Here on the Canna Law Blog, we planned to begin our series on the Impact of the Marijuana Regulation and Taxation Act (MRTA) on Real Estate by discussing the issues every license type faces. However, after reading the recent New York Times article on the real estate frenzy caused by the MRTA, we felt compelled to address some statements that could mislead potential applicants when evaluating their licensing options.
As a quick refresher, the adult MRTA licensing terms indicate that applicants must provide evidence that they either own the physical location or are under contract to own (through lease or management contract) the physical location that the applicant was in during the initial 2 of the applicant will be operating annual license. With all license types, location is one of the most important considerations for applicants.
For those on the production side (cultivators, processors, and traders), finding suitable properties at the right price is critical to running a successful business. For retail applicants (including onsite consumption applicants), identifying and securing the right spot in the right area can mean the difference between financial success and failure. As we like to say in New York: location, location, location.
The New York Times article stated that many landlords will not lease cannabis companies, “either because of the risk of a tenant breaking federal law or because of the unsavory reputation still clinging to weeds.” The article then explains that landlords willing to lease to cannabis companies “could charge premium rates,” implying that the New York leasing market will be prohibitively expensive for cannabis companies. From both a technical and a practical point of view, the article is misleading at best.
Lots of commercial landlords can not Leasing to cannabis companies under their mortgage agreements, not because of the inherent risk or “unsavory” reputation. For any commercial landlord who has issued a mortgage from a federally insured bank, the loan records contain a provision in the “Representation and Warranties” section that prohibits leasing to illegal businesses and often specifically excludes a cannabis business from being conducted in the mortgage property. The determination looks something like this:
The Borrower hereby agrees and agrees not to engage in any illegal activity (whether or not such illegality is determined by local, state or federal law) or activities relating to Controlled Substances (as determined by local, state or federal regulations ) to commit, admit or suffer law) on the property (including, without limitation, any cultivation, distribution and / or supply of marijuana (whether for medical, recreational or other purposes)).
It doesn’t seem like much, and it can’t even stop certain landlords, but the difference for applicants is critical and important to understand. Until federal bank laws are changed, many landlords simply cannot rent to a cannabis company, as doing so can cause their loan records to fail and trigger a number of repercussions, including potential foreclosure.
For adult applicants in New York, the key is to find commercial landlords who either: 1) fully own their property, or 2) have a loan from a non-federal bank or alternative source of funding (provided by New York), many ); or 3) willing to take the risk of a rental loan to a cannabis tenant being drawn. Connecting with the right commercial real estate agent is vital.
Which leads us to the practical inaccuracy in the article. In our experience representing commercial landlords and real estate developers, landlords who are not contractually excluded from leasing to cannabis companies would appreciate the opportunity. The impact of the COVID-19 pandemic on the New York retail property market (including restaurants and bars) has been well publicized. A short stroll through one of New York City’s historic retail districts is now a terrifying sight as “blank” signs appear in countless windows. Landlords strive to find paying commercial tenants in every possible way, and the potential for pedestrian traffic to overflow in favor of neighboring locations only makes cannabis tenants more attractive.
This does not mean that it will be easy for cannabis applicants to get rental contracts. The MRTA’s request for an executed lease upon submission of the application requires creative contracts and (likely) significant capital as applicants will not know if they are licensed before signing a lease. However, this is a solvable problem and we anticipate many commercial landlords will work with cannabis tenants to find mutually beneficial solutions.
Do Some Landlords Avoid Cannabis Tenants Even When They Don’t Have To? Yes. But these landlords will likely be in areas that will vote against the MRTA, and even then, they can change their minds once the New York cannabis industry gets going.
All in all, securing real estate will be a challenge for New York’s adult cannabis applicants, but not for the reasons the New York Times suggests. Overall, we believe the commercial real estate industry in New York will welcome cannabis tenants and we look forward to helping you tackle the complex issues. Learn more about the MRTA and its impact on real estate here on the Canna Law Blog.