much greater safety precautions for making sure you almost have almost what would be considered a bomb proof room if you're going to be doing something of high heat like that, that could explode. And so when you're talking about renting to manufacturers, the type of extraction that they're doing, if they are doing extraction activities and whether it's a volatile or non-volatile solvent process really does play into who you lease to and where you can lease from and or operate. For instance, the city of Los Angeles does not allow any type seven volatile manufacturing in the city limits at all. Period. Full stop. You can only do non-volatile manufacturing extraction in the city of Los Angeles, one of the major markets. So other cities are different. But that's my point. And so when you're looking at it from a real estate perspective, that's something to keep in mind. The other types of tenants out there are testing labs, which are those are for the public good and they typically are only allowed to have that type of license and no other for public safety reasons. But they're laboratories that will then test the cannabis products for lead and pesticides and other molds and other public good to make sure that certain potency restrictions and otherwise are properly disclosed and labeled on certificates of analysis so that everybody can know. And that's that. So those are labs. They're not necessarily as much of a risk factor as a volatile manufacturing facility would be. But knowing what they're doing and knowing that you might be having a laboratory with expensive equipment and what that entails, again, could be an issue. Distributors can change and be of different names depending on the city or state or wherever you're working may be. But essentially I'm using distributors here to refer to those that are sort of the middle men or females that are the businesses that are working as the quality control, the transportation, the storage, the packaging and labeling and or, you know, maybe working with the testing facility. Some states have specific license types for that. Others allow the other businesses to do it specifically. Retailers are the obviously publicly facing companies. And so there's storefronts where you're basically a retail location where people come in and buy products from your store and leave. And so there's a lot of different communications and issues with public safety and with zoning regulations and other regulations for security and otherwise. Some jurisdictions allow for delivery only. And what that means is that they are not while they are a retail facility and they are maybe delivering product, but they're not allowing for a storefront public facing portion of that, which means that they don't really need to have storefronts space, they don't need to worry about having everything be safe and compliant for those reasons because they're not open to the general public. So maybe they can put their delivery retail in a in a manufacturing or industrial park or similar things because they just need storage space. So and a place to park their vehicle. So no matter what many jurisdictions require, that every you can't just like have a delivery service out of the back of your truck. You you need to have a building and a brick and mortar location still. So that's why real estate still comes into play for them. You could also have vertically integrated or micro business combos where you're taking any of the above mentioned types of activities and putting them all into a single building. Like maybe you have a cultivation and manufacturing and a retail all in one building or some combination thereof. That's also very common. And then it becomes a question about improvements and build outs that are going to be necessary to make that legally compliant. And who's responsible for all that and what happens at the end? Lounges are like cannabis bars, if you will. Lounges are essentially locations where public consumption is allowed to occur on premises and lounges is another new and burgeoning area for retail. In fact, did for Quimbee recently a different presentation on out-of-home consumption and entertainment opportunities and regulations that I recommend you check out because it's a very interesting and growing area of the industry that is quite exciting. But Lounges is another type of real estate tenant with its own set of rules and regulations that need to be addressed and dealt with between the landowner and the operator. Events and productions are, you know, they can be single one off type things or they can be ongoing things. If you're a landowner that likes to rent to pop up businesses or allow for differing opportunities like immersive museum pop up, like the Van Gogh installation that was going around, perhaps you want to also allow for some sort of immersive experience with a consumption component attached to it. So that could be a way that if that's allowed and how it's allowed. And are you allowing consumption? Do you need to be licensed? Do your tenant need to be licensed if they're allowing consumption during events or product productions on your on your property? So these are things that matter. And then sometimes you even have to wonder what about ancillary service and product providers? And when I mean ancillary service providers, I can mean you, the attorney or the accountant, you're providing ancillary services that directly affect the plan touching business. You may be profiting off of this plant touching business, but you're not touching it yourself. So guess that matter does that. That type of light lease or ownership situation that also needs to come up? It depends on the activity, but there may be some additional considerations and concerns in those types of businesses if they are servicing plant touching businesses. Because how close is the line? So these are the types of tenants that are out there and each one have their own specific needs for determining what they need for property use and ownership and or renting. So when you talk about this and you look at it for all landowners, whether you're going to be owning the building yourself or you're going to be leasing to a third party cannabis provider company, these are things that everybody is concerned about. Obviously, there's