If you are considering leasing to a cannabis business, make sure you talk to a lawyer who understands the cannabis industry or, at a minimum, a real estate broker who specializes in cannabis in your area. Both in California and Oregon, the state has deferred to the local counties and cities to decide whether they will allow cannabis businesses, and, if so, in what zones. Most listings for cannabis real estate are not public, and therefore there are no real benchmarks on the fair market value of these leases.
I have had a landlord come to me on more than one occasion with the same story: (1) the lease must be reviewed now because the tenant is looking at several options and has to submit to the local jurisdiction asap; and (2) the landlord has no idea what the fair market value is for the lease and is simply excited to be receiving higher than the standard industrial rate. Beware when the tenant has such a sense of urgency. This is, in my opinion, an underhanded negotiation tactic to create a false sense of urgency to push unsuspecting landlords into an under-market real estate lease.
Secondly, call a local cannabis attorney or call a local cannabis broker to find out what the market rate is in your jurisdiction. Every city and county is unique, and you need a local expert’s opinion in the cannabis industry. These rates are not published, so cannabis industry outsiders may not be able to find the information. Each county or city’s land use regulations are so different, that they affect the market rate. For example, the City of San Diego is only licensing 40 Marijuana Production Facilities (MPF) in the city and there is one specific zone where these MPF can be located. In addition, the applicant has to comply with the State and City buffer zones, which limit the supply of available buildings for lease. While the industrial zone for non-cannabis related activity involve leases for $1.60/sq. ft. for a marginal gross lease, a cannabis lease is approximately $2.50 to $3.50/sq. ft. for a triple-net lease. An unsuspecting landlord may think they are getting a great deal at $2 a sq. ft. for a marginal gross lease while not understanding the nature of the market.
If you are the landlord, I strongly recommend only agreeing to a triple net lease when leasing to a cannabis business. A triple net lease (or “nnn” lease) is a form of real-estate lease agreement where the tenant or lessee is responsible for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance, in addition to paying the rent and utilities. By contrast, a gross lease or marginal gross lease leaves many of these expenses, such as insurance and taxes, on the burden of the landlord to be paid out of the monthly rent check. The risk of maintaining the building in compliance with building codes, insuring the building leased for a cannabis operation, and repairing and maintaining the building should be left to tenant who would have a better understanding of what it takes to operate and maintain a cannabis operation under the laws of the local jurisdiction and the state. Cannabis cultivation and manufacturing can be very taxing on a building. As a landlord, you would want the tenant, who is the cannabis cultivator or manufacturer, to be responsible for maintaining and repairing the building. This expense should be factored into the cannabis operation’s cost of doing business.
If your land is in the green zone, make sure you do your homework before entering into a lease. Besides the basic business terms, there are also legal terms to consider. See my blog, Commercial Cannabis Leases – Not Your Run of the Mill Commercial Lease.