Hashish actual property transactions might be notoriously sophisticated – rather more so than your common actual property deal. On January 9, 2024, I’ll be talking on a panel known as “Navigating Real Estate Issues Impacting the Cannabis Industry” for the Los Angeles County Bar Affiliation, the place my co-panelists and I plan on referring to lots of the most precarious points in these kinds of transactions. At this time, I need to preview a few of the key points we see in these sorts of offers.
Location, location, location
A very powerful consider any hashish actual property transaction is location. Licensing authorities impose all kinds of necessities or restrictions on actual property places, together with:
- Zoning legal guidelines are normally hyper restrictive for hashish corporations. Hashish companies could also be relegated to very small areas inside a metropolis. Permissible zones usually change relying on the kind of use. For instance, some cities might enable storefront retail amenities nearer to residential areas, whereas you’ll be able to nearly warranty that unstable manufacturing can be caught in industrial zones.
- States and cities additionally impose all types of location-specific restrictions. Hashish companies, for instance, could also be prohibited inside X ft of colleges, parks, church buildings, libraries, and so forth. In locations like California, cities usually add restrictions on high of state-specific necessities.
- States or cities may additionally impose limitations on the variety of hashish companies that may be positioned in a particular space. Generally we see caps on licenses inside a metropolis (extra on that later), whereas some cities will as a substitute prohibit two completely different hashish companies from present inside a sure distance from one another.
- Along with location-specific points, there could also be a number of property-specific points that would disqualify a possible property. A chunk of actual property could also be correctly zoned and out of doors buffer zones, however might not adjust to native parking necessities, setback necessities, electrical energy wants, and so forth.
Every of the problems above might be computerized disqualifiers for a parcel of actual property. Issues like buffer zone places might be troublesome to determine and alter over time. For instance, a college would possibly open up in an space earlier than a hashish enterprise submits a license utility, and it might lose out on its likelihood to take action. All of that is to say that performing diligence on a property and its location is completely vital previous to coming into right into a lease or committing to buy a bit of actual property.
Shopping for v. leasing?
When a hashish firm finds an excellent piece of property in an excellent location, the following most vital resolution it must make is whether or not to purchase it or lease it. There are some key exceptions right here, like giant farms or processing amenities in industrial or agricultural areas. However basically, most hashish corporations are inclined to lease. There are a variety of explanation why hashish corporations choose to lease actual property as a substitute of shopping for. I mentioned that intimately right here. However usually talking:
- Hashish corporations are startups with restricted funds that choose to lease, moderately than purchase.
- Shopping for actual property is normally rather more sophisticated than leasing it.
- Companies don’t need to decide to a multi-million greenback buy earlier than figuring out they will safe a license and/or have any prospect of success.
- Financing is an enormous problem! That brings me to the following level.
Financing, escrow, and title
Securing financing has lengthy been a problem for hashish corporations. In truth, my final submit analyzed key points that hashish corporations can count on when attempting to safe financing. Few startup hashish corporations are sufficiently capitalized to buy actual property with out financing, and since conventional financing is sort of by no means out there, consumers normally find yourself with a lot larger rates of interest and extra lender-friendly phrases.
However consumers aren’t the one ones that should cope with financing-related points. If a hashish firm needs to lease a bit of property that’s topic to a mortgage, it would in all probability not occur. Large banks don’t normally financial institution hashish cash, and normally can have the flexibility to default their borrower (the owner) for leasing to a hashish firm. I’ve seen a variety of potential actual property leases fail because of this alone.
One other problem right here is getting escrow corporations or title insurance coverage corporations to work on hashish actual property transactions. Like greater banks, lots of them merely gained’t do contact hashish transaction. That is particularly so in jurisdictions once they begin licensing.
Addressing licensing uncertainty in hashish actual property offers
There isn’t a manner a hashish firm can assure that it’s going to safe a license. Even in non-competitive jurisdictions, there are a number of potential property- or location-specific points that would bar a license utility. The prospect of shedding out is way, a lot larger in a metropolis with 3 licenses up for grabs and 30 completely different candidates. I lately wrote about some key points for aggressive licensing jurisdictions and actual property leases right here.
After all, there are methods to hedge in opposition to these sorts of uncertainty. Listed below are just a few I’ve seen:
- Non-binding letters of intent or time period sheets could also be acceptable to some cities, however they clearly include the chance that the lessor might stroll away or change key phrases if the settlement shouldn’t be binding.
- Choices to lease or buy upon securing a license, versus full-scale leases or buy agreements, is usually a good option to tie up a bit of property whereas ready for a license to challenge.
- Leases with termination rights if a license shouldn’t be secured are yet one more option to hedge in opposition to denial of an utility.
It’s key to level out that licensing authorities might have strict necessities on what a tenant wants to indicate with a view to apply. Some cities is not going to enable a doc except it’s binding (i.e., an choice or a full-fledged lease). That is but another excuse why early diligence is so key.
Different points for hashish actual property transactions
Another key points that I’ve seen come up greater than as soon as embrace the next:
- I’ve by no means seen a hashish applicant that didn’t assemble at the very least some tenant enhancements to their facility with a view to get licensed. Tenant enhancements can result in will increase in actual property taxes. It’s finest observe to handle who’s liable for these enhancements in a lease.
- Going off the final level, I’ve seen fairly just a few hashish tenants flip a dilapidated constructing in an industrial space right into a extremely productive, state-of-the-art facility. As you’ll be able to think about, this prices some huge cash. Savvy tenants might attempt to negotiate some form of tenant enchancment allowance from the owner. Or they might use their enhancements to justify decrease hire or an extended lease time period.
- Type industrial actual property leases universally require tenants to adjust to all legal guidelines. It’s good observe to carve out federal hashish legal guidelines. Not solely will this keep away from a default lure, however it would additionally forestall a landlord from attempting to later terminate a lease with the declare that they have been unaware that hashish was federally unlawful (sure, I’ve seen issues like that occur).
- Renewal choices are key! Hashish leases are inclined to hover round 5 12 months preliminary phrases. In states like California the place licenses are successfully tied to a single piece of actual property perpetually, landlords have immense energy to stroll away from the lease on the finish of the lease time period except a tenant has renewal choices (and well timed workouts them). This clearly can be devastating for an applicant who couldn’t transfer its license elsewhere.
- Buy choices are additionally vital. Hashish lease hire tends to be a lot larger than market hire for comparable non-cannabis makes use of. And it nearly at all times will increase 12 months over 12 months. Companies with multi-year lease phrases might want a purchase order choice in order that they will decide whether or not it makes extra sense to purchase the property outright (if doing very nicely) versus paying X instances market price every month.
I might preserve going right here for a very long time. The purpose is that actual property offers within the hashish house are troublesome and are riddled with potential pitfalls. Utilizing a type lease from a traditional industrial transaction is sort of at all times a foul concept, and failing to correctly diligence actual property can result in repercussions.