- December 4, 2019
- Posted by: Hanson Law Firm
- Categories: Real Estate, War Story Wednesdays
We’ve talked about the devil’s lettuce before on this blog, and with good reason: legalization’s opened up so many smoky doors, you’d be forgiven for getting lost in the weed(s). So, for the benefit of those thinking of leasing to or investing in CRB (Cannabis Related Businesses), let’s hash out a blunt pros and cons list.
Okay, first off, we gotta dispatch the elephant in the room, ‘cause he’s really harshing my buzz. Regardless of individual state laws, the use, possession, sale, or processing of marijuana is a federal crime under the Controlled Substances Act (CSA). Any temporary sense of security got cut short last year on January 4, when Attorney General Jeff Sessions, in his wisdom, scrapped the 2013 Cole Memo – which directed the Justice Department not to waste its limited resources on enforcing the CSA. Just recently, 106 homes got busted by the Federales for illegal cultivation and distribution up in Northern California, resulting in the seizure of 61,000 cannabis plants and 440lbs of processed product.
That’s a lot of space cakes. And, potentially, a lot of problems, because the ’86 federal law popularly known as the Crack House Statute makes it a felony for a property owner to knowingly lease a place for any activity involving a controlled substance. Since hundreds of owners lease or use property for activities involving a controlled substance all over our state… it’s a just a smidge grey, legally.
Anyway, that’s the biggest, flashing, red-flag, number one big issue, but honestly? It wouldn’t make a lot of sense for our gracious overlords to start raining down punishment when legalization’s proving so lucrative. Granted, nowadays, it’s anyone’s guess what’ll show up on the news every morning, but while federal prohibition is an important factor to keep in mind, it’s just one of many. Much like living with your parents and coming home from a friend’s house reeking of bud, the powers that be are largely choosing to look away and pretend it’s not happening.
The federal issue does create a ripple effect. Prospective tenants or landlords struggle to find banks willing to cooperate, as almost no banks want to risk running afoul of federal law. For this reason, the CRB will probably need to pay rent and expenses in cash, which causes more problems, since even if you find a bank willing to work with you, cash transactions over $10k trigger federal reporting which might make them think twice about the relationship. Obviously, keeping and moving large sums of money is also a huge security risk, and paying employees and taxes is a pain in the neck.
Speaking of rent and pains in the neck, how will you be calculating rent? Retail rents are often percentage-based, but whoops, if you go that route, you’re considered “in business” with your tenant and you might be breaching federal law.
If you’re willing to tackle all that, great. But where’s your property? It better be 1,000 feet away from schools and parks, or that federal crime might incur extra jail time. Even if you’re in the clear on that front, your zoning regulations might still be a thorn in your side, from total bans to a limit on CRBs allowed in the area. The Orange County Register’s put together a handy list of cannabis zoning laws around California, so that’s not a bad place to start when investigating all this.
If your zoning happens to be all set, there’s the property itself. There’s the physical side of things – exposure to smoke implies higher maintenance costs, and cultivation requires more power and water, along with moisture that’s almost guaranteed to cause problems in the long run. Then, there’s the fact that a property used to CRB will be very hard to flip back around to a normal business. Make sure you’re willing to brand your place with a scarlet letter W.
Finally, let’s consider the tenant. We’ve covered how hard it is for them to get a loan, so you’ll want them to have a good two years’ worth of expenses on hand, plus enough to cover starting and developing a business. The source of this money could be as shady as I’m making it sound, so check your tenant’s references. A lot of landlords go so far as to hire a private investigator, which doesn’t seem like an amazing start to a tenancy, so maybe keep to hiring a good attorney with a record of working with CRBs to make sure your tenant is in the clear.
Finally, don’t paint yourself into a corner with the lease. With so many risks involved, you’re well within your rights to include and enforce strict termination clauses. Any trouble with the cops, any non-permitted activity, any stretching deadlines – out.
So. With all those risks, why are so many people going into this new property market?
Well… might have something to do with the marijuana industry making $9 billion in sales this year and hiring 200,000 people, with predictions of over $20 billion and 500,000 workers by 2023. And rents being, conservatively, 20-40% higher per square foot for CRBs.
That’s a lot of space cakes.
Plus, as with any new game, the early players make the rules. That’s the upside of the legal status being such a mess. You get to shape ‘em.
And it’ll probably make your kids think you’re, like, super chill.