Tag: cannabis

For cannabis entrepreneurs, finding a place to operate their business presents considerable challenges amidst the uncertainty surrounding the legality of cannabis.

It’s an industry rife with risk, but also opportunities.

On the one hand, property owners can often charge higher rents knowing that cannabis entrepreneurs have fewer options for finding space to set up shop. On the other hand, finding a building to purchase for a cannabis operation presents its own set of legal and financial challenges.

“A lot of property owners are very nervous about renting to cannabis businesses,” said Morgan Fox, spokesperson for The National Cannabis Industry Association, a nonprofit trade association and advocacy group in Washington, D.C. “State and local authorities can institute asset forfeiture.”

The threat of asset seizure by these authorities can make property owners less willing to rent.

While there are certainly risks, entrepreneurs could benefit from the changing attitudes and beliefs about cannabis as they look to offer a place for their products.

Cannabis entrepreneurs are sitting at the forefront of an emerging trend. While it’s a turbulent and uncertain one, it’s an industry that’s growing as new companies make inroads throughout the state to open dispensaries for medical marijuana.

Whether it’s better to rent or buy commercial real estate depends on the user, but Fox said property owners should not be afraid to rent to cannabis businesses. If property owners can view these businesses as those that could contribute to economic development through business and job growth, that could turn things around.

“The stigma is certainly starting to erode,” Fox said. “On the national level, it already has. Having cannabis businesses in their jurisdiction is beneficial to their cities and towns in terms of job creation.”

However, finding a place to locate continues to be a conundrum for these businesses. Often the places available to the industry are limited by local zoning rules, he said. Municipalities may force these businesses into industrial zones, which cuts down the number of properties available to them.

Legal concerns

In addition, state-mandated security regulations are tough, Fox said, partly because few banks are willing to provide services to the industry because of its murky legal status. That complication forces many to be cash-only, which creates crime risks.

There were many rules that made it hard to sell to a grower or seller, said Tom Skeans, managing director of SVN Imperial Realty, a brokerage firm in South Whitehall Township.

“From the brokerage side, [the firm] really wasn’t going to get involved in it because of the risk,” Skeans said. “Normally, if you have a small tenant, the only risk factor is, are they going to succeed?”

As a broker, Skeans said he has made an intentional choice not to get involved in this industry because it’s so heavily regulated, particularly because banks are federally regulated and it is federally illegal to sell marijuana.

Until the legal questions are resolved, cannabis entrepreneurs will be better off owning their shops, he said. And that’s a tough choice.

“In general, for a business, renting is always going to be better because you have an easier exit, Skeans said. “Buying and selling real estate is really expensive.”

Dealing with uncertainty

Since distribution and sales remain illegal under federal law, that creates uncertainty, particularly as it relates to the enforcement of contracts with cannabis businesses, said Paul McGinley, a partner in the Allentown law firm Gross McGinley LLP.

It affects their ability to get property insurance, title insurance and to ensure the validity of their leases, he added.

“Until the federal government says that cannabis is no longer a controlled substance, there’s going to continue to be some uncertainty,” McGinley said. “What we are hearing is that it’s driving those businesses to use state credit unions as opposed to fiduciary-chartered banks.”

Generally, banks do not want to do business with a business that’s illegal under federal law, McGinley said.

While Pennsylvania allows marijuana dispensaries, it’s unclear what the federal government would do should it decide to step in, McGinley said. So far, the U.S. Justice Department is leaving these facilities alone.

“The good news from the cannabis industry point of view is that while federal law continues to say cannabis cultivation and production is illegal, there’s no appetite at the federal level to enforce that statute,” McGinley said. “Cannabis seems to be a very fast growing industry.”

In the meantime, property owners are trying to write provisions into their leases that protect them from potential federal enforcement practices. Essentially, the provision would outline how the tenant would conduct him or herself in a legal fashion, often requiring a large security deposit, he added.

On the purchasing side, buyers would need to prove they can obtain title insurance, even for a lawful dispensary business in Pennsylvania.

In other states, some cannabis businesses are bifurcating their operations, creating one entity as the licensed business and a separate one as the property owner, he said.

Getting creative

McGinley has seen massive growth in public support to legalize medical marijuana, as well pressure on states to legalize recreational use. That, he thinks, is giving many entrepreneurs the confidence to enter the industry.

One Lehigh Valley dispensary has established a rare real estate arrangement.

“Because of our business and the federal illegality of it, my preference was always to have a standalone building and not deal with lenders or tenants,” said Patricia Gregory, a lawyer at PG&R Law Firm.

Gregory is one of the owners of Keystone Canna Remedies, the first medical-marijuana dispensary in the state. The family owned and operated company leases the Bethlehem building from a family friend.

The building, which sits on Stefko Boulevard across from the Just Born factory, opened in early 2018. While it may be along a fairly high-traffic area, the building is not considered in the real estate world to be a Class-A (often newer, higher quality) property.

And one of the key reasons Gregory chose it.

“When I’m looking for real estate, I discard Class-A real estate,” she said. “Most of those kinds of properties have tenants that have use restrictions on the property. My preference is always to try to look for a nice location and stay away from Class-A properties.”

As a commercial real estate attorney, has seen many properties with marijuana use restrictions. However, among Class-D and C properties, a buyer can find less restrictive requirements.

She also believes that as long as cannabis business tenants are structuring their leases appropriately in their negotiations with property owners, they should have protection from legal pitfalls.

One tip would be to include numerous renewal options, she said. In addition, from a tenant’s perspective, it’s good to make sure the lease terms are tied to the market rent for retailers in general, not specific to cannabis users, which are sometimes treated differently, she said.

Moreover, buying a site can be an option if the right institution is behind the financing.

Gregory and the other owners of Keystone Canna used New Jersey-based Parke Bank to finance the purchase of a second Keystone Canna dispensary, which opened earlier this year on Hamilton Boulevard in South Whitehall Township.

“Having that as an option really increases what we can do,” she said. “Without having that kind of financing, buying wasn’t an option.”

Keystone Canna plans to open a third location in Stroud Township. It is seeking a building permit for a leased property.

The Stroud Township building has one other tenant and with that property under lease, Keystone plans to open that site in the first quarter of next year.

“What’s critical is you have to make sure you have sufficient term on your lease so you can control your rent,” Gregory said. “At least 20 years is a good length.”

Whether they buy or own their own real estate, it’s hard for any cannabis entrepreneur to set up shop, she acknowledged.

“But you have to weather those early years,” she said. “There’s always the hope the federal government will change the law. As time goes on, I think you are going to see some significant changes.”

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