Some essential CRE steps when leasing to an essential business
At the height of lockdowns and quarantines, it quickly became apparent that what was considered essential expanded far beyond first responders and hospital staff. Truck drivers working long shifts to get goods to supermarkets, and the employees stocking shelves with those products quickly rose to the top.
Another business that quietly made the essential list was medical marijuana dispensaries. In many states where medical marijuana is legal, including Florida, the dispensaries were allowed to remain open through the shutdown.
In fact, many dispensaries expanded their operations to get products to regular and new clients, many of whom were diagnosed with PTSD and anxiety linked to the stay-at-home orders, via delivery services and drive-thru windows.
Navigating the grey zone
Getting to that point, though, was no easy task, primarily because the cannabis business operates in a grey zone. Although some states have legalized medical marijuana, the substance remains a controlled one on the federal level—and how stringent the feds follow that law depends greatly on who happens to be inhabiting the White House and who is Attorney General.
While there are indications in many regions around the country that the medical marijuana business is steering property values upward, there’s a fair share of risks and considerations for landlords looking to lease space to dispensaries and growers.
For a CRE owner to get involved in the marijuana business, it’s imperative to make sure that all T’s are crossed, and I’s are dotted.
A key concern: if there’s a mortgage on the property
One of the first issues is if the owner is carrying a mortgage. If so, it’s imperative to review if there is a clause in the terms of the loan that stipulates that the borrower, the property, and its use will comply with “all applicable laws, rules, and regulations.”
Because there is a disparity between how marijuana is viewed at the federal and state levels, and because federal law technically preempts state law, many banks are less likely to allow a borrower to lease to any party involved in the marijuana business. The cannabis-related leasing deal may be dead before it is even on the table.
Similarly, the property owner may have to seek alternative funding sources for the property as long as the lease with the marijuana business exists.
Additional considerations, with or without a mortgage
Even without a mortgage, there are some additional issues, outlined by the American Bar Association, that the landlord should consider:
- How will rent be paid? Cash and federally-illegal substances raise eyebrows, and the property owner’s bank may become suspicious of how involved the owner is in the marijuana business. The consequence could be the bank terminating the relationship with the property owner.
- How will the rent be computed? In traditional tenant leases, rents are either fixed or determined by a percentage. With marijuana-related businesses, though, a percentage-based rent may result in interpretations that the owner is involved in the sale of marijuana.
- What are the local and state laws? Many jurisdictions have specific guidelines on dispensary licensure, zoning, and inspection rights.
- What sort of lease works best? This all depends on the role the tenant is playing in the marijuana trade. For example, growing operations will have higher utility costs for water and electricity, and they also raise the risks of fire, electrical issues, and mold. In this case, a triple-net lease may be a better option than a gross lease.
Lease clauses to protect the landlord
If a property owner is interested in leasing to a marijuana-related business, there are a few clauses to consider within the lease terms. While many of these may seem obvious, putting them in writing indicates the owner has taken steps to ensure the lease is following the law and eliminating any grey areas or misinterpretations of the landlord’s position.
- A specific permitted-use provision that spells out what the dispensary is allowed and not allowed to do. Very often, this can follow local and state laws.
- A clause that explicitly stipulates the tenant will comply with all laws and guidelines.
- An early termination rights provision so that the landlord can terminate the lease should the tenant violate the law, face criminal prosecution, or if the landlord receives nuisance complaints.
- A clause that prohibits the tenant and their employees and clients from using marijuana on the premises.
- An indemnity clause that requires the tenant to compensate the landlord for any costs stemming from damage to the building and common areas due to vandalism, burglaries, break-ins, etc.
Medical dispensaries in SoFlo
Although the road to legalized medical marijuana in Florida has been a long and rocky one, its presence is seen as a boom for the commercial real estate market. Still, there are key areas of concern that all parties must examine before entering any leasing agreement. The pros at Morris Southeast Group can help both landlords and tenants negotiate the legal twists and turns.
To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.
Tags: COVID-19, Medical Marijuana
