Robert Koonin And Cynthia Thomas, co-authored the article “Look before you lease: Landlord considerations in renting to the cannabis industry,” published on the front section of New York Real Estate Journal’s website. Click Here to read the article or see below.
Imagine reading the newspaper when a headline catches your eye, “New Market Expecting Multi-Billion Dollar Growth in Coming Years.” You continue reading in the hopes of uncovering more about this unfamiliar industry and gaining insight into how you might, as a commercial landlord, be able to take advantage of such potential growth. When you realize that the article is addressing New York State’s recent legalization of recreational marijuana, you begin wondering whether you are equipped to wade through the murky waters of an entirely new regulatory landscape. While there are still many unknowns, and the final regulatory framework remains uncertain, you can undoubtedly be well positioned to ensure that you are at the forefront of this bourgeoning, multi-billion dollar, market.
On March 31, 2021 governor Andrew Cuomo signed the Marijuana Regulation & Taxation Act (MRTA) legalizing cannabis use for adults 21 years of age and older in New York State.1 The licensing process for cultivators, processors, distributors and dispensaries will be regulated through the Office of Cannabis Management (OCM) governed by the Cannabis Control Board2 and while retail sales are not anticipated to begin until 2022, the moment is ripe to begin thinking critically about how to take advantage of market opportunities. The New York Medical Cannabis Industry Association recently retained MPG Consulting to, among other things, quantify the necessary retail licenses and cultivation space required to facilitate the cannabis market.3 Total market size in New York is estimated to reach $4.6 billion in 2023 and is projected to grow to $5.8 billion by 2027, resulting in a total economic impact in excess of $10 billion.4 As the market develops, not only will demand for retail space increase, but it is estimated that approximately six million s/f of cultivation space will be necessary to meet market demand.5
Before diving headfirst into the market, there are several matters that commercial property owners must weigh and consider. Importantly, the MRTA provides that no applicant will be granted a retail license unless the applicant can demonstrate that it has control over the premises through direct ownership, a lease, management agreement, or other agreement.6 Site control is a requirement that is routinely necessitated by New York State in other non-cannabis related areas of healthcare (e.g. hospitals, nursing homes and other Article 28 facilities). Consequently, landlords must be willing to negotiate and enter into a lease prior to confirmation that the proposed tenant has received license approval.
In addition, landlords owning properties financed with mortgages from federally charted banks will find themselves prohibited from leasing to cannabis related businesses, such as retailers, cultivators, processors, and distributors. Marijuana is still deemed an illegal drug under federal law and financial institutions are prohibited from lending to businesses involved in the sale or production of marijuana. Fortunately, commercial property owners may find relief from this restriction as the Secure and Fair Enforcement Banking Act of 2021 or the SAFE Banking Act of 2021, was recently passed by the United States House of Representatives. The SAFE Banking Act of 20217 offers a glimmer of hope by prohibiting federal banking regulators from punishing a financial institution for providing banking services to cannabis-related businesses. Unfortunately, until formal legislation is enacted some commercial landlords may find their hands tied and should proceed cautiously before leasing space to cannabis related entities.
Landlords in New York could also face additional hurdles if their property is located in a municipality that exercised their “opted-out right.” Municipalities have the choice to “opt-out” by adopting local laws requesting that the Cannabis Control Board prohibit the establishment of retail dispensary licenses and/or on-site consumption licenses in that particular jurisdiction. Municipalities have until December 31, 2021 to make this election, and such election can be subsequently repealed at the municipality’s election.8 While the MRTA specifically provides that on-site consumption licenses will not be granted to any premises within 500 ft. of a school or 200 ft. of a house of worship, municipalities are also free to adopt reasonable restrictions on the time, place and manner of operations, provided that such limitations do not effectively make the operation of such business “unreasonably” impractical.9 As such, even if federal and state laws allow landlords to lease space to cannabis-related tenants, local municipal law may create another roadblock.
Although the regulatory framework remains unclear, as the market matures, it will certainly offer a new avenue of opportunity for commercial landlords in all property classes, provided that due consideration is paid to local, state and federal requirements.
Should you have any questions regarding the above, please contact us at 516-393-2200 or firstname.lastname@example.org.