Medical Marijuana Act Raises Thorny
Challenges for Commercial Landlords
Landlords and tenants
should be prepared to address issues that include security, lender and insurance
concerns, objections from other tenants, lease termination, tenant improvements,
payment, and impacts on CAM
In November 2010, Arizona
voters passed the Medical Marijuana Act, which legalized the sale of limited
quantities of medical marijuana to qualifying patients throughout Arizona.
Medicinal marijuana raises a host of issues ranging from licensing to
landlord-tenant/real estate concerns to employee workforce use. Licensing is
subject to regulation by rules that have already been promulgated – and likely
will be amended and refined – by the Arizona Department of Health Services
Medical Marijuana in Arizona: The
Dispensary Application Process
Medical Marijuana Dispensary Update
Less clear is how the Medical Marijuana Act affects the landlord-tenant
relationship and the precautions a landlord can take when faced with the
opportunity of renting to an individual or entity that seeks to cultivate and
distribute medical marijuana.
Before we discuss the landlord-tenant issues, it might prove useful for us to
discuss some background topics, including the pending legal challenges that
could delay implementation of the Act or undermine it altogether. (If you
prefer, you can skip ahead to the landlord-tenant discussion.)
Conflicts with Federal Laws, Policies. It is important to point out that the
rules and procedures in Arizona for growing and selling marijuana almost
certainly contravene Federal law dealing with controlled substances. The current
administration does not appear to be eager to prosecute (for violations of
Federal laws) qualifying patients who comply with the Medical Marijuana Act (for
fear, perhaps, of a test of the supremacy doctrine). Large distribution
operations, however, may be a different story. Furthermore, while the current
administration has adopted a more relaxed approach to enforcing Federal laws
against people complying with a state-run medical marijuana program, future
administrations may take a much stricter approach to enforcement. (Incidentally,
if your shopping center or facility is located on a reservation, the thinking is
that the Federal government is not going to look the other way.)
Dispensaries. As currently structured, medical marijuana will be sold to
qualifying patients, for the most part, through registered non-profit
dispensaries. (It is not clear whether the dispensaries will look like
pharmacies or like head shops – perhaps more the former than the latter.) There
will be a limited number of dispensaries throughout the state – approximately
one dispensary for every ten traditional pharmacies. During the first phase of
dispensary registrations, the DHS is limiting dispensaries to one for each
“Community Health Analysis Area” (CHAA). The boundaries of each CHAA are based
largely on population, and allowing one dispensary per CHAA is designed to
spread the dispensaries across the state in accordance with population density.
Notwithstanding the challenges to the Act's implementation, we believe it important to discuss the real
estate issues associated with the Act so that property owners and tenants can
Special Use Permits. Most of the activity so far has revolved around zoning or special use permits.
Under the new legislation and the corresponding regulations, cities cannot
prohibit the operation of dispensaries altogether. However, cities are allowed
to enact reasonable regulations and restrictions on the use and operation of the
dispensaries, and a number of cities have already done so.
restrictions are similar to the statewide restrictions relating to liquor stores
– distance from schools and churches, special setback requirements, and the
like. We have all read about and perhaps attended land-use hearings in which
residents take the position that they don’t want any dispensary in their city,
and certainly nowhere near their homes (similarly, some businesses that are
located near a proposed dispensary also oppose the granting of the applicable
zoning and/or special use permit).
As mentioned above, a jurisdiction cannot simply refuse to grant permission, but anyone who
frequently attends zoning hearings knows that virtually anything can happen –
and it is not going too far out on a limb to predict that we will see litigation
challenging jurisdictions that try to be overly strict.
Of interest to landlords is the prospect that a jurisdiction being asked to
grant a special use permit or zoning request may require that the dispensary’s
landlord approve or sign on to the application of the dispensary operator.