federal prohibition. And we're going to go into some more detail about those momentarily. There's always odor control and nuisance issues, especially for those in more populated areas that are not industrial. And in parks like that, where it's not just a bunch of warehouses, that seems to be a major concern. And one of the big discussions in the lease is the smell of cannabis considered a nuisance. Do you need to actually negotiate a provision I recommend you do, about whether and what characterizes as a nuisance under a lease and whether cannabis activity and smell falls under that. But odor control is a very important one for a lot of local jurisdictions as well. And because of that, odor control becomes a major issue that needs to be addressed as well because the tenant going to have to build in their own thing for that. Or are they are you concerned about it and what type of improvements is the building require for that? And sometimes the tenant will argue, well, if I'm making your property odor control specialized, then even if you don't have a cannabis tenant, you're getting a huge value. So why am I paying for 100% of this? And there's also concerns, of course, about this still being mainly a cash only business. I did read recently that the number of banks that are working with the federal government and disclosing that they are involved in cannabis banking has increased and more applications have been done. But we're still talking about a small fraction of the banks overall. And. So really, if we're still a mainly a cash only business, while many operators are trying to get more and more opportunities for banking access and otherwise, they sometimes just can't. And so how is the landlord willing to accept money? Are they are they going to get paid by cash? Do they want that in cash? The ten have to go and get a cashier's check every month. Does it have a bank account? Can it do an electronic funds transfer? Is the landlord concerned that if it's getting banking from a canvas tenant that it may affect their banking relationship? Did they want to set up a separate bank account for that reason? Um, of course, with it being a cash only business, there's increased theft concerns. You know, I've seen a lot of times in local jurisdictions that even though cannabis operators are asked to have high levels of security and pixel and and security cameras and everything else, and in fact, many local jurisdictions require that police have 24/7 access to this video monitoring system and everything else. That doesn't mean that if there is a theft or other crime, that police are going to jump and actually come to do something about it. In fact, many times they don't. And it becomes a real rash of problems here in Southern California for a lot of theft. People are coming in, smashing and grabbing, taking as much as they can at night, even with their license plates or their face is caught on camera with no prosecution coming. And so the buildings are subject to risk then, because it's a cash only business with minimal enforcement. It's a concern for landlords. Um, as I mentioned before, zoning continues to be a major thing. And whose responsibility is it to make sure that zoning is appropriate? It's usually a typical lease negotiation discussion, and typically the landlord will want to disclaim any rep or warranty that this is a suitable use or zoning for the business, and that's on the tenant. But it depends on the negotiation. Um, there's also a problem where if you are trying to sell or purchase a property or a loan on a property where you're trying to sell to a cannabis company that has the cash to buy it or close to it, or maybe you're trying to rent, Well, you may have to. You can't usually use the typical escrow models because a many escrow companies, because of the federal illegality, will not perform escrow services for such a transaction. Many banks will not give the loan even when the property is included because of the federal illegality of the use transaction. And so it becomes a real question and you start to have a lot more seller carried loans and other issues that become an issue as well when you're negotiating these types of purchases. And so that's always something else to think about if and when you're trying to sell directly to a cannabis company or rent. Um, similarly. Cannabis use is a new use in most jurisdictions because most jurisdictions didn't start allowing cannabis as a permissible legal use until recently. Last five, ten years, especially out here on the West Coast. And so when you have a building code and you're trying to do a new use that has not been previously done for the building, well, maybe you might have had some grandfathered in, some prior older building codes and everything like that. But now that you're bringing in a new use, building and safety may get involved and want to talk to your tenant and you about your business, your building not being up to code. And since it's now a new use, it's not grandfathered. That could be a pretty big one depending on the nature of the building, and that could be quite the expense and that's quite beneficial to the landowner. But the landowner doesn't have to do that if they don't want to. So the candidate, the tenant, because they're so desperate for a building in a specific area, the landlord usually can say you're going to have to pay for all my improvements that I'm going to benefit off of in addition to my increased rental rate and other things that we've negotiated. And so when you think of all that and all the build out that comes into it, mean you're looking at tenants sometimes that have multi-million dollars worth of build out while they're waiting to get licensed and can't get operational and they're paying a heavy rate without even any rate abatement or reduction while they're doing all this benefit for the building. It's a great deal for the landlords, but it's not a great deal for the tenant operator. So that becomes a hot point of contention as well when you're negotiating costs and improvements. But it really does matter. And again, there's always the risk averse landlord that this is still a federally illegal business. Maybe they want a more solidly grounded enterprise that's not going to have as much issues. And