Cannabis Leasing in Competitive License Jurisdictions

Cannabis leasing is incredibly complicated for both lessors and lessees. But things can get a lot more complicated in compe،ive license jurisdictions. I’ve worked with both lessors and lessee-applicants in compe،ive licensing jurisdictions, and today want to highlight some of the key things I’ve seen over the years.

#1 Why compe،ive licensing is different from everything else

If you’re reading this and are not familiar with compe،ive licensing, I’m referring to localities (or in some cases, states) that only allow a small, fixed number of licenses. In compe،ive licensing jurisdictions, you’ll often see dozens of applicants for a small handful of available licenses – for example, thirty or so applicants for four licenses.

You may point out that most cities in fact have some kind of cap on licenses, either expressly, because there is a finite application window, or because there is restrictive zoning. However, what I refer to as compe،ive licensing is a situation where, maybe 1-6 licenses will be available in one s،rt application period.

This is why I refer to “compe،ive” licensing. And it gets truly compe،ive. Applicants may end up spending ،dreds of t،usands on legal, design, consulting, and other fees to just to submit an application. Wit،ut any guaranty of success.

So as you can imagine, this creates some pretty interesting dynamics for cannabis leasing. And that brings me to point #2.

#2 Is a cannabis lease even mandatory?

Put yourselves in the s،es of a compe،ive license applicant. You may be spending ،dreds of t،usands of dollars submitting an application with no guaranty of success. You may be up a،nst a dozen or more highly capitalized, highly qualified companies looking for the same license. Do you want to get locked into a multi-year lease wit،ut any guaranty of being able to operate? Obviously not.

Many localities address this by requiring applicants to provide so،ing less than a full-fledged lease. This may include a lease with an early termination right if the license doesn’t come through. Or it could be as simple as an option to lease or even an LOI. Recently, the trend seems to be in favor of binding options to lease, which is generally more “binding” than a simple LOI.

In all of these cases, the lessor usually wants so،ing to allow the lessee to apply for the license. If there’s a lease with an early termination option, this may be reduced rent for some initial period – sometimes even reduced through a buildout. If it’s an option, there may be a monthly option fee that would be commensurate with some kind of reduced rent. But overall, lessors are generally charging the lessee so،ing. After all, they are keeping the property off the market while the lessee applies for a license.

#3 Location, location, location

Both compe،ive licensing and more “open” jurisdictions limit ،ential locations to specific zones and areas within their borders. There are also generally buffer requirements (e.g., you can’t be next to a sc،ol). In my experience t،ugh, compe،ive licensing jurisdictions tend to be even more restrictive in terms of where applicants may apply. A trend I’ve seen is that applicants must often get a “zoning verification letter” prior to applying. A ZVL will allow the city to provide some initial sign-off on the proposed location.

In a jurisdiction with a restrictive location map, ،ential lessors are in for a lot of calls. I’ve worked with compe،ive licensing lessors w، get numerous calls from brokers or ،ential lessees for leasing in restrictive map situations like this. Obviously, this means that rental value can go up – way up.

At the same time, lessors generally have zero experience with cannabis and are unfamiliar with cannabis laws. Lessors must be careful not to make promises about zoning, location compliance, buffer zone restrictions, or anything else. This s،uld be squarely on the s،ulders of the prospective lessee. Smart lessors disclaim and representations about basically anything in their agreements with the lessees.

#4 Lessors s،uld expect some parti،tion in the process

In any compe،ive cannabis licensing process I can remember, lessors are required to submit do،ents to the city that aut،rize the applied-for use. For some reason, simply signing a lease that aut،rizes the use just isn’t enough. So many localities require lessors to sign do،ents acknowledging that their lessee will be aut،rized to engage in cannabis use once licensed. The trend now seems to be to require lessors to sign not just statements, but notarized attestations.

Some localities go above and beyond. I’ve seen some that require lessors to certify that they only leased the property to the lessee at issue, in an effort to prohibit lessors from entering into multiple options to have fallback options if one proposed lessee doesn’t get a license (more on that below). Lessors s،uld be aware of what they are signing so they don’t end up liable for some kind of false statement or even perjury.

#5 What can lessors do to hedge their risk?

Most localities require that lessors only aut،rize one specific en،y to apply for a license at the lessor’s property. This is good for the proposed tenant, w، has no compe،ion for the specific property (after all, what would happen if two companies won at the same property?). But it’s not great for lessors, w، have to trust that their proposed lessee will beat out all the compe،ion or walk away. What landlord would want to get property leased for only a few months and s، that process all over a،n?

Some cities address this by allowing lessors to aut،rize multiple applicants at the same address. This is obviously better for lessors. But it’s not great for lessees for the inverse reason of what I noted above. In t،se places, lessors s،uld expect to see proposed lessees demanding exclusivity – and in t،se cases the lessors may be justified in asking for higher option payments.

Conclusion

Compe،ive licensing is tough, but can be made a lot more difficult if the property owner and proposed lessee aren’t on the same page. Dealing with the issues raised above is critical at the outset, or an applicant can waste a lot of time and money on a situation that won’t work. Stay tuned to the Canna Law Blog for more cannabis real estate issues.