Owners of places that are likely locations for dispensaries – e.g., shopping
centers, medical office complexes, light industrial sites – may face a number of
real estate issues, most of which will need to be resolved in the lease
negotiation and documentation. Here are a few issues on which landlord might
want to focus.
Security Issues. State rules require a number of 24/7 security measures,
including the use of video cameras, alarm systems and exterior lighting. Also,
it seems likely that many local zoning ordinances will require that the
dispensary provide additional security beyond that required by state law.
In negotiating leases, landlords might want to include more inspection rights
than usual, to check for items ranging from fire hazards to indoor air
circulation and air quality. However, a landlord will be precluded from
inspecting some areas of a dispensary or cultivation operation unless
accompanied by an authorized dispensary agent. The lease should deal with the
additional expenses involved – presumably, this would not be a CAM charge, but
rather the tenant would bear the additional expenses of the extra security – but
that is all subject to negotiation.
Lenders. For many projects, the loan documents require lender approval of the
leases. There is some thought in the industry that some lenders would rather not
have dispensaries in their tenant mix.
Insurance. The same can be said for insurance. Many landlords have blanket
insurance on the entire project, and some insurance companies not only have to
be notified, but may choose not to insure. Further, it is unclear whether a
tenant can obtain “tenant insurance” of any type if the tenant is known to be
violating Federal drug laws.
Other Tenants. On the subject of tenant mix, landlords will need to deal with
the existing tenants (and keep in mind future tenants), some of whom may not
want to have a dispensary near their business or in their center. Some larger
tenants may even have approval rights over certain types of tenants.
Lease Termination. In addition to usual protections that landlords try to get
(for example, personal guaranties), there is some concern that, especially with
the potential Federal law problem, leases may wind up being prematurely
terminated, and any lease should deal with that issue.
Tenant Improvements. Needless to say, tenant improvement dollars are often a
part of any commercial lease negotiation. Dispensaries, especially those
producing marijuana on site, are likely to have very unique TI’s that are
unsuitable for a replacement tenant after the lease expires or is terminated.
A landlord that is paying for all or part of the TI’s might want to look for a
(guaranty) payback if there is an early termination of the lease.
Payment. Oddly enough, there may be difficulties in actually paying the rent. In
other states with medical marijuana laws, some dispensaries have had trouble
opening bank accounts, since banks are wary of dealing with what might be called
“drug money” (especially since the activity is, at least technically, a
violation of Federal law). In fact, American Express recently announced that it
would decline transactions for the purchase of medical marijuana. While this
will initially affect qualified patients more than dispensaries, such
limitations by financial institutions may also apply to business expenses (such
as rent) for dispensaries and cultivation sites. This might become particularly
interesting where there is a lockbox situation in place.
Parking Ordinances. Some observers speculate that parking ordinances will
overburden parking lots. The basis for that concern is unclear, but there has
been some commentary on that point.
Other Issues. Landlords will have to deal with such mundane issues as the
disposal of waste products, such as equipment, chemicals or excess inventory. If
the inventory will be “produced” on site, both landlords and their insurance
companies should be wary of fire (growing marijuana requires a significant
amount of lighting) and on-site chemical storage, not to mention the potential
effect on CAM of excess power consumption.
Landlords should be especially cognizant of disclaiming warranties of
suitability and warranties for this particular use, wanting the tenant to take
the risk that the tenant will not get the required permits (or later be shut
Landlords affirmatively seeking to have a dispensary as a tenant should also
consider the legality and feasibility of entering into conditional leases with
multiple dispensary applicants and executing the lease with the party that is
ultimately awarded the right to operate a dispensary. While state regulations do
not prohibit such conditional leases, a landlord should thoroughly investigate
whether local ordinances would preclude conditional lease agreements.
Many of these issues are relevant not just in a landlord/tenant scenario, but
also where the dispensary operator actually owns the site.
If you have questions about the issues discussed in this article or other
topics related to medical marijuana, please contact
Steve Benson or