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California Commercial Cannabis: Beware the Residential Farm Purchase


With California’s cannabis real estate market red hot right now, many cannabis businesses are looking at buying rural farms with family farmhouses as sites for their marijuana business. This though can be a risky approach. Businesses hoping to become legitimate licensed operators under California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) should consider the following before signing on the dotted line on this sort of real estate deal:

  1. Government approval contingencies. One of the most important differences between a residential and a commercial Purchase and Sale Agreement is that well-crafted commercial agreements (especially in the cannabis industry) usually contain business-specific contingencies, including a contingency for local and state government approval that the buyer will be able to confirm that it can legally use the property for its intended use. Residential real estate Purchase and Sale Agreements (even those with an agricultural addendum) rarely include these specific contingencies, leaving the buyer to investigate and bear the risk. Because local law is king under MAUCRSA, you need a contingency in your real estate Purchase and Sale Agreement that will allow you to stop the deal if your local government is not going to let you conduct cannabis business on the property.
  2. Zoning. If a seller is using a residential Purchase and Sale Agreement because a house is included with the land purchase, chances are good that the property being bought is zoned residential. This sort of zoning increases the likelihood commercial uses will be disallowed altogether or restricted by local ordinance — many of which will roll out in the months and years to come as MAUCRSA licensing tees up. Even rural properties that look suitable for farming must be closely scrutinized for land use restrictions of all kinds, including zoning. A buyer cannot simply rely on the appearance of the property or on general knowledge about a past use.
  3. Nuisance. California’s Right-to-Farm laws generally work against neighbors seeking to bring nuisance claims against farming uses abutting a residential development. But those laws do not (at least as of yet) make cannabis an explicit agricultural product that landowners have a right to farm. Add that to probably the most common complaint about cannabis — odor — and you can see why that family farm could end up creating a NIMBY problem that would not be there with your typical cornfield. See California Cannabis NIMBYs and Land Use Disputes.
  4. Civil asset forfeiture. Even state-legal cannabis businesses are at risk of federal civil asset forfeiture actions and that sort of action could be even harsher for cannabis operators living in a house on their cannabis farm — the federal government could take their house as well as their land.
  5. Conservation Easements. California’s Williamson Act allows localities to enter contracts with landowners that restrict the use of their property to only agricultural purposes and not build any improvements on the land in return for local tax breaks. Some California localities (even those with medical cannabis licensing ordinances) will often decline to waive prohibitions on federal illegality in agricultural conservation easements to allow cannabis operations on those parcels because federal funding is directly tied to these conservation programs, and it is much easier for the federal government to turn off a locality’s funding spigot than to pursue a civil asset forfeiture against individuals and their land. This means you should carefully examine all land use restrictions on any parcel you are considering buying.
  6. Water rights. California’s water rights laws are complex and contentious (see, e.g., Chinatown). A California landowner’s right to use a nearby water source can flow from a number of different legal sources, such as riparian rights (land is adjacent to water source), appropriative rights (first in time, first in right), prescriptive rights (akin to adverse possession), overlaying groundwater rights, adjudicated rights, contractual rights, statutory rights, etc., etc., etc. What’s more, these various rights frequently compete with each other in priority for finite water sources, particularly during droughts. A potential buyer of a residential farm will need to look closely not only at the existing water rights associated with the property, but also at the potential for those rights to be augmented, especially if the intended use is cannabis cultivation, which is water-intensive. Commercial properties, especially those with past manufacturing or large scale agricultural uses, usually have greater established water rights than a small family farm. Furthermore, though the California Department of Food and Agriculture has not yet issued its final cannabis cultivation rules (those will come in November), MAUCRSA will require government approval of any water diversion for cultivation purposes (and water board approval by certain fast-approaching dates for some water sources), which is something that can be included in a government approval contingency but that would not typically be included in a residential Purchase and Sale Agreement, so amend accordingly.

The above list highlights just some of the key land use issues you should consider before you do any residential land deal involving cannabis.

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Business Hashish Land Improvement: Improvement Agreements as Beneficial Software


Improvement agreements must be in your actual property software package.

We’ve seen this film earlier than: a metropolis will get enthusiastic about business hashish alternatives and passes an ordinance permitting indoor medical hashish cultivation. After the regulation goes into impact, neighbors complain about odors or aesthetic points or simply as a result of they don’t need something to do with hashish of their neighborhood. Eventually, the suitable neighbor complains to the appropriate metropolis council member and hashish suffers a serious setback with a restrictive ordinance or perhaps a moratorium. The town declares the “offending” hashish enterprise use to be nonconforming and points a discover and order to abate. The hashish enterprise finds itself a whole lot of thousand dollars in debt on its development/build-out venture with no path ahead for with the ability to function and a allow it might’t take elsewhere as a result of it runs with the land.

