The Emerging Landlord and Cannabis Tenant Relationship – A Starting Point for Michigan Landlords

Since the Michigan Medical Marihuana Facilities Licensing Act went into effect in December 2016, a wave of new tenants has entered the commercial real estate markets in Michigan. 

While the medicinal cannabis industry is still evolving legislatively and administratively, landlords interested in leasing commercial space are encouraged to educate themselves now on the unique nature of the cannabis industry in order to capitalize on this growing category of tenants.  

A landlord’s general understanding of the cannabis business is one of the keys to successfully navigating the leasing relationship with a cannabis business operator.  I recommend any landlord preparing to lease space to a licensed operator consider taking the following action:

Familiarize yourself with the Michigan statute and any local ordinances regulating cannabis in your community. The statute, codified at MCL 333.27101 et seq, among other things, decriminalizes and regulates the growing, processing, testing, transporting and retail sale of cannabis for medicinal purposes.

It also mandates the establishment of rules relating to marihuana operations, and reaffirms a local municipality’s authority to allow or ban cannabis businesses within its jurisdiction.  Landlords should be aware that licensing approvals are not only obtained and maintained at the state level, but also with the local municipality in which the leased premises is located. 

Get to know the terminology. Yes! Marihuana is intentionally spelled with an “h” by the Michigan legislature.  Here are some other useful terms and their meanings:

• Cannabis, marihuana and marijuana are synonymous. The industry prefers the term “cannabis.”

• A Grower is licensed to cultivate, dry, and cure cannabis for sale to a processor or provisioning center.

• A Processor is granted the right to extract resin to create cannabis-infused products that can be sold in a provisioning center.

• A Provisioning Center is licensed to sell cannabis, cannabis paraphernalia and cannabis-containing products to qualifying patients and caregivers. 

• A Secure Transporter license permits the transportation of cannabis and cannabis products between grower, provisioning centers, processors and compliance facilities.

• A Safety Compliance Facility performs testing to certify that cannabis is reasonably free from biological and chemical containments.

Find out all lawful operations the tenant has applied for at the premises to determine suitability.  A grower, processor and a compliance facility will have leasing needs similar to those of a warehouse tenant and have less customer traffic concerns when compared to a provisioning center. 

Depending on the premises, these operators will require the ability to make significant improvements to the space to accommodate security, ventilation, equipment and electrical needs. Whereas a provisioning center will be desirous of a built-out space and have typical retail tenant requirements. 

The license held by the operator provides the landlord insight as to the intended operations and allows for the parties to determine if the space is appropriate for the tenant’s intended use. Almost always, regardless of license category, cannabis tenants will be making some improvements to the commercial space to fit operational, regulatory and licensing requirements. 

We encourage landlords and tenants to agree in advance on the extent and ownership of the improvements to be made to any leased premises beforehand so that the parties have a mutual understanding relating to the changes to be made to the space. Understanding the type of operation permitted under the tenant’s license and the local government’s cannabis ordinance helps a landlord identify which type of cannabis tenant would be best suited for its commercial space, and anticipate their likely concerns.

Review your obligations as a landlord. Do any current tenants have restrictions in their leases that would forbid a cannabis tenant from operating at the property? Are there any financing covenants or restrictions prohibiting illegal activities at the property that bind the landlord? 

It is important to remember federally-insured lenders will not grant loans to cannabis businesses, regardless of state approval, because cannabis is still illegal under federal law. In fact in April 2018, in response to the growing cannabis businesses across the country, the Small Business Administration issued Policy Notice 5000-17057 banning SBA loans to any business deriving revenue from cannabis.  The exact language states as follows:

“Because federal law prohibits the distribution and sale of marihuana, financial transactions involving a marihuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marihuana-related activities or that support the end-use of marihuana may be ineligible for SBA financial assistance.”

This fact is extremely important not to miss as landlords with existing financing arrangements on the property could be in breach of their financial covenants by leasing space to a cannabis business. Therefore, every landlord should consider prior to entering into a lease agreement with a cannabis tenant whether or not their current and future financing opportunities may depend on the availability of federally insured loans, grants or other programs.

Consult with an attorney familiar with the requirements of the cannabis industry who can assist the landlord negotiate lease terms, review financing commitments, and advise the landlord as the tenant progresses through the lengthy multi-step approval process. 

After the tenant has pre-qualified for a cannabis business license, the tenant proceeds to step two, wherein the tenant must identify and secure the targeted real estate. At this point the negotiations between the landlord and tenant will need to move towards finalization.

However, the landlord should keep in mind that it is not uncommon for a cannabis tenant to request a termination clause in the event state and local approvals to operate in the location are denied or even later revoked.  While this option to terminate the lease by the tenant may make the arrangement seem less attractive to some landlords, I have helped landlords negotiate language designed to minimize these less beneficial terms, such as sunset clauses and guaranteed minimum rent provisions.

Retaining the services of an experienced attorney can help the landlord identify and strategize early on how to address the tenant’s demands to ensure the needs of both parties are met as practical as possible.

Although the landlord and cannabis tenant relationship may be new to Michigan landlords, the uncertainty of how to navigate the relationship can be alleviated by developing a general working knowledge of the industry and obtaining the assistance of counsel.

Taking the action outlined above will help landlords determine if leasing to cannabis tenants will or will not be an available option to help grow their real estate assets.

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