7 Tips For Cannabis Companies Entering Lease Negotiations
A bad lease can have serious implications for businesses in the cannabis industry. When negotiating with a prospective landlord, here is how to ensure critical aspects are addressed.
Property rental is among the most expensive and impactful aspects of canna-business.
A bad lease can be devasting to a dispensary or cultivator. It can be exacerbated by IRS code 280E, tough zoning laws, a small market for cannabis-friendly insurance, risk of property forfeiture (even without a related criminal charge), an intense regulatory environment, an inability to file for bankruptcy, and semi-licit status.
In this environment, cannabis landlords charge premium rents – because they can. But landlords have it rough, too. They are exposed to most of the vagaries as the cannabis operators to whom they rent to. A string of cases nationwide has established that cannabis landlords – in addition to their plant-touching counterparts – might not get to access bankruptcy. Then consider if IRS extends its 280E tentacles into landlords, same as dispensaries (2018’s Tax Court Decision in Harborside implies the IRS may apply the code to landlords).
Landlords have a lot of reasons to want to protect themselves and the income promised to them for renting, and for agreeing to share the risk. But leases don’t have to be one-sided. When entering a lease negotiation with a prospective landlord, consider the following:
- Lease term – How is your state poised to expand in the cannabis space? Is it currently medical only? Is recreational or adult-use legalization on the ballot? The outlook may impact your expansion plans. For instance, is the space adequate to support growth? Is there a chance you will need to move operations? Will your regulator allow you to move? These are critical questions to ask when determining how long your stay might be.
- Restoration of the property upon lease termination – Do you want a lease that surrenders your improvements and fixtures to the landlord? Do you want the physical and financial obligation to restore the property upon lease expiration? Consider the wear and tear on a building inside a cultivation site, for example. The heat and humidity can damage structures, costing you handsomely to restore a property.
- Exclusivity – Although zoning can be a challenge for most cannabis operators, why not ask the landlord for exclusivity? Lower the risk of a competitor opening shop in your territory by asking the landlord not only to give you exclusivity at the property but also at any other of the landlord’s properties in the vicinity.
- Electric supply – Especially at your cultivation site, is there enough electric supply to the property? Have you priced the expense to bring it to the property? Can you even get enough energy to the property, depending on your company's needs? If you have never priced utility infrastructure, you may be shocked by its cost. Plan ahead.
- Insurance – Make certain that as a tenant, you have the right insurance coverage. Most insurance excludes cannabis coverage, so a broker specializing in canna-business is imperative. In fact, the involvement of cannabis could wholly invalidate coverage in its totality. Further, it’s important to ask whether your landlord’s insurance covers cannabis companies as well.
- Use – Make certain the lease includes permitted uses for not only what your business is doing today, but also include areas of growth. Not extracting today, but think you might want to later? Need a commissary kitchen to make edibles? Get it in the lease now.
- Escape clauses – Consider terms to terminate the lease if certain conditions come to pass, such as changes to the regulatory environment or reinstitution of federal law enforcement. This industry is always in flux, so flexibility in lease termination is preferred.
Last, have your lawyer review the lease before you sign it. This initiative can be critical when faced with the unknowns of the future. The upfront cost can ultimately protect the viability and longevity of your enterprise.
Gary Michael Smith is an attorney, arbitrator, and founding member of Arizona-based Guidant Law Firm. He is also a founding director and current president of the Arizona Cannabis Bar Association and a board member of the Arizona Cannabis Chamber of Commerce. He can be reached at Smith@Guidant.law.