How then ought to a would-be hashish tenant or purchaser keep away from this danger, or at the least mitigate towards it, earlier than leaping into an enormous funding for enhancing the land? A improvement settlement is one answer.

A improvement settlement is actually a contract between a property proprietor/developer and a municipality that specifies how a given parcel will probably be improved and used for a sure finite time period, and specifying how the planning and zoning legal guidelines for that parcel will change or not change throughout that point. Municipalities profit from improvement agreements as a result of by decreasing danger they encourage improvement and improve property tax revenues. The property proprietor/developer advantages by having a lot larger certainty relating to the makes use of to which the property could also be put.

The added certainty of secure zoning makes builders and their buyers and lenders extra prepared to take a position their time, effort, and monetary assets into enhancing the land. And not using a improvement settlement, builders sometimes should danger paying architects, engineers, and contractors earlier than they will get hold of a constructing allow from the municipality. Builders and municipalities typically find yourself litigating over vested rights and the allowing course of. Underneath California’s vested rights doctrine, solely after builders get hold of the constructing allow can they make sure their parcel will stay unaffected by future zoning regulation modifications — and even this isn’t all the time a complete certainty, as California courts have discovered exceptions that permit zoning modifications, relying on the circumstances.

Given its unpredictability and its big potential, California’s business hashish business is a chief candidate for improvement agreements, but they’re nonetheless not often used for hashish enterprise land improvement. I see this as on account of a mixture of issues, starting from native authorities reluctance to tie land inside metropolis limits to makes use of the federal authorities nonetheless deems illegal, to hashish legal professionals (particularly those that solely lately switched from representing hashish felony defendants) merely not figuring out about improvement agreements. See How To Select Your Hashish Enterprise Lawyer.

Regardless of the cause, much less certainty in already unsure occasions is dangerous for all events concerned.

Cities need to appeal to accountable, skilled builders to enhance land and public infrastructure and improve property values and tax revenues. Builders and their associates search certainty that the enhancements they pay so as to add to their land could also be legally utilized. Cities that cross ordinances to permit hashish enterprise actions, in addition to would-be purchasers and builders, must be contemplating improvement agreements as a part of their business hashish improvement plans.

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California Business Hashish Leases: Will Courts Implement Them?


A contract isn’t value a lot with out your with the ability to implement it, and the identical goes for business leases. We’ve written about distinctive issues in hashish contracts because of the state-vs-federal illegality drawback (see right here, right here, right here) and of how courts have navigated that inconsistency within the context of contract enforcement. However in terms of business hashish leases in California, landlords and hashish corporations alike need to understand how probably it’s a courtroom will implement their lease. The brief reply: it’s a lot likelier now than 5 years in the past.

The primary problem with California business hashish leases, as with all hashish contracts, goes again to the issue of federal illegality. As a result of hashish continues to be federally prohibited beneath the Federal Managed Substances Act, it’s federally unlawful to domesticate, manufacture, or promote hashish for any function. This implies hashish contracts set off the doctrine of illegality in contract regulation, which holds that contracts with no lawful object are void and unenforceable as towards public coverage. Although enforcement of contracts is usually ruled by state regulation, state regulation consists of federal regulation beneath the U.S. Structure’s Supremacy Clause.

Courts have struggled with tips on how to reconcile the totally different legal guidelines, however a constant theme emerges in California courtroom selections: business hashish lease agreements will usually be enforced as long as the dispute earlier than the courtroom is only contractual and as long as the owner and tenant are in an arms-length transaction for cost of lease. One notorious instance of that is the Harborside case, the place a U.S. District Courtroom declined to void a business lease for a hashish dispensary on grounds of illegality, the place the dispensary was in compliance with California regulation.

One other newer instance is Mann v. Gullickson, a November 2016 Northern District of California choice involving a dispute between a creditor plaintiff who bought shares in two hashish companies to the defendant in change for a promissory notice. When the creditor sued for nonpayment beneath the promissory observe, the defendant argued federal illegality rendered the contract (the promissory word) unenforceable. Although the courtroom acknowledged it might void a contract if it required a celebration to violate the CSA by, for instance, requiring it to domesticate or promote hashish, for a number of causes, the courtroom declined to take action on this case.

First, the truth that the courtroom might order cost on the observe with out requiring any cannabis-related actions meant that implementing the contract wouldn’t essentially additional an unlawful objective. Second, even when an unlawful function have been to be furthered, the courtroom discovered it might be inequitable for the defendant to be unjustly enriched by not having to pay on the promissory word. Third, the courtroom famous that many states, together with California, had lately modified their legal guidelines to encourage state-legal hashish enterprise actions, thereby undercutting the defendant’s public coverage argument. Fourth, and most apparently, the courtroom referred to as out the noticed impact of adjusting state legal guidelines on federal enforcement: “The federal authorities’s concern over the CSA’s medical marijuana prohibition has waned in recent times, and the underlying coverage purporting to help this prohibition has been undermined.” The courtroom additionally famous that beneath the McIntosh case, the Rohrabacher-Farr modification prohibits CSA enforcement towards medical marijuana within the Ninth Circuit (the federal appellate circuit that encompasses California).

