Industrial Insider: The new frontier of marijuana and commercial real estate

Elise Couston

Elise Couston

by Elise Couston, Newmark Grubb Knight Frank

I attended the national CREW conference in New York in September, and moderated a panel that included a presentation and discussion about marijuana and commercial real estate.

On July 29, 2016, Illinois Gov. Bruce Rauner signed Senate Bill 2228 into law, which decriminalizes the possession of small amounts of marijuana and enables it to be used for some medical conditions.  It is now legal to grow and distribute marijuana in Illinois, but there are some caveats to be aware of as real estate owners and brokers.

For this month’s column, I interviewed Zane Gilmer, a Denver attorney who specializes in commercial real estate properties and marijuana processors and distributors.  This interesting interview with Zane includes some things you need to know about Illinois’ new legislation, as both a building owner and real estate broker. 

What are the potential criminal and civil issues involved in the marijuana industry and commercial real estate? 

Zane Gilmer: The legal issues are really too numerous to name.  However, the primary issue is that although many states have legalized marijuana, the possession, distribution, and cultivation of marijuana still remain illegal under the federal Controlled Substances Act.  This inconsistency results in numerous legal issues for the marijuana industry and those that do business with that industry.

For example, because marijuana is still prohibited on the federal level, any individual or business that provides services to marijuana-related businesses (MRBs) could be subject to aiding and abetting or conspiracy charges, even if the services are not directly related to the marijuana itself.  Further, proceeds of the sale of marijuana are also illegal, which can trigger federal anti-money laundering laws for individuals or businesses that accept and transfer those proceeds.  A primary example of that would be landlords or asset managers accepting rental payments from a MRB tenant.

The legal issues are not limited to potential criminal exposure.  For instance, property that is used for the operation or assistance of MRBs is subject to forfeiture.  Moreover, anti-marijuana advocacy groups have also initiated civil lawsuits against MRBs and businesses and individuals who provide services to them.  The lawsuits allege that the defendants engaged in a conspiracy to violate the Controlled Substances Act, which also violates the Racketeer Influenced Corrupt Practices Act (RICO).  RICO is a federal statute originally enacted to fight organized crime, but can also be used by civil litigants.  RICO cases are very complex and expensive to defend.  Thus, even if the lawsuit itself is not successful (which many have not been), getting out of it can be costly.   

Are there specific provisions that should be included in commercial leases to protect landlords from marijuana-related businesses using the properties for marijuana activity? 

Zane Gilmer

Zane Gilmer

Gilmer: Yes.  A common covenant found in many leases relates to how the property may or may not be used.  Specifically, there is often a provision that states that the property will not be used in a way that is prohibited by law.  Because it is not always clear whether state legalized marijuana is considered “prohibited by law” under these generic provisions, the provisions should be tailored to make clear that marijuana-related activity, even activity that is otherwise lawful under state law, is prohibited on the premises.

Landlords should also consider adding a specific marijuana-related addendum to their leases that expressly state that the property cannot, and will not, be used for any marijuana-related activity.  Such an addendum, especially one that is signed or initialed by the tenant, will help ensure that there is no ambiguity about prohibited conduct and that the tenant was aware of the restriction.

As a related issue, landlords should also be aware that even if they have these types of restrictive covenants in their leases (whether general or specific), they run the risk of waiving their ability to enforce them if they permit marijuana-related activity on the property.  As such, it is important to make sure that landlords are enforcing the provisions at all times.

Is there any risk in attempting to ban all marijuana-related activity?

Gilmer: Probably not as long as the provision in the lease that bans such activity is clear and unambiguous as mentioned above.

Are there specific provisions that should be included in leases or other contracts if marijuana-related activity is permitted? 

Gilmer: If a landlord is going to permit marijuana-related activity, then several things should be considered.  First, it is important to know that allowing this conduct could subject the landlord and property managers to potential civil and criminal liability.  To help minimize that potential exposure, due diligence should be conducted on the prospective MRB tenant.

