Commercial Real Estate Road Blocks in Cannabis Transactions

Even as more states legalize recreational marijuana use, the question remains: when will marijuana be legalized federally? For those of us in Ohio, perhaps the more looming question is: when will Ohio permit the recreational use of marijuana?

As deal activity involving medical marijuana license-holding companies in Ohio continues to boom, these questions have a material effect on such transactions. While some obstacles will likely be solved upon the legalization of adult-use in Ohio, some will remain, and certainly others will arise.  The two bigger issues are banking and real estate titles.

Many, if not all, of the transactions involving a license-holding entity include a real estate component. In transactions where one party is acquiring another entity that holds a dispensary, processor, or cultivator license (or some combination of the three), the buyer, or an affilate of the buyer, will often also desire to purchase the real estate on which the license is operated (or intended to operate).

Last fall, during RFAII (the second round of dispensary applications in Ohio), each application included a contingent lease agreement, an option to lease, a contingent purchase agreement, or an option to purchase, with respect to the related the real estate. Each of these options or contingenies rest upon whether such applicant would be awarded a license to dispense medical marijuana at that particular location. While, for many of these land owners or potential landlords, this was a happy payday as there were fairly large option fees paid and deposits made, a few challenges arose that are consistent with the challenges that arise during the transactions involving license-holding entities; challenges that will persist as the license-holding entities continue to be bought and sold, even if adult-use is permitted in Ohio.

One of the hinderances these parties face during a transaction involving the sale of land, relates to the title company. Generally in commercial real estate transactions, the title company will provide a title commitment, issue a title policy, and act as an escrow agent. However, finding a title company willing to issue a policy and act as escrow agent can prove difficult given the continued variances between federal and state law. It is not that there are no companies willing to fill these roles, but parties looking to enter into these types of transactions should be prepared and, even if they find a title company willing to issue a policy, they might be exchanging funds directly if the title company is unwilling to act as an escrow agent. Alternatively, if the purchaser cannot obtain a title policy given that marijuana is still a Schedule I drug under the federal Controlled Substances Act, and while always important, due diligence and airtight representations and warranties become even more imperative for the purchaser. Further, in the more uncommon instance where a lender is involved, that lender may have additional requiurements for the title company, adding yet another hurdle.

In instances where a license-holder is instead looking to enter into a lease agreement with a landlord, something that is often overlooked is the landlord’s mortgage. The terms of the landlord’s mortgage are important to consider because often the mortgage will include covenants prohibiting illegal conduct on the premises or leasing to a business conducting illegal activities. Given the federal status of marijuana as a Schedule I drug, leasing to a dispensary could be a breach of the terms of the mortgage. It is important to consider whether the landlord is willing to take the increased risk of having its loan called for violating the terms of its mortgage, whether the landlord owns the property outright, or whether the mortgage loan was issued by a non-federally insured institution.

While some of the customary aspects of entering into a lease agreement or a commercial real estate transaction can prove more difficult when cannabis is involved, these are merely hurdles, not complete roadblocks. Once the new dispensary licenses are issued, and its holders operate the dipensaries for a period of twelve months, many will possibly either look to sell or apply to relocate the dispensaries. These are just a few things that landowners and potential landlords should be thinking about if they are interested in entering into a lease agreement or real property transaction with a license-holder.

The legal status of cannabis under federal law, despite its status under state law, continues to make transactions involving the drug difficult, and such transactions should be undertaken only with counsel experienced with walking this fine line.