The lesson to be drawn from these instances for California business hashish leases is that hashish leases must be written to maintain the landlord-tenant relationship as an arms-length transaction. This implies no profit-sharing preparations, no funds in hashish product, and no fairness shares altering palms; simply cost of lease. Finally, the easiest way to keep away from enforcement issues on your California business hashish lease could also be to incorporate a well-drafted arbitration clause that specifies selection of California state regulation, amongst different issues, as that may to a big extent side-step the difficulty of courtroom enforcement, at the very least till you’ll want to get your arbitration award enforced by a courtroom.

That will help you higher perceive what’s going on with California hashish and what MAUCRSA means on your hashish enterprise, three of our California attorneys can be internet hosting a free webinar on Tuesday August eight, 2017, from 12 pm to 1 pm PT. Hilary Bricken from our Los Angeles workplace will average two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a dialogue on the most important modifications between the MCRSA and MAUCRSA, together with on vertical integration and possession of a number of licenses, revised distributorship requirements, and what California hashish license candidates can anticipate extra usually from California’s Bureau of Hashish Management as rule-making continues by way of the rest of the yr. They will even tackle questions from the viewers each throughout and on the finish of the webinar.

To register for this free webinar, please click on right here. We sit up for your becoming a member of us.

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California Hashish Leases – 5 Keys to Doing Them Proper


Business leases for hashish companies are distinctive and require particular issues for danger administration through the tenancy. Business hashish leases in California are susceptible to the next pitfalls inherent in a landlord doing enterprise with a hashish tenant, and these dangers must be thought-about when deciding find out how to construction your landlord-tenant relationship:

  1. Accepting possession within the hashish tenant firm. Shopping for and promoting shares in privately held hashish corporations can set off state and federal securities legal guidelines and create regulatory issues underneath California’s hashish licensing program. A landlord’s acceptance of an possession share from a tenant in lieu of or along with lease can jeopardize the hashish tenant’s California state hashish license standing. California’s proposed hashish guidelines outline an “proprietor” as an individual with 20% or extra possession within the licensed hashish firm, a CEO or board member with 5% or extra possession in an entity with 20% or extra possession within the licensed entity, or any person who workouts “path, management, or administration” of the licensed enterprise. All such “house owners” are topic to thorough background checks as a part of the corporate’s means to accumulate and keep its hashish enterprise license. A change in possession or management places the tenant’s license vulnerable to being revoked, harming each landlord and tenant.
  2. Receiving hashish product as lease cost. Although cash-poor hashish tenants might have hassle discovering financing, they often have loads of worthwhile hashish product. However for a similar causes landlords ought to keep away from accepting possession of their hashish tenants enterprise entities, they need to additionally keep away from accepting hashish product as nicely. Not solely does a tenant offering its landlord with hashish jeopardize the tenant’s license (and thus the owner’s supply of lease income), it additionally exposes the owner to legal responsibility for working as an unlicensed hashish service provider. California’s proposed hashish guidelines strictly management who can and can’t deal with or settle for hashish product as a part of a licensed operation, and circumventing these strictures exposes each landlord and tenant to legal responsibility.
  3. Revenue/income sharing. Business leases for garden-variety enterprise tenants typically embrace phrases requiring the hashish tenant pay a sure proportion of its income or income to its landlord along with or as a part of lease. Although this type of association might be advantageous in different conditions, it raises issues for hashish tenancies since receipt of income or income particularly tied to hashish gross sales can expose the owner to legal responsibility for unlicensed hashish exercise as a de facto proprietor. 
  4. Liens for build-outs. Indoor agricultural grows require distinctive environmental management techniques and this in flip typically means hashish tenants should interact in costly build-outs. Landlords might need to search lease provisions making certain all alterations be approved in writing beforehand, that the owner acquires no possession or profit from any alterations, and that each one alterations have to be eliminated when the tenancy ends until the owner elects in any other case, along with serving notices of non-responsibility the place applicable. Primarily, landlords will need to keep away from permitting build-outs which may end in liens filed towards their actual property. Then again, the owner might need to be concerned within the build-out to outfit the power to its personal preferences. In different phrases, landlords ought to search to keep away from unintended entanglements whereas structuring their leases to mirror their intent.
  5. Entry and safety. Although landlords sometimes need business hashish leases to permit them entry at any time with affordable discover for issues like upkeep, inspections, and showings, the state of affairs is totally different for hashish enterprise tenants. California’s proposed hashish guidelines underneath the Medical and Grownup Use Hashish Regulation and Security Act (MAUCRSA) require hashish tenants to arrange and keep a rigorous safety protocol that solely permits product to be dealt with by approved people, and that solely permits approved people to entry the premises. Unfettered entry by a landlord will doubtless increase issues with California’s hashish regulators, and with good cause. A part of the rationale for complying with strict state-mandated safety necessities is to additional federal enforcement objectives, akin to stopping diversion of product to minors or to states the place hashish has not been legalized. By failing to sufficiently regulate entry within the lease, the owner can unintentionally entangle itself with the operations of the licensed hashish entity and thereby place its tenant’s hashish license in jeopardy.

