Hashish actual property transactions will be notoriously sophisticated – rather more so than your common actual property deal. On January 9, 2024, I’ll be talking on a panel referred to as “Navigating Actual Property Points Impacting the Hashish Business” 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. Immediately, I need to preview among the key points we see in these sorts of offers.
Location, location, location
A very powerful think about 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 often hyper restrictive for hashish firms. Hashish companies could also be relegated to very small areas inside a metropolis. Permissible zones typically change relying on the kind of use. For instance, some cities could permit storefront retail amenities nearer to residential areas, whereas you may just about warranty that unstable manufacturing will likely be caught in industrial zones.
- States and cities additionally impose every kind of location-specific restrictions. Hashish companies, for instance, could also be prohibited inside X ft of colleges, parks, church buildings, libraries, and many others. In locations like California, cities typically add restrictions on prime of state-specific necessities.
- States or cities may impose limitations on the variety of hashish companies that may be positioned in a selected space. Typically we see caps on licenses inside a metropolis (extra on that later), whereas some cities will as a substitute prohibit two totally different hashish companies from current inside a sure distance from one another.
- Along with location-specific points, there could also be a bunch of property-specific points that would disqualify a possible property. A bit of actual property could also be correctly zoned and outdoors buffer zones, however could not adjust to native parking necessities, setback necessities, electrical energy wants, and so forth.
Every of the problems above will be automated disqualifiers for a parcel of actual property. Issues like buffer zone places will 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 software, and it might lose out on its probability to take action. All of that is to say that performing diligence on a property and its location is totally important previous to getting into right into a lease or committing to buy a chunk of actual property.
Shopping for v. leasing?
When a hashish firm finds a great piece of property in a great location, the following most necessary choice it must make is whether or not to purchase it or lease it. There are some key exceptions right here, like massive farms or processing amenities in industrial or agricultural areas. However typically, most hashish firms are inclined to lease. There are a variety of the explanation why hashish firms decide to lease actual property as a substitute of shopping for. I mentioned that intimately right here. However usually talking:
- Hashish firms are startups with restricted funds that decide to lease, reasonably than purchase.
- Shopping for actual property is often rather more sophisticated than leasing it.
- Companies don’t need to decide to a multi-million greenback buy earlier than realizing they’ll safe a license and/or have any prospect of success.
- Financing is a giant problem! That brings me to the following level.
Financing, escrow, and title
Securing financing has lengthy been a problem for hashish firms. The truth is, my final submit analyzed key points that hashish firms can anticipate when attempting to safe financing. Few startup hashish firms are sufficiently capitalized to buy actual property with out financing, and since conventional financing is sort of by no means obtainable, patrons often find yourself with a lot increased rates of interest and extra lender-friendly phrases.
However patrons will not be the one ones that must take care of financing-related points. If a hashish firm needs to lease a chunk of property that’s topic to a mortgage, it’s going to most likely not occur. Large banks don’t often financial institution hashish cash, and often could 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 issue right here is getting escrow firms or title insurance coverage firms 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 is no such thing as a means a hashish firm can assure that it’s going to safe a license. Even in non-competitive jurisdictions, there are a bunch of potential property- or location-specific points that would bar a license software. The possibility of shedding out is way, a lot increased in a metropolis with 3 licenses up for grabs and 30 totally different candidates. I lately wrote about some key points for aggressive licensing jurisdictions and actual property leases right here.
In fact, 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 is just not binding.
- Choices to lease or buy upon securing a license, versus full-scale leases or buy agreements, could be a good solution to tie up a chunk of property whereas ready for a license to problem.
- Leases with termination rights if a license is just not secured are yet one more solution to hedge in opposition to denial of an software.
It’s key to level out that licensing authorities could have strict necessities on what a tenant wants to indicate to be able to apply. Some cities won’t permit 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 not less than some tenant enhancements to their facility to be able to get licensed. Tenant enhancements can result in will increase in actual property taxes. It’s finest observe to deal with who’s accountable 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 may think about, this prices some huge cash. Savvy tenants could attempt to negotiate some form of tenant enchancment allowance from the owner. Or they could use their enhancements to justify decrease hire or an extended lease time period.
- Kind business 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’s going to additionally stop 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 yr preliminary phrases. In states like California the place licenses are successfully tied to a single piece of actual property eternally, 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 workout routines them). This clearly could be devastating for an applicant who couldn’t transfer its license elsewhere.
- Buy choices are additionally necessary. Hashish lease hire tends to be a lot increased than market hire for comparable non-cannabis makes use of. And it nearly at all times will increase yr over yr. Companies with multi-year lease phrases might want a purchase order choice in order that they’ll decide whether or not it makes extra sense to purchase the property outright (if doing very nicely) versus paying X occasions market fee every month.
I might maintain 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 kind lease from a traditional business transaction is sort of at all times a nasty concept, and failing to correctly diligence actual property can result in repercussions.