also cannabis tenants are getting something of a bad name out here on the West Coast because they're breaching their leases and can't pay them anymore. Failing again because they've agreed to all these additional costs. And these are all things that need to be addressed. And I'm not I may be sounding like I'm one way or another, but I'm not. I have represented both sides many times and I've gotten many a deal done where I think the tenants paying too much and the landlord is charging too much and vice versa. And each deal is specific and different. But these are things that have to be worked out whenever you're talking about cannabis related real property. So when we talk about that, one of the first things we have to talk about is, well, what is this federal illegality? What does it mean for landowners and why do we get heartburn over it? Well. As I started off talking about, it's still schedule and controlled substance, and that means there's no medical use and high potential for abuse. And since there is no medical use and everything is commercially related activity, well, that means therefore there's stiff criminal penalties and sanctions. And that can include the risk of forfeiture if there's ever been a federal enforcement proceeding that really does matter in choice of law. Provisions do come into play on that. I'll talk about that later on. But there's also something known as the crack house statute, which makes it a felony to knowingly lease or rent any property that's manufacturing, distributing or using or selling any controlled substance. And marijuana is still a controlled substance. Technically, you're still subject to the crack house statute. And then you start talking about Money Laundering Control Act of 1986 as well, which is another statute that basically says that if you're using money from federally illegal activities, are you laundering it for your tenant? And so once again, now a landlord has concerns for banking for that reason. And so right off the bat, we're seeing a bunch of like, well, geez, what do we do here? This is kind of scary. There's other issues involved, but those are the big ones. We already talked also about the risk of insurance issues and rent and banking and theft and other things. And I'll get into that more later. But the point is, is that there are plenty of major concerns from the federal level, but we do have some quote unquote, antacids to help with the heartburn. For starters, there's an amendment known as currently the Rohrabacher-farr amendment. It used to be the Rohrabacher Blumenauer Amendment. It's been around in one form or another for quite some time. And essentially it says that most federal departments, including the Justice Department, cannot expend funds that interfere with implementation of state medical cannabis laws. Mackintosh was a famous case that came down in 2016 about just that. It was a Ninth Circuit case. So it's not it's not state supreme I'm sorry, it's not federal Supreme Court law of the land. It's only circuit, but it's directly on point. And it is that the practical effect of having this type of amendment is that you can't use funds appropriated to it to prosecute defendants if they fully comply with state law. Now that that decision was very quick to note that this could change if the law goes out of effect. It doesn't address recreational that's been tried to push through a couple times. But, you know, with a bunch of other things that have been going on and with different language that has been done here and there in the past with what used to be known as the Cole memorandum, which is no longer guiding policy, but is still basically followed by the federal government, which is there's only limited funds available for the federal government to prosecute and forward with their, um, their enforcement priorities on controlled substances. And so they're more concerned with things like where if the business is doing something like selling to minors or funding drug cartels or giving it to federal land or crossing state lines or things of that nature, then the direct they're not so concerned about the direct user who's using under federal law or the state law excuse me, or the cannabis tenant who is an operator who's running a state legal business that is doing everything that they're supposed to do and everything is above board, like they're unless the operator does something to create the federal government's eyes to come on them for violating federal law in a more specific way than just operating, then there's less risk, especially because now they can't spend the money on it most of the time anyway. So that's why I mentioned earlier these forfeiture and other foreclosure issues are concerns. In the last five years or so, I have not heard of or seen very much actual activity on enforcement of that nature. I mean, really, there has to be something else and something more going on. The operator is engaging in some truly heinous federally illegal activity or something to gain the attention and doing more than just operating a state licensed cannabis business in state jurisdiction. And that goes directly to us. 903 21 is the Federal Controlled Substances Act, and it has specific language that the Controlled Substances Act very specifically says that federal law regulating controlled substances cannot interfere with the states abilities to regulate drug and controlled substance laws. Gonzales versus Raich is a very famous case about that. That said, because California law regulates and permits conduct that may be criminal under federal law, there is a direct conflict between federal and state law. However, intra not interstate possession use and commercialization of. Medical cannabis is allowed and Congress only has the power to regulate interstate commerce. And what this is basically saying in a nutshell is there is a perception express non preemption language in the CSA that the Federal Controlled Substances Act does not preempt. State legal businesses. That's why we have this. That's why everything I'm talking about right now is possible. Because just because it is federally illegal does not mean that it's illegal in the state. And that's why we have these state legal businesses and that's why you have businesses renting to