In the rapidly evolving cannabis industry, acquiring real estate to support business operations is the gating item, presenting, perhaps, the highest barrier to entry. As cannabis business licenses are always location-specific, those businesses who seek to engage in cannabis cultivation, extraction, manufacturing of cannabis products, and/or sales cannot afford to trust just any real estate attorney to guide them through these trajectory-setting transactions. What might seem like a straightforward property deal quickly becomes a labyrinth of compliance, licensing, and financial intricacies, all of which demand a unique understanding of cannabis laws.
Here’s why relying on a traditional real estate attorney who lacks cannabis expertise is a risky move.
Cannabis Real Estate’s Unique Challenges
Regulatory Landscape
Real estate deals in the cannabis industry involve more than just negotiating prices and drafting contracts. They require a deep understanding of federal, state, and local cannabis laws, rules, and regulations, which vary wildly from one jurisdiction to the next. Currently, cannabis is legal for adult use in 24 states, and medicinal use is allowed in 38 states, but federal prohibition remains intact. This patchwork of laws means that a deal compliant in one state could be a ticking time bomb in another.
For instance, zoning restrictions specific to cannabis operations can dictate where a company is even allowed to set up shop. According to the Cannabis Business Times, cannabis sales are prohibited in nearly 50% of municipalities in states with adult-use programs. These restrictions can appear at the State level or at the local level, depending on the jurisdiction.
Zoning and Compliance
At the local level, restrictions dictating where a cannabis business may be located frequently appear in the form of zoning ordinances, resolutions, layovers, or specific “zones.” Most states and local jurisdictions regulate the distance between cannabis retail operations and sensitive uses, such as schools, places or worship, and/or youth-focused community centers; and many also regulate the distance between other cannabis retail facilities, ensuring that they are not located too close together, creating a purported undesirable “green light district” of sorts.
Financial and Banking Complexities
Unlike most industries, cannabis businesses (and the ancillary businesses that support them) operate in open violation of federal law, with cannabis remaining classified as a Schedule I substance under the Federal Controlled Substances Act (CSA). Consequently, traditional banks are often reluctant to bank with cannabis companies, as doing so would constitute conspiring, aiding and abetting laundering and other financial crimes. Furthermore, banking a cannabis business requires significant (and expensive) due diligence for financial institutions, to ensure that clients meet state and local requirements, deterring the practice.
According to AP News, a Congressional Research Service report last year stated that only about 675 financial institutions are doing business with cannabis companies out of more than 4,500 banks in the United States. All major payment card networks likewise refuse to service cannabis companies, with Visa, in particular, prohibiting the submission of any transaction for the “purchase of products that claim or imply a similar efficacy as prescription drugs, controlled substances, or recreational/street drugs, irrespective of claims of legality.”
Even if the DEA is poised to reclassify cannabis to Schedule 3 of the CSA, the vast majority of cannabis licensees would continue to be acting in open violation of such classification, which imposes a plethora of regulatory restrictions that directly conflict with the very nature of an adult-use business. Thus, even with a federal reclassification, many cannabis operators will continue to face these financial and banking hurdles for many years to come.
Financing Hurdles
In the absence of access to traditional sources of capital and debt, cannabis businesses frequently get “squeezed” in real estate negotiations, imposed with all manner of guarantees, hold fees, lock fees, penalties for non-payment, and other unique and punitive default mechanisms, designed to give the owner more security than a traditional security deposit would provide.
Those businesses empowered by a cannabis-savvy attorney have their finger on the pulse of legalization efforts and policy. They should endeavor to temper these fears with market terms while educating their property owners on the nuances of leasing in the cannabis industry.
Cash Transactions
Because access to traditional financing and debt is a challenge for cannabis businesses, these businesses rely heavily on cash transactions, raising a whole host of other issues, particularly in the real estate context.
First, transacting in large sums of cash poses serious security risks. Cannabis businesses may need to transport substantial amounts of cash for property acquisitions or lease payments, making them and/or the sellers/landlords prime targets for theft, robbery, and other criminal activity.
Second, cash transactions can impede and/or complicate real estate negotiations. Landlords/sellers unfamiliar with the cannabis industry may be apprehensive about accepting cash payments or may charge an unreasonably high premium for taking the risk of doing business in this manner.
