Many people want to get involved in the emerging legal marijuana business world. Residency requirements and other restrictions, however, limit the ability of some individuals and businesses from entering Washington State’s legal marijuana market. Others just do not want to hold a state marijuana license. Consequently, real estate investment has become a popular vehicle for indirectly entering the legal marijuana market place.
In terms of real estate, owners and developers of industrial and large agricultural properties have been the prime beneficiaries of Washington’s legalization of marijuana. In Whatcom and Skagit counties, property owners with previously under-utilized industrial buildings have been able to lease out their properties at premium rental rates. As most industrial land was quickly snapped up by the first wave of licensees, it is currently very difficult for indoor growers and processors to find suitably zoned and developed property.
In Eastern Washington, land owners with large tracts of agricultural land have been able to create multiple outdoor grow sites for licensees. Local bans and moratoria, however, do limit marijuana production and processing east of the mountains. Water availability is another big challenge for outdoor production facilities. Property owners and tenant licensees should always evaluate the amount of water available at a site whether via an exempt well or an appurtenant water right before committing to a lease.
Although property owners can reap big rewards from high rents paid by marijuana businesses, landlords also face unique challenges in this industry. Federal illegality creates numerous risks for landlords. For instance, most commercial loan agreements have a default provision in regard to any illegal activity occurring on the property. Since marijuana remains illegal at the federal level, a landowner could be in breach of its loan agreement if the landowner leases to a marijuana business. Forfeiture or other federal enforcement actions due to marijuana’s Schedule I status remain ongoing risks for the property owner.
Another pitfall for landlords is not to become a “True Party in Interest.” Anyone who has an interest in the profits of or exerts control over a marijuana business is deemed to be a “True Party of Interest” by the Washington State Liquor and Cannabis Board (the “LCB”) and must be listed on the licensee’s application. Developers of turnkey sites need to pay particular attention to this issue.
In order to maximize rental profits and to facilitate commencement of the licensed business operation, real estate investors often seek to provide tenants with ready to go sites. A landlord may be able to do this without running afoul of the LCB rules, as long as they are providing improvements to the land, which they would normally provide to commercial tenants. For example, construction of fences, buildings, interior walls, utilities, etc. are commonly provided by the landlord and recouped in rent. In contrast, providing business equipment or other items for the tenant may be problematic and the parties will need to consult legal counsel as to any landlord or tenant improvements.
Real estate leasing and development of marijuana business property can be lucrative. But, a clear line needs to be drawn between the interests of the landlord and tenant. Both the property owner and the tenant need a well drafted lease agreement fully setting forth the responsibilities of each party as well as contingencies in regard to changes in both state law and federal enforcement priorities.
For more information on the regulation of marijuana businesses, please contact Heather Wolf.