In July 2017, Governor Baker signed into law An Act to Ensure Safe Access to Marijuana, General Law Chapter 94G, which allows individuals over the age of 21 to lawfully operate marijuana establishments for retail, cultivation, manufacturing and testing. Over a year later, in November 2018, the first legal sale of recreational marijuana was made at a dispensary in Leicester. Today, more than 50 retail establishments have opened state-wide.
Even in its infancy, the retail marijuana industry has created a plethora of new business opportunities— not only for operators and cultivators, but for their landlords as well. If you are a landlord with real estate in a cannabis-zoned area, you are in a great position to negotiate a lucrative and favorable deal with an operator/tenant. However, the retail cannabis industry comes with a unique set of risks, that prudent landlords should take steps to shield themselves against.
• Risks
From a business perspective, retail cannabis operations pose many risks. Landlords are wise to use their leverage to negotiate a lease that will help insulate them from these risks.
Indeed, cannabis operators have an uphill battle. Not only do they need to score properly zoned real estate, but they must successfully negotiate and accept a Host Community Agreement (“HCA”) with the municipality in which they are located. Since there are limited retail licenses in each municipality, obtaining an HCA is competitive and there are often multiple potential operators vying for the same license. Moreover, operators typically negotiate their tenancy before entering into an HCA, so there is always a possibility that the HCA will fall through after negotiating a lease. As such, it is wise to plan ahead for such events by negotiating a contingency plan in the lease.
Another risk is the tenant’s potential business failure. Retail cannabis operations require significant upfront capital, and many cannabis operators simply run out of money. Therefore, landlords should consider negotiating a right to terminate the lease in the event the tenant loses financing or has an inability to finance its operation.
The tenant/operator’s legal compliance presents another unique set of risks that should be considered by landlords, the most obvious being that marijuana is still illegal at the federal level. While it is legal in Massachusetts, operators must still comply with the terms of their HCA, and state laws, including extensive regulations promulgated by the Cannabis Control Commission of Massachusetts (“CCC”). Therefore, landlords should consider carving out provisions in the lease requiring the tenant to indemnify the landlord for liabilities associated with overall non-compliance with federal law, as well as non-compliance with the tenant’s CCC licenses or applicable law, or from the tenant’s failure to comply with its HCA or local permitting.
Additionally, there are security concerns inherent to retail cannabis operations, as they are high-demand and cash-heavy businesses. To help protect themselves from potential liability, landlords should resist making any warranty regarding the safety and security of the building’s tenants. Additionally, landlords may wish to include lease language requiring the tenant to adhere to safety protocols, as well as a disclaimer that the landlord will not be held responsible for the admission of any person into the building or for any resulting criminal acts.
• Rewards
In addition to addressing a unique set of risks, cannabis landlords have a unique potential for reward. In part, this stems from a heightened negotiating power due to the limited supply of cannabis-zoned real estate. Also, landlords may seek increased compensation from tenants due to the risks set forth above. Overall, landlords can leverage favorable lease terms, starting with rent. Landlords should wisely negotiate the rent, from the months leading up to the opening of the retail store and throughout the life of the lease. Keep in mind that operators are signing a 5-year HCA, so the lease should be at least that long.
A landlord’s potential profit does not have to stop at collecting rent. Many landlords negotiate a percentage of the profits from the retail business.
The retail marijuana business presents a lucrative business opportunity for landlords of cannabis-zoned real estate. The more thoughtful, careful, and strategic a landlord is in drafting their lease, the more they stand to profit, and the better they can insulate themselves from the risks of this emerging industry.