renting from cannabis, cannabis businesses, from landowners. And that's why this is able to happen in our country. So that's important. Um, and that's why you have to note that while there are federal concerns, they are real. You do need to disclose and talk to them. What you really need to be looking at is how much of an actual risk are there with them. Um, in my opinion, and from what I've seen, it's not as high as it was originally thought it was going to be. And as more time passes and less happens, the more that seems to be reinforced. So it's something to note. So. That's why we have to talk, though There are federal concerns. And what does that do? Well, like I said, we have rental rates that are typically two and a half times 2 to 5 times market value. You also have, because of the threat of forfeiture foreclosure, increased costs or taxes from used and non-conforming uses you're getting a lot of. Increased leases you're getting a lot of. Much more landlord favorable provisions. And I've seen things going on as far as disclaiming all use and warranties of the building. I've seen I've seen waivers of known and unknown issues with the buildings in order to rent. And tenants are going, why would I agree to that? But then they're like, well, you don't have to take it or leave it because somebody else will take it. And so tenants do not have a lot of leverage when they're negotiating. And, you know, especially because this has become sort of industry standard out here on the West Coast, at least, that tenants think they have no choice and they have to do it. And so they keep taking these leases. Mean to this day, I literally just negotiated a lease yesterday where the landlord is doing a gross lease, but he's going to be making by year five over $1 million a year in annual rent. All taxes are being paid by the tenant. The tenant is paying $6.50 a square foot when market value on the property is 225. The tenant is going to be responsible for all maintenance of the building and the landlord has disclaimed all liability for the building and the tenant has agreed to this. Food for thought, but is this good for long term viability? But anyway, this is what we look at and these are the reasons why we have these provisions. Also, each state may be different, but how much does local jurisdiction play in licensing approval? Some issues like zoning and specialized use permissions and things like that. There's always going to be local approval. And then there's also landlords that are required to have to actually give a statement under penalty of perjury that they're actually leasing to a cannabis business. There might be defensive use buffers that have to be done many times. There's other departments that get involved in the process for different reasons, and those people have to come through and look at everything. And sometimes even if you some landlords think they're being clever, where they'll sit there and they'll say or they own the business itself, but they want to rent as a separate entity for tax reasons or otherwise. So they go for a lower rent base rent, but then they agree to additional rent of a percentage of profits from the business or revenues or something of that nature. And while that's perfectly fine, many states have disclosure rules that require that anybody that takes any financial interest, any percentage of profit, has to be disclosed in a cannabis business, has to be disclosed to the state and maybe even the local jurisdiction as well. And these are all things that the landlord needs to decide, well, how do I feel about and what do I want to negotiate on that effect and how the tenant wants to try and convince the landlord it's okay to. And who's going to be responsible? And are we doing this in such a way that the tenant is going to have no financial flexibility to succeed afterwards or not? And so these are all things that we have to think about as we're negotiating and discussing these issues with the landlords and the tenants and working through all these issues. Um, the one thing that I know because again, I'm really focusing on landlords and tenants is can you use the formulas? And the answer is, yeah, they have multiple form leases here in California that we've used for many years. And I think that in general, these forms have come together after much negotiation to what is just standard landlord tenant relationship. However, when it comes to a cannabis tenant, you do need an addendum, just no ifs, ands or buts about it. Um, you just may need some further nuance beyond just the typical landlord tenant relations. Maybe you don't want to upset those. Or maybe you do like the example I gave a few minutes ago of a landlord disclaiming all use that could be done in an addendum. Similarly, the additional rent would have to be dealt with. Their tenants, of course, always want to make sure that they are getting express landlord cooperation for everything they need to do, which could be not just getting the landlord affidavit for stating that they're renting and other signing other forms. There may be other things as well that might be required by the local jurisdiction. But then there's also questions about, well, what if you need power upgrades or you need to do other things for zoning versus conditional use permit, like I mentioned earlier, or there needs to be other building code changes. And in all those situations, the tenant getting the landlord to affirmatively cooperate, to participate and help with that is very important. Um, but either you use a form or a bespoke lease for dealing with these types of issues. You can usually use forms for purchases to options such. I've done it that way. I've used form guarantees many times, but then sometimes best spokes are necessary. It depends on the landlord, it depends on the tenant and it depends on the situation and the economics of the deal and what's being done. So form leases are fine, but they're not perfect and so you need to work through that as you're talking about. So another big issue that we always need to think about and want to go through a few with some of the time I have remaining is what are some really important lease provisions? I sort of touched on some of them already in the last couple of slides, but I want to talk