Backside Line: California business hashish tenancies profit from being stored as arms-length transactions in order to guard towards problematic entanglements, each meant and unintended and any proposed tenancy must be analyzed with this aim in thoughts.

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California Business Hashish Leases: Arbitration Versus Litigation


We’ve written beforehand on arbitration and why it so typically is sensible for hashish enterprise contracts, primarily due to enforceability points stemming from hashish being unlawful beneath federal regulation. However within the realm of economic actual property leasing, hashish makes use of can current different distinctive challenges that require considerate options to disputes, and, extra importantly, considerate planning to organize for potential disputes down the street.

Under are a number of the points our California hashish legal professionals sometimes think about when anticipating methods to draft dispute decision clauses for business hashish leases.

  1. Enforceability of the lease and the arbitration award. Federal illegality of hashish impacts all hashish enterprise transactions. Although the Federal Division of Justice has issued hashish enforcement tips within the Cole Memo (and each cannabis-touching lease settlement ought to embrace language mandating compliance with these tips), this does not assure towards federal civil asset forfeiture or different federal enforcement actions. One other consequence of federal illegality is that hashish corporations should think about what recourse they may have in implementing their contracts and account for federal district courts being unwilling to implement any such contract. Because of this alone, it’s going to almost virtually all the time be higher so that you can have your disputes resolved in a California state courtroom that might be much more more likely to apply and implement California state hashish legal guidelines. California state courts can even apply federal regulation, however as a result of there’s typically a danger of your case being eliminated to federal courtroom you must all the time think about placing an arbitration clause in your hashish business leases, specifying the arbitral physique, limiting how the lease and the arbitration award may be enforced (confining it to state courts, maybe) and limiting potential appeals.
  2. Selection of regulation. We’ve written about how California business hashish landlords (and tenants) ought to think about beefing up their lease’s indemnity provisions, permitting for early termination within the occasion of enforcement actions, disallowing federal illegality as a grounds for invalidating the lease, and usually requiring strict compliance with California state regulation for the precise proposed hashish use. For comparable causes, arbitration clauses can embrace a mandate that the arbitral physique apply state regulation and the California Arbitration Act, and never, for instance, the Federal Arbitration Act, which permits an award to be vacated the place the arbitrator “manifestly disregards the regulation.” It isn’t troublesome to think about a state of affairs the place a federal courtroom vacates an arbitral award for an arbitrators having failed to use the Managed Substances Act or void the hashish lease ab initio. California arbitration clauses ought to, at minimal, particularly define 1) the tactic for selecting the arbitrator, 2)  the legal guidelines the arbitrator should apply in resolving the dispute, and three) the usual of assessment any reviewing courtroom should apply. For a lot of California actual property transactions, the arbitration clause also needs to embrace particular statutory discover language.
  3. Carve-outs for Illegal Detainer, Nonpayment, and different Early Termination Causes. Although arbitration could be a extremely useful gizmo, landlords will even need to keep their capability to hunt cures for nonpayment of lease and illegal detainer (eviction) with out having to undergo the arbitration course of. Equally, if a tenant faces a state or federal enforcement motion, the owner (and even the tenant for that matter) will doubtless need to keep its capacity to terminate the lease shortly and with out arbitration. The events to a California business hashish lease ought to all the time contemplate carving out exceptions to arbitration to maintain choices open and to encourage well timed efficiency of the lease.
  4. Arbitrator’s business experience. California arbitrators are typically retired California state courtroom judges and the modifications of this kind of arbitrator having deep information concerning the hashish business or hashish legal guidelines will not be good. However spelling out the arbitrator choice course of in your business lease settlement (and even naming the precise arbitrator or arbitrators) can assist you to make sure your arbitrator has enough hashish business information to know any eventual dispute.
  5. Think about making mediation step one. Arbitrations might be costly and their outcomes unsure. So as an alternative of drafting a business lease settlement that requires you to leap proper into that course of each time a dispute arises, think about making personal mediation a compulsory first step earlier than a requirement for arbitration might be made.

Although each business lease dispute is exclusive (much more so for hashish business leases), there are widespread themes and one is that non-public dispute decision tends to work greatest for disputes between hashish companies.

