What Are The Considerations For Entering Into A Lease Or Property Purchase For Cannabis Business?

With the growing acceptance of cannabis for both medicinal and recreational use, the landscape of cannabis retail for lease or property purchase is evolving rapidly. Entering into a lease or buying property for a cannabis business involves several unique considerations that differentiate it from other commercial ventures. This article explores the key factors stakeholders must evaluate when navigating the complex terrain of the cannabis industry’s real estate.

Understanding Local Zoning Regulations

The legality of cannabis at the state level does not automatically translate to freedom in choosing a location for your business. Local zoning regulations play a crucial role in determining where a cannabis business can operate. Municipalities may impose restrictions on the proximity of cannabis establishments to schools, parks, and other establishments or dictate operational aspects such as signage and hours of operation. Before committing to a location, it’s imperative to ensure the property complies with these local regulations.

Enhancements and Modifications

Cannabis businesses, especially those involved in cultivation and retail, require specialized modifications to the property. Enhanced security systems, ventilation, and potentially screening or fencing are common requirements. These modifications can be costly, and landlords may negotiate leases that require tenants to bear the cost of these build-outs. On the other hand, properties that already possess some of these enhancements due to their previous occupants may offer a cost-effective solution.

Financing and Banking Challenges

The federal classification of cannabis as a controlled substance complicates financing and banking for properties intended for cannabis business use. Most financing agreements require compliance with federal law, potentially putting property owners at risk of default. Additionally, the reluctance of many banks to do business with cannabis-related enterprises can make managing finances challenging. Before proceeding, verify with lenders and banks their stance on cannabis businesses to ensure that financial operations can proceed smoothly.

Tax Implications

Another critical area requiring attention is the tax implications of owning or leasing property to a cannabis business. The IRS’s Section 280E prohibits deductions and credits on income derived from the cannabis trade, which could significantly impact financial planning. While primarily affecting businesses directly involved in cannabis, landlords and investors should also engage in careful tax planning and consult with professionals to navigate these waters.

Landlord and Tenant Considerations

For Landlords:

• Compliance and Use: Ensuring that the tenant’s business operations comply with all applicable laws is paramount. Leases should include clauses that require adherence to state and local cannabis regulations.
• Access and Environmental Impact: Landlord access rights need balancing with security requirements of cannabis businesses. Additionally, leases should address the disposal of cannabis waste and byproducts in compliance with environmental regulations.

For Tenants:

• Lease Term and Operational Realities: Tenants must consider the lease term length in relation to the time and expense involved in preparing the premises for cannabis operations. Operational needs, such as energy demand and ventilation, should influence the suitability of a property.
• Insurance: Securing insurance for a cannabis-related business can be more challenging and costly. Tenants need to ensure their policies reflect the nature of their operations to avoid potential claim denials.

Entering the cannabis industry’s real estate market requires careful consideration of numerous factors beyond those relevant to traditional commercial properties. Stakeholders must navigate local regulations, property enhancements, financial complications, and the specific needs of a cannabis business to establish a successful operation. With thorough research and planning, entrepreneurs can find opportunities in the burgeoning cannabis market.