about a few in particular. One is agreed upon use. Typically, most leases say that you're allowed to use this for any legally permissible purpose, but that could be kind of questionable because what if it's federally illegal, but state legal? Should we keep that language? Do we need that to say that for for cannabis? I like to treat it more like a patent application where, you know, you want to be too specific would be an issue, but it needs to be more specific. So broad enough that it covers a lot of activity, but specific enough that we know it's there. So let me give you an example. Maybe you want to have a agreed upon use that says any legal use or purpose and more specifically, cannabis, retail and related activities, distribution and storage and related activities, cannabis cultivation, etcetera. That would be fine. That would give some more specificity. But you're also mentioning for more related activities. So it's not just the cannabis use, but then you can get to specific. We say you can only use this for cannabis retail. Well, what if you want to sell food or drink that's allowed under state law? Or what if you want to sell merchandise or other types of swag or paraphernalia or whatever? Well, that would not be technically permitted under the lease. Or what if, like the landlord's attorneys getting too cutesy and they start giving specific license numbers down, like you can only operate under this license? What if that license number changes or what if there needs to be a new license? Or what if the tenant wants to obtain a new license under an affiliate entity to subdivide its premises so that it's doing multiple activities, but it wants to use a different entity for each because it has legal reasons such as it has a manager or someone coming into any profit share off of one type of activity and they want to separate it. So again, you can go to specific as well. So it just you want some specificity and that's why just using the general form lease, it's usually not enough. But you also need to include related activities and what else is going to be allowed. Um. Most jurisdictions sometimes require that only commercial cannabis uses can be used, for instance. In California, there are some express rules that you can't sublease. Partitioned premises that have been listed as cannabis facilities and therefore you're only allowed to do the cannabis active commercial activity licensed to be done in there. Is that something that the landlord in their lease wants to further affirm, or do they want to leave that up to the tenant? What about one conditional use permissions are required? Who's going to be responsible for getting those permissions? And what's going to happen with that? Same thing with zoning and use. So these are things that specifically will benefit the landlord in the long run, but become a question of whether or not they want to be done in the short. Another one, which already talked about was landlord cooperation. And again, that's incredibly important because as I noted before, there could be many different reasons why that was there. And in fact, in some situations I'll use the city of Los Angeles again, in addition to requiring an affidavit that a landlord has to sign saying, yes, I'm leasing to this person under penalty of perjury, and I know there's cannabis activity going on. I can send to it sometime. In Los Angeles, for instance, they have to actually sign a notarize a location eligibility form attesting themselves that there's been no violation of cannabis ordinance requirements. They've never leased it to an illegal cannabis operator, previously or otherwise. That has occurred to make it because under Los Angeles law, that would make the the the location no longer permissible and conforming to allow for cannabis activity. So the landlord has to attest to that, not the tenant. That could cause some issues. If you don't have a very clear lease that the landlord is going to cooperate and participate in all these things. And that could also be a due diligence question. The landlord cooperation is always very important. And again, you don't see this in a forum lease. You're going to have to specifically negotiate this into an addendum or bespoke lease. Again, another big one that I talked to you about is, well, what are we talking about here? And who's responsible for the building And most growth tenants, there's two main types of that. There's obviously modified grosses and other types of things, but we have a gross or a triple net lease. A gross. There's a single flat fee for the use of the base. Landlord agrees to pay for all expenses that come up for the property and use taxes, insurance, providing utilities to the building itself. A triple net is the opposite. And it promises to pay for everything. It's triple net of all expenses of the property, real estate, building, insurance and maintenance. And that's in addition to the cost of rent and paying for utilities, which is always paid for by the tenant gross lease as well. So. Which one do we use? A lot of times there may be a negotiation for a gross that then becomes a modified hybrid of a triple net, but not quite going back to that one that I mentioned earlier as an example, that was a gross lease, but the landlord specifically put in a bunch of provisions that while it would still recover the property tax and utilities to the property line to make sure it was being provided and would warrant the roof and the actual structure of the building. Beyond that, the Hvac, the internal situation and everything else and all maintenance of the building and everything else was actually taken on by the tenant in that deal. That's kind of a hybrid of the two, which again requires very specialized language for the addendum. So that becomes a lot of questions about it. Also, how much common area charges are involved and if there are other tenants that are non-cannabis plant touching tenants, you need specialized provisions regarding that for payment of things as well. Signage and security. These are all types of expenses that come up in lease consideration that we need to be aware and discuss. Uh, another big one that I kind of touched on a few other times as well, and that needs to really be worked out is tenant work and