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Hashish Actual Property: The Wrap-Round Mortgage


Having a financial institution mortgage in your hashish property is often not the best marketing strategy. In case you already personal a property encumbered by a financial institution mortgage, commencing hashish operations is a dangerous proposition. In case you don’t personal property however apply for a financial institution mortgage on a parcel to develop, course of or promote marijuana, the banker will probably ship you away in ten seconds or much less. In our expertise, even gear mortgage choices by small credit score unions to hashish companies are vanishingly uncommon.

As a result of it’s so exhausting to get institutional financing for hashish properties, we’ve facilitated many seller-carried property transactions over the previous few years. These transactions are a breeze when the vendor owns the land free and clear. When the vendor doesn’t, nevertheless, issues can get fascinating– particularly so when the transaction occurs anyway. The car for a lot of of those uncommon transactions is a wrap-around mortgage.

A wrap-around mortgage (a “piggy-back” or “wrap”) is a junior mortgage the place a vendor has a number of present belief deeds on his or her property– sometimes, with a financial institution as beneficiary. Collectively, the vendor and pot farmer or processor, or what-have-you, enter right into a land sale contract or a promissory word and belief deed. These paperwork cowl the complete buy worth, minus no matter earnest cash is agreed upon, and minus any down cost. Each month, the customer pays the vendor, and the vendor pays the financial institution. In a basic wrap, the events agree to not notify the financial institution of the switch, though typically a memorandum is recorded within the public report. The legal guidelines surrounding wraps differ state by state.

Why do sellers like wraps? As a result of they are often profitable, particularly within the hashish business, the place land has premium pricing. If the financial institution mortgage is at 5%, and the vendor is getting 10% or 12% on a junior notice, for instance, a wrap may be extremely worthwhile. Why do consumers like wraps? Typically, it’s the one means for a hashish enterprise to get a foothold on a property. The large danger right here for each purchaser and vendor is that the financial institution will cite the belief deed’s “due on sale” clause, wiping out the customer’s curiosity, and leading to foreclosures for vendor. With a hashish wrap, there could also be a number of contractual levers a financial institution can pull to set off this clause: the senior mortgagor is allowing “criminality” on the property; the senior mortgagor has given a deed to its junior mortgagee; and so forth.

Wrap mortgages have been prevalent in conventional, non-cannabis property loans 5 to seven years again, particularly in residential actual property. This was because of the slowdown in actual property usually and to the shortage of financial institution financing at the moment. With hashish—the place financial institution financing is almost inconceivable, nonetheless—wraps are considered one of a number of artistic actual property choices for entrepreneurs trying to make an business play.

It’s crucial for all events, together with attorneys and realtors, to remember that a wrap mortgage within the hashish context typically includes a vendor triggering the due on sale clause within the first lender’s deed of belief. For that cause alone, we usually steer our purchaser and vendor shoppers away from wraps. Do our shoppers all the time pay attention? No. Many hashish companies and landlords are already taking over mortgage danger, or are decided to take action, by facilitating weed exercise on a mortgaged property. And lots of take coronary heart within the actuality that banks are detest to name loans: banks love getting paid, hate proudly owning property and sometimes ignore the “due on sale” treatment for comfort.

Given the above, we anticipate to see a persevering with stream of wrap-around mortgages on hashish properties. In any case, when your core enterprise exercise includes violating federal regulation, a bit additional enterprise danger might not appear so dangerous.

For extra on the distinctive points concerned with hashish actual property, take a look at the next:

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California Medical Hashish Cultivation: The Previous Greenhouse Version


California Hashish Cultivation. It’s difficult.

There was surge of curiosity in changing previous flower-growing greenhouses in Monterey County to hashish cultivation. Although this has introduced a welcome improve in actual property values and, in some instances, a lifeline for family-owned greenhouses hit onerous by the rising worldwide flower commerce, potential consumers or business tenants trying to convert these properties to hashish grows ought to take a tough take a look at the authorized panorama and the suitability to the locality earlier than leaping in.

In some ways, dilapidated greenhouses and hashish cultivation would appear to be an ideal match. Greenhouse house owners see elevated property values and a vendor’s market. Hashish cultivators see rural or semi-rural business area prebuilt for optimum plant cultivation circumstances. And native governments see elevated tax income and a welcome enchancment of rundown properties.

