California Cannabis Leasing: The Normalization of Cannabis Landlords

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california cannabis marijuana landlord
…In a good way, for cannabis landlords.

Almost two years after the passage of Proposition 64, the 2016 California voter initiative to legalize and regulate medicinal and adult-use cannabis, California has begun to finalize its regulations that will govern the largest cannabis market in the country, though that effort has not been without some hiccups and bumps in the road. But, things are coming along and we anticipate that, as in other states that legalized cannabis like Washington and Oregon, after an initial period of turbulence, the rules will be solidified, prices will clam down, and there will be at least some measure of market stability going forward, notwithstanding those localities that decide to sit this one out. In the meantime, how are marijuana landlords faring in the midst of these industry growing pains? As it turns out, quite well. Here are a few examples.

Availability of insurance. Landlord insurance is essential in any tenancy. It protects the landlord against liability for injuries and property damage that occurs on the leased premises, and it covers losses to the building such as fire or burglary. Just months ago, California approved the first lessor’s risk policy for cannabis landlords to be written by a traditional state-admitted carrier. That may not sound like a big deal, but it really is: admitted carriers are held to high standards, and for the California Department of Insurance to agree to allow (and therefore essentially underwrite) such policies to be issued despite the subject activities being federally illegal is encouraging for the industry. The state also recently approved a business owners policy for cannabis operators, which is good for tenants.

Mainstream investor acceptance. One does not have to look to Canada to see mainstream investment success for U.S. cannabis companies. Real estate investment trusts (REITs) are highly regulated investment vehicles that can also be subject to federal scrutiny. In the U.S., only a handful of publicly listed REITs include properties leased to cannabis tenants, and now one of the country’s preeminent financial publications is openly recommending investment in a cannabis REIT, on the premise that businesses that lease to cannabis tenants “don’t actually ‘touch the plant’ which makes it a safer bet for long-term investors.” With the proviso that the CSA doesn’t necessarily agree with that assessment, this is one of many watershed moments in the normalization of commercial cannabis, with due respect to the republican former Speaker of the House becoming a board member of a cannabis investment fund.

Emergence of renewed federal enforcement priorities. Since the rescinding of the Cole Memo at the beginning of 2018, it has slowly emerged that federal cannabis enforcement priorities in California will be aimed at aligning with the state’s own enforcement priorities, as well as traditional federal prerogatives such as protecting federal lands and preventing organized crime. Notably, these articulated enforcement priorities have not included any mention of pursuing landlords of commercial cannabis tenants that are in compliance with state laws.

Advancement of tenancy-friendly state legislation. Recently, the state legislature has advanced a proposed law encouraging shared tenancy resources and tenant cost savings, e.g. bathrooms, break rooms, locker rooms, hallways, or loading docks. This is obviously an encouraging development for tenants, especially in places like the Bay Area where commercial space is at a premium. But it is also good news for landlords, who can market their properties to multiple tenants, rather than try to lease larger multi-unit spaces to a single tenant because of the inability to share common areas.

As long as cannabis remains federally illegal there will always be a measure of uncertainty and risk involved in commercial cannabis leasing for both landlord and tenant. But the trend lines do seem to be pointing towards normalization, which in turn points to decreased risk. Only time will tell.

For more on California cannabis leasing, check out the following:

Source: https://www.cannalawblog.com/california-cannabis-leasing-the-normalization-of-cannabis-landlords/

 

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