alterations, generally speaking, especially when you're talking about an indoor cultivation or manufacturing facility or even a retail, you're doing significant tenant improvement and build out. And and for something like a cultivation where you're changing entire Hvac and air systems and filling and heating systems and lighting systems, these are things that would typically be considered fixtures and or part of the building or become part of the building. So what happens in those situations? Who pays for it? What happens after it's done? Does the landlord want to keep it? Is the landlord going to pay the tenant at that time for all the improvements that was done to its building? Does it become a fixture or does it not? Do we need provisions about how the tenant is going to put it back or not when the when the lease is done? Also, many landlords want to make sure that construction is being done pursuant to code and with licensed contractors, which sometimes may not want to pay. So these are all things that have to be discussed and considered when you're talking about who's going to do what for ten improvements and you're going to pay for it and how. In addition to that, we always talk about also the profit sharing question. I mentioned earlier about the regulatory ownership disclosure concerns. And that's why obviously they want to make sure they're avoiding diversion and cartel ownership. What if you own a building and you're a US citizen or you are a dual citizen or you're not a US citizen, but you're here with property? Did you know that if you're engaged in profit sharing off of a cannabis business, which this is something where I'm not talking about just getting rent from a business, but even then you should talk to an immigration attorney. But I'm talking about where you're actually participating in profits from this business. Uh, US Customs and Border Control still because this is a federally illegal substance. Um, they would consider that if you're engaged in a, in a federally illegal state legal cannabis operation or profiting from it, you're engaged in federally illegal activity, you could be stopped at the border and not permitted to come in or come back or come back to the country if you leave. That could be a major issue. What if you're you got a medical license and you own this building? Got some other like special security service clearances from your other job and your own building. Does just renting to a cannabis tenant or taking a participation in the disclosures that come with it endanger those licenses? That's a great question. The things you need to look at. Um, right. And so when you talk about profit share, when you're looking at it from the tenants side, are you doing this in a way to offset base rent and get paid on the back end? Or are you doing it just as you got your hands out because you try to make more money? That could be an issue for the tenant and that could make it that you got a deadbeat tenant way sooner than you meant. So again, there's always a tug and pull on the or push and pull, I should say, on these, uh, relationships and these negotiations. And it really does matter. And lastly, of course, we have a separate ownership stake in the tenant because it should be a lot fairer if they're renting to their own tenant, Right, We think, but not necessarily so. Again, the relationships become very important and you have to consider these things when you're doing it One of the other and in my opinion, the biggest other consideration, which again, this is more all addendum, all these are addendum because you don't find this stuff in the forms, at least out here on the West Coast is early termination. Um, so even if you have come to terms on everything and you're happy as can be, well, what happens if for a variety of reasons it doesn't work out? Some of the major ones I see are they can't get their license. I had one tenant who had a landlord that I was representing. He had a holding fee and a tenant held his building and paid that monthly fee religiously for five years, waiting for their opportunity to get a license on that property. He finally gave it up a month or two ago, giving up because he just could not find a pathway to licensure. So he held on to that building forever. But the lease had an early termination clause, Uh, you know, so that might be an issue because you just can't get it or also because of the fact that you have to have an attached to cannabis activity and don't do it. What happens if you can't renew the lease or what happens if they violate a federal law? And they started doing something that was incredibly illegal. Um, what happens if the defendant federal law changes their enforcement priorities and they decide they want to start making an example of state licensed cannabis businesses all of a sudden or the or the or the local government changes their rules and regulations or there's a nuisance claim. And that the neighborhood just cannot stand, that there's this odor control odor odorous business here that is just not good for the neighborhood, according to the neighborhood. What can the landlord do in this situation or the tenant? Because in both situations, I mean, not necessarily. No. So much for the nuisance one, but for the others. This is stuff that is generally outside their control or they did something super wrong. And so you really need to make sure that you have early lease termination provisions because what happens and you know what, if there's multiple licenses at the property, maybe they have a cultivation, manufacturing, distribution and retail. What if they lose three of them? But they kept one is that it can either side still terminate or do they got to keep it going because there's still at least one legal activity happening. Um. What happened? Uh, there could be a lot of different reasons for it. And so when you talk about it and you're considering these early termination, well, what do you do? Well, it becomes a big negotiation. Um, there could be different penalties. I mean, I've done a lot of nuanced negotiation, for instance, where you basically look at those examples I just gave, and for each one you change what termination is. For instance, if it was the tenant doing something illegal and incredibly wrong, well, it's allowed