As a landlord in a cannabis legal state like California, you may have heard the terms “green rent” or “cannabis rates”. These terms describe the above market rents that a cannabis business typically has to, and to a certain degree, expects to pay for space that is within a specially designated “green-zone” or is zoned in accordance with local cannabis ordinances.
Our staff has heard of applicants paying up to three times normal rent just to reserve a location that may be eligible for local permission in the future. In another case, an opportunistic landlord gave his permission to three different applicants on the same property to ensure that he got his share of the pie when one of them was selected for a licensed location.
For some landlords, the idea of renting to a cannabis operation brings back nightmares of past tenants who were illegally growing and vanished when the police found out or suffered great damage at some point. Others knowingly dipped their toe ( or whole leg) in the cannabis space by renting to Collectives under a legal set of laws previous to today’s regulations.
Whatever your history and track record with regards to renting to a cannabis tenant in the past, you need to know what’s happening today in five key areas to best protect yourself and property, but also take advantage of an economic opportunity to potentially double or even triple your rents.
1) Yes, Cannabis is still illegal Federally.
It is certainly not news to you that the US government and its many agencies continue to treat cannabis as an illegal Controlled Substance. As a result, there are some ways in which you can find yourself in a little hot water if you rent to a cannabis tenant.
The threat of forfeiture as a co-conspirator in drug trafficking has traditionally been the biggest concern but as long as your tenant is licensed and in cannabis compliance (see below), you will be just fine. For a variety of reasons, the FBI and DEA is either legislatively or as a practical matter prohibited from prosecuting you in this manner.
Depending on how you are financing your building, your lender may have some issues with your tenant’s choice of business based on their own charter and customer base. You should check into this prior to leasing with them and if need be, evaluate other lenders.
2) Beware the Conditional Use Permit.
As your tenant most likely has to obtain a Conditional Use Permit from their local Planning Commission, your building or whole development may come under increased scrutiny for cannabis compliance matters and even some requests that exceed your required improvements.
Whether it be ADA related, enhanced build outs with extensive security, exterior including landscape upgrades or even resurfacing “old” parking lots, cannabis applicants have been known to have to do lots of typically non-required improvements for the right to operate in some cities.
You should have an understanding of the impact such review may have on your portfolio before going down this path and potentially opening yourself up to some expensive review. Our land use experts at BeGreenLegal can give you an impartial analysis prior to making any big, potentially disastrous commitments.
[PROTIP for Entrepreneurial Landlords]
To really increase the value of your land and the speed at which a cannabis operation can be licensed, you should consider applying for an Entitlement as a Cannabis Business in advance off a tenant seeking local permission. With this CUP in hand, you can command top dollar and get them to market months faster. We can lay out the ROI and related investments required to take advantage of this regulation and ordinance-based opportunity.
3) Who can you trust in the weed business?
Especially for those landlords once bitten, trusting a “weed” tenant can be overwhelmingly tough. It deserves to be noted that a huge percentage of those businesses that want to rent your property are run by entrepreneurs who are not from the black or even grey cannabis market, but rather following the new opportunities made possible by legalization. To protect yourself you should obviously do a great deal of due diligence on the individuals involved and really understand their corporate structure and funding. You may want to insist on greater than average security deposits, months of rent in advance and personal guarantees.
You should also try as best you can to understand their business plan and get help from professionals to forecast their likely success.
If all of this research makes you comfortable, you could very well have yourself a fantastic tenant who more so than any other possible tenant is locked into your space for a very long time. Remember that their state license and local permissions are tied to your land and building and relocating would be a great expense and burden, if the city even allows it.
4) Timing is everything.
Getting the max green rent is all about timing and tenant selection. If your tenant, who may just have an option in fact, gets their license and is funded appropriately, you have yourself a winner.
But knowing how and when the local permits will be allocated and estimating if your tenant has a good chance to win in a competitive situation is vital. As many cities cap the permits and awards in a very short timeframe, you need to know if your horse is a winner or have at least secured your payout even if they lose. You can do this by becoming familiar with the evaluation criteria and your tenants match to the scale. Perhaps they can demonstrate past success in similar competitions.
As mentioned above, you may want to consider hedging your bets by giving ( or selling) your landlord consent to multiple applicants trying to guarantee a green tenant, at increased rates, ends up in your space.
You should look to maximize your leverage in the lease term as well, shorter (but at least permissible length for consideration) that are subject to renewal at negotiated rates are a good idea if you believe your tenant will be successful.
5) Know their Cannabis Compliance or Risk Disaster.
Last but not least, as a landlord of a cannabis business – your tenant’s compliance with licensing regulations is your business and you need to be aware of their practices and track record.
You need contractual right to audit and be a party to cannabis compliance reporting of the business as well as made aware of any issues that may put their license in jeopardy at the state and local levels. If they lose their license, you lost your golden ticket in most cases. Even if you had personal guarantees, this disaster could make that uncollectible even from wealthy renters.
The state publishes and updates which companies have licenses but you need to go deeper, and may want to even consider having the right to get third party audits of your tenants cannabis compliance. If the tenant pushes back on this request, it could be a look into how much they plan on complying with the regulations that could bite them in the future.
BONUS ITEM – Thinking About Getting into Cannabis Yourself?
Some of our happiest clients are those that cashed in their “green-zone” lottery ticket themselves and went on to get their state licenses. Our team provided all the expertise, they provided the building and they are now sitting on a license that some people will pay a fortune to acquire.
With a license in hand, you can also (with our help) build a business and a brand(s) that can take advantage of great valuation multiples today and promising cash flows for the future in what many consider to be the economic boom of a lifetime.
Whatever your issues or questions, BeGreenLegal would love to help you explore the opportunities as a landlord, investor or operator in California’s legal cannabis market.