Finally, real estate transactions involving cash can lead to all sorts of financial, banking, and/or valuation problems. For instance, properties with a history of heavy cash transactions may not appraise as high or otherwise be as marketable; they might also pose red flags to mortgagors and other lenders, jeopardizing current and future financing of the properties in question; and bank accounts held by anyone receiving unusually large amounts of cash are at greater risk of being unceremoniously shut down.
An experienced cannabis attorney can help businesses prepare for and navigate these issues before they implode by, for example:
- Negotiating for the payment of some or all rent in cash.
- Ensuring that all lenders/mortgagors are aware of and approve the cannabis use if there is a pre-existing mortgage, and that the landlord agrees to obtain approval of such use from all future lenders/mortgagors to avoid a default on any mortgage.
- Bridging the gap for sellers, landlords, and lenders by educating them on cannabis financial transactions and The Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) guidance, which clarifies how financial institutions can provide services to cannabis-related businesses consistent with their anti-money-laundering obligations under the Bank Secrecy Act (BSA).
- Drafting lease and purchase and sale agreements that protect all parties to the greatest extent possible.
- Recommending banks and lenders that are more “cannabis-friendly.”
Specialized Cannabis Real Estate Attorneys: What's Their Role?
Navigating Complex Transactions
Landlords, too, are often wary of leasing to cannabis companies, as their properties might be subject to federal forfeiture. This makes negotiating lease terms particularly tricky. An attorney without cannabis experience may be unable to properly advise on the financial and legal risks associated with leasing for cannabis use, leaving both tenant and landlord exposed. It is critical that landlords understand that their tenants operate in open violation of federal law and that compliance with “all laws” is impossible, while strict compliance with state law is indispensable.
Aside from the government, landlords must ensure that their properties are not encumbered by a mortgage underwritten by a federally insured bank, in the absence of a non-disturbance or subordination understanding. Acceleration of an underlying mortgage, owing to federal illegality, continues to be among the top reasons cannabis businesses fail to achieve site stability. Leases should include robust representations on such matters.
Protecting Client Interests
Other cannabis-specific nuances (aside from the Permitted Use) that require close attention to the applicable regulatory environment to mitigate risk involve matters such as:
- Events of default (what happens in the event of a regulatory problem in which a cannabis business license isn’t renewed or is revoked)
- Re-entry and dispossession rights (particularly on a default)
- Securitization or collateralization of cannabis business assets to satisfy lease obligations
- Insurance
- Rights on assignment and subleasing
- Signage
- Security
- Parking
- Lighting and wattage
- Environmental issues
- Dispute resolution, and
- Severability, among others
A cannabis-savvy attorney knows how to address these heightened risks and nuances, ensuring lease terms protect both you and the landlord. Beyond that, they need to understand how state regulations intersect with leasing contracts. A generic real estate agreement isn’t enough—especially if a landlord unknowingly exposes your business to legal consequences because of a poorly drafted clause.
Supporting cannabis real estate clients at Rudick Law Group
In the cannabis world, experience isn’t just a bonus; it’s a necessity. Attorneys well-versed in cannabis law bring invaluable knowledge of industry-specific pitfalls and opportunities. They understand the licensing process, how to navigate local compliance regulations, and how to draft agreements that protect your business from state and federal legal complications.
Choosing an attorney who understands these nuances isn’t just about protecting your assets—it’s about ensuring your cannabis business thrives in a legally sound manner. Trusting your deal to someone who only knows real estate law, outside of the cannabis context, could lead to disastrous consequences. In an industry as heavily regulated and scrutinized as cannabis, the last thing you want is to learn the hard way that your attorney was out of their depth.
Here at Rudick Law Group, we’ve successfully negotiated real estate transactions, ensuring our clients were protected every step of the way by, among other things:
- Performing expedited diligence on properties and opposing parties prior to completing a real estate transaction;
- Expertly navigating lease issues concerning permitted termination, deferred and/or discounted rent, possession, and contingency periods to maximize client flexibility in the event of a regulatory change or hurdle affecting cannabis license status;
- Ensuring all lease and purchase agreements accurately reflect the regulatory framework of the jurisdiction in which our clients operate; and
- Guiding clients through mortgage subordination and non-disturbance matters to prevent a landlord from defaulting on their mortgage obligations due to any prohibited cannabis use.
Contact our real estate attorneys to learn how we can help safeguard your property investments with a comprehensive legal strategy tailored to your specific needs.
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