for immediate termination by either side. The security deposit would be forfeited at that point after the landlord and there would be holdover penalty rents for every day that the the tenant does not leave the property that they should have that are higher than the base rent. The tenant will sometimes push back and say that's fine, but can I. But maybe it wasn't something so heinous may have a period to cure. And in those situations, sometimes we negotiate in a cure period before that provision applies. But the holdover rent rate may apply. If it doesn't, what if it's something that's not outside the fault of the tenant or anything like, for instance, they've been holding the property forever and never got the license, or they couldn't renew the license because of whatever reason. It doesn't matter what. Well, in that case, unless it was some fault of the tenant, which you may or may not want to negotiate, then either side could cut the lease because nobody wants a dead business in there for 3 to 5 additional years. But what are the penalties then? Do we just do forfeit the security deposit? Is there any other additional consideration? Do they have a period to vacate? These are all the things you talk about, but you can do it for each one individually and honestly. That's one of the big ones where I find most of the negotiation is on this area. Um, assignment, sublet and sell is the same concern, but a little bit different. It you know, one thing that I get worried about with tenants is affiliate and control. For instance, here on the West Coast and in California, you can't sell a cannabis license. You just can't. It's non-transferable. And what that means that if a operating business wants to sell out or sell their business, they have to sell the entity under which they own the license. And so that could be a whole regulatory process. There could be a whole bunch of things involved. Sometimes if they own multiple other businesses, they have to separate out and get a new entity before they can sell the entity. Et cetera. Et cetera. And if you have situations like that, it, you know, you might still have the same if, for instance, in the first scenario where you're just selling the whole business, then you're actually gonna have the same tenant. But there's been a change of control. So does the landlord actually catch that and deal with that, or is it just the same tenant and the lease continuing landlords care tenants don't want that and that becomes something that may be an issue as well. Some local jurisdictions may have social equity and other requirements that certain rules and regulations must be in effect to protect the social equity programs that are in place. And when those requirements are in place, you know, there might be some rules about how they can assign or include things by the tenant for the city operations, and you actually have to negotiate these into the lease so that you're giving the tenant the necessary flexibility to deal with these types of situations. But what happens and how much the landlord is going to allow and these are some of the major key issues that you see in that. Indemnification is also another big one. Um, obviously landlords want no exposure for federally illegal activity and that's something most tenants are willing to do. But then they try to go further than that and just disclaim all liability and then it becomes a and that's not necessarily the case in all typical landlord tenant relationships. And so as you can see from the list I have here on the slides, some of the common negotiation points of liability on maintenance or operations or hold harmless or death or injury, each thing mattered. And then also we always have hazardous substance issues and things of that nature. Um, in my leases, I've always negotiated that cannabis and cannabis related activities shall not be deemed to be hazardous substances for the lease. And so that becomes a question of, well, is that something that is legal and can be done or not? It depends on local law and it depends on what the other sides are trying to do. But I have seen situations where a crafty landlord gotten this really big lease, but then they got really upset with the tenant for whatever reason, and they decided, well, you're engaged in an odorous nuisance and you're gay and you've got hazardous pesticides in your cultivation. So the lease is silent on this and I'm going to kick you out otherwise. And so these are things that you have to talk about and indemnify and transparently address at the top of the negotiations, because if you miss it, it can come out. Um, similarly, there's OSHA and ADA compliance that every building is supposed to be dealing with, but sometimes the landlords try to offset that and they make that a condition for the lease that even though they're supposed to be making these representations, they don't want to. And the cannabis tenant says, okay, so these are, um, these are. And so last but not least is slides because I'm already running out of time. It's amazing how much you can go through in such a little amount of time and still feel like there's barely scratching the surface. But other things that, you know, come up a lot in these commercial leases are operating covenants. And I've seen some landlords actually go and list a big list of all the different reasons why they need to operate the tenant compliant legally. And I've even seen some of them put in cut and paste from the ordinance language of all the operating requirements they expect the tenant to do. My question for that in a landlord tenant lease of this nature is so basically you've now said that the landlord has required and created it to be a breach of the lease if you violate local law, even though you've already probably already got a provision for indemnification of all use activities that are related to this is probably what's in there. And then you probably have a rep and warranty that they'll comply with all state and local laws, etcetera. And if they don't, that's grounds for breach of the lease. So do you really want to go a step further as the landlord and then actively and affirmatively list each one of those conditions? Yes, it gives a little more grounds maybe for, um, uh, for enforcement of the lease. But on the