Take the Due Diligence High Road for Cannabis-Related Leases

SAN FRANCISCO—A recent report by Cushman & Wakefield shows that low vacancy combined with continued high levels of demand in Sacramento have led to rapid growth in asking lease rates, closing the first quarter at $0.68 per square foot per month on a triple net basis. The report does call out that the lofty figure is likely inflated by landlords seeking out cannabis-related industries demanding higher rents, but is also due in part to sustained levels of low vacancy.

Indeed, with medicinal marijuana giving rise to legal sales, cannabis is a hot button these days. And, the real estate landscape is no exception. In this exclusive, Katy Young, managing partner of San Francisco-based law firm Ad Astra and the current president of the National Cannabis Bar Association, recently shared insights into the ins and outs of leasing retail space for cannabis use, how long before it’s widely accepted by the general public, and cautionary tales about cannabis use leasing.

GlobeSt.com: What advice would you give to a cannabis company looking to lease retail space/?

Young: Be sure that your landlord understands that your business functions in the cannabis space, and depending on your state’s laws, the landlord may have to participate in the licensing process insofar as being disclosed on the application. You should be careful to negotiate exit ramps in the lease, just in case your business does not obtain a license to operate a cannabis business. You’ll want to be able to terminate the lease if you can’t operate. Be sure to negotiate about the law of fixtures as well, especially for indoor grows, because the equipment that you affix to the property to run your business could become the landlord’s property.

GlobeSt.com: What advice would you give to a landlord who has been sought out by a cannabis company?

Young: Do your due diligence on the tenant: Are they licensed? Compliant? What is the corporate structure? Who will be your guarantor? Include a clause in the lease that allows you audit rights to check to ensure that your tenant is licensed and compliant. If the tenant loses its license, you want to be able to terminate the lease immediately to avoid civil asset forfeiture. Include clauses that allow exit ramps if the tenant does not get a license to operate or loses its license.

GlobeSt.com: Do you think we’ll see a day where CBD and cannabis products are widely accepted by both shopping center landlords and the general public?

Young: Oh yes. CBD is very popular among seniors and is already widely available despite still largely remaining illegal federally and in many states. CBD is the non-psychoactive form of the cannabinoids in cannabis, so it won’t get you high but it does appear to have the therapeutic properties that many medical patients seek. The stigma is worse than anything. As our society grows used to cannabis in the mainstream, shopping centers and the public generally will embrace cannabis use the way we tolerate cigarettes and alcohol.

GlobeSt.com: Is there a case study where a cannabis or CBD retailer was either turned away or had a license revoked as an example of the confusion and resistance remaining in this market?

Young: There are distance requirements that prevent cannabis businesses from being too close to a school, daycare facility, etc. In Oakland, one of my client’s had one of the coveted equity permits and was operating in a permitted space, but then a school moved in next door to them, and they lost their license to operate.