The MRB should be required to disclose information that will allow the landlord to evaluate whether the MRB is in compliance with relevant state law and, importantly, the federal marijuana guidance (i.e., not in violation of one of DOJ’s eight enforcement priorities).  The lease should contain a provision that requires the information to be provided to the landlord at least quarterly or upon the landlord’s request and should also permit the landlord to terminate the lease if it is suspected that the MRB is not in compliance with relevant law.

Landlords should also consider requiring the principals of the MRB to execute personal indemnity agreements that indemnify the landlord for any loss that relates to the marijuana-related activity (including forfeiture of the property).  In addition, some state’s marijuana laws restrict access to certain areas of buildings where marijuana is grown or stored.  Generally, access to those areas is limited to certain employees who have licenses with the state.  As such, landlords need to require that in the event the landlord needs to gain access to the property, the MRB must be able to present an employee with proper credentials within a reasonable amount of time.

If commercial retail space is used for marijuana-related activity are there things that the landlord should consider or think about concerning neighboring tenants? 

Gilmer: The existence of a MRB can negatively impact neighboring tenants.  For instance, the stigma of being next to a MRB may impact customer traffic.   Similarly, there can be odor issues.  These issues can lead to complaints from neighboring tenants or, worse, demands to permit those tenants to break their lease and move.  Thus, landlords should consider whether allowing a MRB tenant could result in unnecessary harm or conflict with neighboring tenants.

How can CRE professionals engage in activity that is related to the marijuana industry and, at the same time, protect themselves from civil and criminal liability?

Gilmer: The short answer is that they cannot completely eliminate all risk.  As discussed above, virtually everyone involved in this industry theoretically has some civil and criminal exposure.  There are ways to minimize the exposure.  For example, if a business or individual is going to provide services to MRBs, I recommend being familiar with the state and federal laws, follow the federal guidance, and consult with a lawyer who is familiar with these issues. Marijuana-related activity is happening every day in half of the states with little to no problems.  The examples where problems arise are generally a result of someone not following the “rules.”  State laws vary and being in compliance with them is a primary consideration, so you must know them and follow them.  The same goes for the DOJ guidance.

Are there special issues that arise for asset managers or other CRE professionals who deal with marijuana-related property located in different/various states (e.g., how a commercial property in Colorado is treated vs. one in Illinois where both have marijuana-related business tenants)? 

Gilmer: Yes.  First of all, keep in mind that marijuana laws vary by state and, in some circumstances, by county or city within each state.  In order to stay in compliance with DOJ’s guidance, the state marijuana activity must be in compliance with that state’s marijuana laws.  Thus, you must know what the law is in each state where you have operations, which may not be consistent.

In addition, if you are dealing with commercial property on a national scale, you need to also understand your own state laws (i.e., where you are physically located).  It is possible that the state you are in does not recognize “legal” marijuana or related activity, even though you are managing property in states that do permit it.  In those instances, you want to be sure that by being located in a state that does not permit marijuana activity while overseeing assets in a state that does permit it, you are not running afoul of local laws.

Are there any special considerations that CRE lawyers should think about before advising clients on marijuana-related activity? 

Gilmer: Yes.  Lawyers are subject to rules of professional ethics and in most states there is a prohibition on assisting or advising clients in a way that encourages or helps them violate state or federal law.  By assisting clients with marijuana-related activity (even if permitted by state law), the lawyer may be violating their ethical obligations.  Some states, however, have amended their ethics rules to permit this activity.

Wishing Industrial Insider’s readers all the best for a happy and healthy Holiday Season, and prosperous 2017!  See you all next year!

Elise Couston is senior managing director with Newmark Grubb Knight Frank. Zane Gilmer is an attorney with the national law firm of Stinson Leonard Street LLP. He practices out of the firm’s Denver office, and focuses on business litigation and compliance. Gilmer can be contacted at zane.gilmer@stinson.com or 303-376-8416.

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