Nevertheless, such offers are removed from turnkey transactions, as there stay essential present controls on the municipal, county, state, and federal degree that have to be thought-about and accounted for earlier than placing pen to paper. Listed here are a couple of of the various issues to think about as a part of your actual property marketing strategy:

  1. Native Laws. This stays by far crucial issue for figuring out the viability of actual property for medical hashish enterprise use. Beneath California’s Medical Hashish Regulation Security Act (MCRSA), native governments retain management over whether or not, how, and when hashish companies can function and that is along with conventional native controls over zoning, land use, constructing security, and occupancy. Monterey County (which has had an fascinating historical past with hashish regulation), has determined to permit previous greenhouses to be transformed to medical hashish indoor cultivation operations, however underneath a strict set of necessities. Candidates should acquire a business medical hashish allow and a use allow, which is allowed just for greenhouses inside sure particular zoning districts and solely underneath sure circumstances associated toon-site renewable power era, water conservation, offsite plant visibility, and safety measures, amongst others.
  2. State Laws. As we’ve been writing about for some time now, California is within the means of enacting an enormous new regulatory regime for every type of medical hashish companies, together with cultivation. In the event you intend to function in California as a state-licensed hashish cultivator and also you haven’t but formulated a enterprise technique for making that occur (e.g. company type, financing, native code compliance, environmental evaluate, and so on.) you’re already behind the curve. Beneath MCRSA, California won’t problem you a state hashish license until you’ll be able to show native approval.
  3. Land Financing. Although some California banks, financial savings and loans and credit score unions are dipping their toes into offering hashish companies with banking providers, your probabilities of getting a standard mortgage on a property that can be used for hashish are slim to none. Consequently, most land offers find yourself being both all-cash offers or supported by secured notes. If a purchaser with an ordinary mortgage later leases the property to a hashish enterprise, due to federal hashish illegality and anti-money laundering legal guidelines, the financial institution can name the mortgage, placing each the owner and the tenant in danger. Backside line: don’t anticipate commonplace financing choices in case your greenhouse will probably be used for any type of business hashish exercise.
  4. Business Lease Issues. Business leases within the hashish business will not be solely distinctive of their necessities, they’re now half and parcel of each the native and state licensing schemes as a result of to get a state license as a tenant it’s worthwhile to present that your lease lets you use the area for hashish. It’s important for each landlords and tenants to have a correctly drafted business lease that tailor-made particularly to the proposed hashish use and to the locale.
  5. Federal Enforcement. Hashish stays federally unlawful in all varieties and makes use of. The just lately renewed Rohrabacher-Farr modification and present controlling case regulation forestall the federal authorities from implementing the Managed Substances Act towards medical hashish companies in compliance with state regulation, however that is hardly a assure towards federal civil asset forfeiture. One fascinating impact of this federal-state authorized purgatory is the protectionist advantages given to hashish companies. Whereas a Monterey greenhouse flower enterprise would discover it onerous to compete with imported flowers, a hashish cultivator in that very same greenhouse advantages from the prohibition on interstate commerce in hashish. In different phrases, as a result of hashish can’t legally be transported throughout the border (and even throughout state strains), hashish companies in California are NAFTA-proof.

Backside Line: The hashish business, actual property and California state and native laws are a sophisticated combine and failing and that you must spend actual money and time sorting this stuff to forestall worlds of hassle down the street.

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California Hashish Leases and Licensing Timelines


California is in the midst of constructing an enormous regulatory construction for licensing medical hashish companies. Although we already knew that the state will probably be giving precedence evaluation to present collectives “in operation and in good standing with the native jurisdiction by January 1, 2016,” final week, we discovered from the state’s chief hashish regulator that California can be issuing short-term licenses this fall to candidates with prior native approval. That is forward of the state’s January 1, 2018 deadline to usually start accepting license purposes, and it highlights the significance of gearing up as quickly as potential. The primary steps for that contain securing property to lease.

We now have written about some nuances in lease provisions for business hashish tenants in California, however the state’s speedy timeline for licensing creates some distinctive issues. Right here then are some things you need to think about together with in your California business hashish lease to deal with uncertainty in licensing and to assist streamline the licensure course of:

  1. Clearly and narrowly outline the permitted use and the controlling regulation. It’s essential to limit using the property and to determine boundaries for indemnification functions, and notably necessary for laying out the idea for complying with relevant native regulation as a precursor to making use of for a state license. The proposed laws underneath the Medical Hashish Regulation and Security Act (“MCRSA”) require tenant candidates to reveal they’ve the fitting to conduct their particular proposed enterprise exercise on the premises, as demonstrated by a lease settlement. MCRSA additionally requires proof of approval from the native authorities. Lease language ought to embrace obligations to make use of the premises solely in conformance with the precise laws relevant to the tenant’s proposed use and in accordance with the phrases of the native allow or different approval, in addition to with all native legal guidelines.
  2. Mandate native approval from the get-go. Although a state-issued hashish license is extra of a forward-looking proposition at this level, native approval can and ought to be sought earlier than the events put pen to paper on their lease settlement. A widespread mistake is for a tenant to spend money on a hashish facility build-out or begin shopping for gear and provides earlier than getting all mandatory native inspections and permits, or earlier than confirming compliance with zoning and land use legal guidelines. The shortage of constructing permits is a basic foundation for a municipality’s after-the-fact choice to label a tenant’s hashish enterprise a nonconforming use (for extra on current California land use disputes, see right here). The underside line is that the events have to know forward of time whether or not the locality will permit the use, and in that case, precisely which present and proposed native legal guidelines the tenant will probably be anticipated to comply with. The lease ought to prohibit the tenant from partaking in any hashish exercise with out categorical written approval from the locality, ideally by way of a allow.
  3. Lay out a state license software timeline. California has stated that it’ll start accepting license purposes as of January 1, 2018, nevertheless it has additionally confirmed that it’ll settle for purposes for short-term licenses as early as this coming fall. The lease ought to subsequently include an obligation for the tenant to start the state software course of for the precise sort of license sought, upon its execution. Proposed laws for some forms of licenses permit the applicant to proceed working if it was working in compliance with native regulation previous to January 1, 2018 and has submitted its software to the state earlier than July 2, 2018. The events might carve out an allowance for such a state of affairs, however they need to additionally embrace an obligation to safe a state license by a sure date or the lease could also be null and voice.
  4. Assign duty for software prices. Tenant candidates can anticipate to incur commonplace license software charges and prices, however underneath the proposed laws, sure candidates might want to reveal compliance with California environmental legal guidelines, both by way of certification by the native allowing entity, or if no native allowing system exists, then by way of an environmental impression report (EIR) commissioned by the tenant. The lease ought to set out a timeline for an anticipated EIR, if one is important, and will make clear that each one such prices shall be borne by the tenant.
  5. Embrace an out for failure to acquire a license. Consistent with quantity four above, if the tenant finally fails to accumulate a state license underneath the timeline within the lease, then, whatever the purpose for the failure, each events will need to be relieved of their lease obligations. The tenant might be unable to gather income for lease, and the owner won’t need to be caught with a non-paying tenant. The lease ought to embrace failure to acquire a license inside a sure time period as an occasion of default.

California continues to be in unchartered territory because it seeks to create and implement a posh regulatory construction over the nation’s oldest and largest hashish enterprise ecosystem, and it stays to be seen what the ultimate guidelines for medical will seem like, and the way they may reconcile with the yet-to-be-released guidelines for grownup use hashish. However within the meantime, hashish entities looking for to be the primary members within the regulated market (and their landlords) have to rigorously contemplate how their lease relationship goes to be affected by the licensing course of.

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Hashish Case Abstract: Courtroom Enforces Hashish Property Lease


Business leases for hashish companies are a serious concern for a lot of of our shoppers largely as a result of hashish companies function in an business prohibited underneath federal regulation. Usually, contracts which might be unlawful are unenforceable and there’s an argument to be made that any and all hashish contracts are unlawful, a minimum of on the federal degree. However a current Arizona state courtroom exhibits that state courts will not be all the time receptive to that argument and that a contract that violates federal regulation isn’t essentially unenforceable.

Inexperienced Cross Medical, Inc. v. Gally (April 18, 2017) addressed whether or not a business lease with a medical marijuana develop operation in Arizona was enforceable. John Gally owned business property in Winslow, Arizona that he leased to Inexperienced Cross Medical to function a medical marijuana dispensary. Two weeks later, Gally despatched a letter to Inexperienced Cross revoking the lease. On the time Gally terminated the lease, Inexperienced Cross had not acquired the required license to function a dispensary. Nevertheless, the lease permitted Inexperienced Cross to sublease the property and nothing within the lease said the lease can be terminated if Inexperienced Cross didn’t obtain a license to run a dispensary.

Inexperienced Cross sued Gally for breach of contract and tried to acquire a short lived restraining order to forestall Gally from revoking the lease. Gally argued that the lease was unlawful and subsequently unenforceable as a result of it concerned hashish distribution. The trial courtroom was persuaded by Gally’s argument and dominated that the lease settlement was certainly unenforceable as a result of violated each federal and state regulation. Based mostly on this, the trial courtroom didn’t grant Inexperienced Cross the restraining order and it denied Inexperienced Cross damages for Gally’s having revoked the lease.

Inexperienced Cross appealed the trial courtroom’s determination.  First, the appeals courtroom decided that Inexperienced Cross might search damages towards Gally regardless that Inexperienced Cross didn’t obtain a license to function a dispensary on the leased property as a result of the fitting to sublease was a invaluable property proper. Consequently, Inexperienced Cross was permitted to hunt damages for the lack of the lease.

The appeals courtroom additionally held that the lease was not unlawful on beneath Arizona regulation. The courtroom said that the Arizona Medical Marijuana Act (AMMA) protects rights of dispensaries to enter into business leases and that dispensaries have a contractual proper to enter into lease agreements with landlords. The appeals courtroom concluded that “[g]iven the language of the AMMA, a courtroom might not void or refuse to implement a dispensary’s lease with a landlord just because the dispensary can be supplying marijuana in compliance with the AMMA.”