flip side of that, now, aren't you kind of taking on a role and responsibility for ensuring that compliance as a landlord, are you now getting involved in the activity of the business a little bit more than you meant to? That may call into question the indemnification language because you're now actively as the owner requiring certain things and that if you don't, if you fail to enforce that, does that create concerns for other provisions in your lease? And these are things that need to be addressed. So it's a balancing act which you're hearing a lot. Insurance is another really big one. I see Sometimes landlords just say, well, this is cannabis, you need higher insurance, but insurance is already hard enough to get for cannabis companies and you know, when they can get it. There are legally mandated amounts that they're supposed to have. So when a landlord comes in and says you must have higher insurance because I just want it, the question is, well, that's insuring my and my activity. That doesn't necessarily insure the building, but with the purpose of this additional insurance that you're asking for. And why are we doing it and how does it benefit the landlord? That's something that sometimes they go, Oh, well, it's cannabis, I just want it. But you have to actually understand the reasons for the different requirements for insurance and what you want the tenant to have. I mean, sometimes landlords want for the sake of their building more than just the legally required. So it becomes a big issue. Um, with respect to conflict of federal laws, that's another really big one as with nuisance. And in both situations it's a question of, well, what's applying. And one thing I think very important in all leases is that you should have choice of law provisions that are very, very clear, including that you can't claim that this contract is. Yeah, unenforceable or illegal because it's being for a federally illegal or impermissible purpose and that the Controlled Substances Act requirements do not apply to the intra state dealing because of the very reasons that you don't want to have unnecessary arguments or attempts to get through enforcement of a clearly intended to be enforceable contract over technicalities like that. And I've mentioned that a few times with nuisance as well. Um, again, social equity program requirements become an issue at all times because when they have specialized rules about who owns it and everything else like that and where and what, who's being employed or otherwise by the businesses, there could be some rules and regulations that affect ownership and profit sharing. And if the landlord is trying to negotiate a profit, share themselves or other ownership or other issue, they if it's in a social equity jurisdiction, sometimes that needs to be very carefully looked at because there might be some assignment language or other things in the requirements that need to be dealt with as the lease is concerned. Um, inspection rights are another big one because many states and local jurisdictions have very, very strict access rules for the premises and who can come in where and why. And so when landlords demand constant access, that could actually be an issue for the tenant and for compliance with the law. So that becomes the push and pull and negotiations as well. Um, the other big ones that we talked about before were subleasing tenant improvements and hazardous materials and whether or not cannabis and related activities should be part of that. And in general, each and every one of these issues is an issue that has to be dealt with and discussed in negotiation. And so really what I was trying to do today for everybody and make sure that we have a clear understanding is you can't just do a standard lease in most situations in a cannabis situation because of the nuances of the laws, the dichotomy of federal and state rules and regulations and local and state regulations. And because there are usually a lot of additional provisions either from a concern perspective or from what is now being just considered, well, this is how we do it on these types of deals, or just thinking ahead of where the relationship could be fraught with some additional issues that aren't normally the case and what landlords are able to get away with that they wouldn't necessarily with another tenant because they're taking a risk with this type of tenant. So it's a different market concessions and considerations. Long and the short of it is real estate is incredibly important to any cannabis business. Being operational because if they're not able to operate and they're not able to have a building where they can do this legally and openly, then well, hard to get a business off the ground, isn't it? And so that is in a nutshell some of the major considerations that come up when you're dealing with a landlord tenant relationship and overall when you're looking at. Regulations pertaining to owning land and dealing with a. So I have my information up here on the board and I'm always happy to answer any questions or go into further detail about something I touched upon. It's obviously very difficult to hit on anything in any extreme detail in the time we have, but thank you very much for listening with me today and good luck with your dealings and all your operations. Thank you.

Presenter(s)

BBJ
Bryan Bergman, JD
Principal
Law Office of Bryan M. Bergman

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                                                                                                                January 16, 2026 at 11:59PM HST

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                                                                                                                        September 27, 2024 at 11:59PM HST

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                                                                                                                            September 28, 2025 at 11:59PM HST

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                                                                                                                              September 28, 2025 at 11:59PM HST

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