By Hannah E. King and Edward (Ted) Kelleher, Attorneys at Drummond Woodsum.
The marijuana industry poses profitable possibilities and serious challenges to the real estate industry. As Maine continues to work on the regulatory structure of its recreational marijuana marketplace, a land rush has already started as businesses begin to position themselves for legal marijuana sales. Warehouse space for cultivators and processors and downtown storefronts for potential marijuana retailers are renting out at multiples of usual market prices.
However, while the economic excitement is justified by the track of record of the marijuana industry in other states, here are some important caveats that should be considered soberly and clearly by any property owner thinking about renting space to a marijuana operator.
Federal illegality: Marijuana is still completely illegal under federal law. Every business person growing, processing and selling marijuana under a state legalization regime is breaking federal law every day. The Obama administration had a cautious hands-off policy toward the industry, but the Trump administration position is very unclear. Landlords expose themselves to potential direct criminal liability, and also the risk of civil asset forfeiture. The practical reality of these risks is hard to assess. One clear guidepost however, is that if tenants are violating state law, by for example, growing or selling more than they are allowed to, selling over interstate lines or selling to minors, they attract law enforcement attention and put the landlord at risk as well. Thus vetting tenants is even more important in this industry than usual. Additionally, the federal illegality of marijuana may affect things like the ability to get title insurance, to get property and casualty insurance at affordable rates and many commercial banks are beginning to expressly prohibit marijuana operations in properties they finance.
Municipal control. Under Maine’s marijuana laws, municipalities have enormous power to regulate marijuana operations within their jurisdictions. Many Maine towns have moved very slowly and have not yet grappled with zoning or local permitting issues. Tenants and landlords both need to understand what kinds of rules and processes the local municipality will put in place, and what kinds of obligations these rules will impose on property owners.
Operational concerns. Marijuana cultivation creates odor issues and uses huge amounts of electricity for indoor lighting. Cultivation and retailing both pose security concerns because of the valuable nature of the product and the cash-based nature of the businesses, since marijuana businesses have difficulty getting credit card services. Landlords need to understand the operational issues posed by these kinds of businesses and make include appropriate lease provisions to address them.
Timelines. The Maine legislature approved a final version of the legalization law in May 2018. Now, the State is in the process of creating the specific rules that will govern the recreational marijuana industry. The rules will likely be final at some point in mid-2019. The state then needs to accept and process licensure applications, which likely means first sales of recreational marijuana in Maine in early 2020. This schedule, could of course, slip farther out into the future. Landlords and tenants need to recognize these timelines since they directly affect the ability of a location to produce the cash-flow that will support rent levels.
The marijuana industry has caused excitement in many circles in Maine because of the economic potential just around the corner, but care must be taken, especially by landowners, in assessing and jumping into this business.