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|Friday, June 13, 2014|
BY CLIFF HOCKLEY | OB GUEST BLOGGER
A building owner asked to lease to a marijuana dispensary is faced with a host of complex legal considerations unique to marijuana dispensary tenants. This arises from the inconsistent state of play between federal, state, and local regulators:
This article summarizes the key considerations a building owner must keep in mind when thinking about leasing to a dispensary.
The Legal Morass
The sale of medicinal marijuana is illegal under federal law and marijuana remains a federally controlled substance. As long as marijuana remains a federally controlled substance, there will always be a risk that federal law enforcement will shut down a dispensary and potentially seize the premises.
The U.S. Department of Justice, however, has stated that federal prosecution will occur only when the sale of medicinal marijuana touches on one of the following:
1. The distribution of marijuana to minors
2. Revenue from the sale of marijuana goes to support criminal organizations, gangs and cartels
3. The diversion of marijuana from states where it is legal in some form under state law to other states where it is illegal
4. State-authorized marijuana activities being used as a cover for trafficking other illegal drugs or engaging in other illegal activities
5. The use of firearms or violence in the cultivation and distribution of marijuana
6. The exacerbation of other adverse public health consequences associated with marijuana use such as driving under the influence
7. Growing marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
8. Marijuana possession or use on federal property
If federal law enforcement steps in to shut down the dispensary, it may also seek to take the premise through civil forfeiture laws. Under federal and state civil forfeiture law, the government has the authority to seize property used to commit a crime, even if the owner of the property is not charged with, or convicted of, a crime. As long as the property itself is linked to the criminal activity, it may be seized. Typically, the government first seizes the property and then builds its case as to whether the property should be forfeit. This can take months or years before the forfeiture is final, during which time the building owner is deprived of any revenue from the property.
Consequently, while the threat of federal law enforcement is mitigated when a dispensary is operated in compliance with state law, the risk associated with federal law enforcement remains very real (and very high), especially considering that federal enforcement policy may change with a new administration.
A building owner would be wise to include terms in the lease that mandate the tenant to provide the owner with documentation of compliance with all state requirements. For example, the premises cannot be within 1000 feet of a school or another dispensary, it must be equipped with an alarm system and video monitoring, and the dispensary tenant must pass a criminal background check. In order to know if the dispensary tenant is in compliance, the building owner should be familiar with the state’s regulations governing dispensaries. Regular property inspections will show tenants that they cannot deviate from their obligations to the law and the lease agreement.
Under Oregon law, any Oregon city may pass a moratorium on dispensaries until May 2015. At least 70 cities across Oregon have passed moratoria or other regulations effectively prohibiting dispensaries altogether. These cities include Hillsboro, Beaverton, Tigard, Tualatin, Milwaukie, Gladstone, Oregon City, and Wood Village. Thus, the building owner should know whether the local code even allows a dispensary at the premises.
The Practical Considerations
Once through the legal morass, the building owner must address the host of other considerations unique to dispensaries such as (a) tenant mix, (b) image issues, (c) insurance considerations, (d) compliance with other leases, and (e) compliance with financing restrictions.
For example, in a multi-tenant building the other tenants may not appreciate having a marijuana dispensary as a co-tenant. Besides the perceived image problem, marijuana gives off distinctive odors that other tenants sharing a common HVAC system may not appreciate inhaling.
Relatedly, having a dispensary as a tenant could lead to a decrease in lease renewals from other tenants in the building. Other tenants may perceive any loss of business as caused by the dispensary (whether true or not). To mitigate this, and other co-tenant risks, stand-alone facilities may be the best option for dispensary tenants.
Finally, dispensaries are relatively new and their operators may be inexperienced in operating a dispensary. This inexperience increases the likelihood that the dispensary will fail and the tenant will default on the lease.
A building owner asked to lease to a marijuana dispensary is faced with a host of complex legal and practical hurdles unique to marijuana dispensary tenants. While not insurmountable, the building owner should take great care, and consult with experienced legal counsel, when considering whether or not to enter into a lease with a marijuana dispensary.
Cliff Hockley is President of Bluestone & Hockley Real Estate Services.
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