The appeals courtroom additionally rejected Gally’s arguments that he as the owner might face felony legal responsibility beneath state regulation as a result of he was facilitating marijuana distribution by leasing property to a hashish dispensary. The appeals courtroom pointed to the truth that Gally agreed to execute the lease understanding that Inexperienced Cross meant to function in Arizona’s medical market:

We emphasize that nothing within the AMMA requires a landlord to lease a property to a proposed dispensary. Gally was free to not enter into the lease if he was uncomfortable with the proposed use of the Property. However as soon as he selected to take action, he was not free to rescind his contractual commitments with out dealing with potential financial legal responsibility. Accordingly, leasing property to a medical marijuana dispensary that’s in compliance with the AMMA shouldn’t be unlawful beneath Arizona regulation. Thus, the superior courtroom erred when it discovered the lease was void and dismissed the grievance looking for damages for the breach.

The appeals courtroom then acknowledged that federal regulation prohibits distribution of marijuana beneath the Managed Substances Act (CSA) and that it’s, subsequently, unlawful beneath federal regulation for an Arizona landlord to lease property to a marijuana enterprise. Nevertheless, the appeals courtroom went on to state this federal illegality “doesn’t render the contract on this case unenforceable beneath all circumstances.” The courtroom cited to a number of instances the place contracts involving medical marijuana companies have been upheld by courts regardless of being prohibited beneath federal regulation, displaying that courts stability the federal authorities’s curiosity in implementing the CSA with states’ curiosity in allowing the medical use of marijuana.

The appeals courtroom weighed the pursuits of the federal authorities and the state of Arizona and held that the lease was not unenforceable just because it violated the federal CSA. The appeals courtroom defined that federal authorities enforcement of the CSA towards state-compliant marijuana operators had been in flux for years and that the Division of Justice (DOJ) had instructed US Attorneys not to prosecute people appearing in compliance with the Cole Memo. The courtroom additionally famous that Congress has prohibited the DOJ from utilizing funds to prosecute individuals distributing marijuana in compliance with state regulation. As a aspect notice, that spending provision was lately prolonged.

The Arizona Appeals Courtroom despatched the case again to the trial courtroom to rethink the details of the case in mild of the appeals courtroom having held that the lease was not unenforceable and that Inexperienced Cross might get well damages for Gally’s terminating the lease.

You’ll find extra on hashish leases right here:



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Marijuana Sale-and-Leaseback: Pulling Cash From the Land


Everybody who grows hashish wants actual property. Some growers begin with a small piece of land, however others require acreage to perform their objectives. New growers, particularly, are likely to over-reach on the land piece. As enterprise operations proceed, and harvest dates are pushed again for any variety of causes, the grower might need it had held again some money for operations, slightly than dropped a lot on the land. That’s the place the sale-and-leaseback is available in.

Leaseback offers are a time-honored method for corporations to entry capital. Briefly, a leaseback is only a monetary transaction the place an entity sells a bit of property and instantly turns into a tenant, leasing that property “again” for a big time period. The promoting entity is usually cash-strapped however needs to proceed in its line of enterprise, and at its current locale. The vendor subsequently finds a purchaser, and works with that purchaser to barter a long-term sale and lease. On paper issues look totally different; however on the bottom, the whole lot stays the identical.

We have now labored on a collection of leasebacks in hashish of late, and we anticipate extra of those transactions going ahead. The leaseback mannequin is in some ways best for an business the place conventional financing is unavailable. For instance, if a marijuana enterprise has stretched its price range by shopping for actual property, making enhancements, and getting ready the land for its hashish operations, that parcel could also be sucking up money. That stated, it might even have actual liquidation worth. With restricted choices for fundraising, corporations can look to the land.

Leasebacks aren’t solely engaging to cash-strapped enterprises. We have now dealt with leasebacks for producer shoppers which are worthwhile however want to unencumber money to start out operations at a second location, with an eye fixed towards growing their market share. In jurisdictions like Oregon, the place a single entity can maintain a number of hashish licenses, aggressive operators see the leaseback as a singular leverage choice. Within the eyes of those operators, liberating up money for a second or third website is an important head begin in a burgeoning business.

We have now additionally dealt with leasebacks for corporations constructed for the only function of getting into these transactions. Formally, these corporations could also be structured as partnerships, LLCS, and even actual property funding trusts (REITs). As soon as a leaseback associate is recognized, a typical strategy is to construction the transaction as a sale and triple-net lease, which targets investor most popular returns upwards of ten % based mostly on these rents, and growing property values. These corporations want to spend money on extremely regulated states, like Oregon, Washington, Colorado and, hopefully quickly, California.

We predict leasebacks will proceed to be extra prevalent for develop websites than for retail or different makes use of, due to the dimensions and worth of the properties at challenge. We additionally predict that as business competitors intensifies, operators will more and more flip to leasebacks as a approach to transfer cash from actual property holdings to core enterprise– specifically, rising and promoting pot.