In this and four subsequent posts, I’m discussing from the landlord perspective some insights into leasing to medical marijuana enterprises space in commercial buildings, primarily in industrial and light assembly (commerce park-style) projects.  Fourteen states and the District of Columbia have approved the sale to licensed patients of smoke-able and consumable versions of Cannabis.  Another nine states have legislation in the works for consideration by lawmakers.  It appears that if the federal government holds its course, this retailing to prescription holders is here to stay.  There is, admittedly, some uncertainty about the federal posture in the enforcement of the Controlled Substances Act, which schedules Cannabis as a drug that cannot be sold, transported or possessed for sale without the commission of a crime.  In October of 2009, the Justice Department issued a letter indicating the Obama Administration’s determination not to prosecute users of Cannabis having legitimate medical credentials or prescriptions.

In February of this year, however, the U.S. District Attorney for the District of Northern California advised the Oakland City Attorney and the California Attorney General that it would not sit idly by while that city licensed commercial (unattached to a dispensary operation and growing in bulk) cultivators.  No doubt the city was miffed, since the licensing fees (including application fee) for the six growers it hoped to license would have raised more than a Million Dollars for the city.  However, states will continue, it seems, to seek additional tax revenues.  In addition, one wonders if the federal authorities figure that non-prosecution of legitimate medical marijuana enterprises may discourage the export of firearms for growers south of the border in some small degree.  Whatever the impetus(i) may be, it seems that medical marijuana use will be licensed in a majority of American states by decade’s end.  This presents certain opportunities and constraints for commercial landlords in communities that have adopted ordinances to permit these activities in states where medical marijuana laws apply.

Now, this post and those to come will not be about the state (or applicable local) government’s rules for establishing and monitoring medical marijuana businesses, shortened to “MMEs” from here on.  Real property issues are the sole focus of this exposition, particularly offering advice for landlords to contemplate while they consider whether or not to rent space in their buildings and share common areas with these new MMEs.  In any state where medical marijuana cultivation and sale are permitted, the landlord’s first step is to become familiar with the state statutes and accompanying administrative regulations that impinge on real estate matters, such as the physical occupancy requirements for growers and retailers.  Since I’m based in Arizona, let’s examine the rules of the road here for illustration.

Follow-up on passage of the Arizona Initiative Measure effective December 14, 2010 (Prop. 203)  are statutes found in Title 36, Chapter 28.1 of the Arizona Revised Statutes (the Arizona Medical Marijuana Act) and the regulations to become part of Title 9 (Health Services), Chapter 17 (DHS – Medical Marijuana Program) of the Arizona Administrative Code.  The latter regulations’ initial round will be final around the end of this month, now that the comment period is near its end.  (Of course, all local communities adopting ordinances have their own regulatory scheme requiring compliance by operators, some of which seems duplicative of state regulations but most of which touch on land use considerations such as separation of dispensaries from churches, schools and one another.)  The state statutes, being harder to modify, are the landlord’s first stop on the road to deciding if its property is eligible for rent.  Perhaps fortuitously, there are nearly no Arizona statutes with much to say about real property requirements.  These are all contained in A.R.S. §36-2806 and relate to a secure facility entrance, cultivation of an enclosed locked facility, which means a secure area that only a cardholder can access.  The regulations of the Department of Health Services elaborate a bit on the characteristics of the “locked facility”; and that’s about all landlords have in the realm of reference material courtesy of the Arizona government.  But that’s not the end of the analysis of whether there are any restrictions on implementing an MME operation on your property.  Of course, a landlord must review the zoning ordinance in the applicable jurisdiction.  The city ordinances in Maricopa County have some similar qualities, but each has particulars that distinguish them one from the other, so reading one is not tantamount to familiarity with all.

Next, if you’re in a commerce park or among a group of industrial/warehouse buildings that form a “project,” prior to agreeing to rent anything to a MME, you may want to review the CC&Rs for that project.  Here’s why:  Explicitly or implicitly, the declaration may ban such types of businesses.  Permitted use-type clauses have to be reviewed, and legal advice obtained where needed.  For the uninitiated, declarations are private multiparty contracts among all those owners within the project.  Winning approvals from the city of location and the state does not ensure that the MME use is “allowed” in the project, and any other owner of property in the project likely can move to enforce a prohibition against an illegal use.  Let’s review here; the federal Controlled Substances Act makes possession, transport and sale of Cannabis illegal acts; and the Supreme Court of the United States has indicated that the Supremacy Clause of the U.S. Constitution still allows the federal government to control the industry should it choose that path.  That’s the decision in Rausch v. Gonzalez from 2005.  Because the Department of Justice has been perfectly vague about what its intentions are in terms of enforcement, other than giving the appearance that they will not prosecute users of Cannabis with a legitimate prescription, the commencement of a prosecution could be followed shortly by a lawsuit by another owner of property in the commercial subdivision to compel closure of the MME’s operation.

Another item sometimes appearing in CC&Rs for a project addresses the concept of exclusively “first class” business operations within the project.  If the Declarant remains an owner of any of the property in the project, that party’s intention may be persuasive in the event of a contest between an MME landlord and another owner of property in the project.  If there is no Declarant, whether the original or its successor, the issue of “first class” occupancies could turn on community standards measured in the vicinity of the project of the same character.  In either event, the thoughtful landlord will reserve in the lease this landlord’s election – that a prosecution of a suit to enforce a restriction under the declaration of CC&Rs by another owner in the project be grounds for terminating the lease in the landlord’s election.  And certainly, a judgment against the landlord arising under a declaration dispute should be grounds for termination with impunity, since the plaintiff’s judgment will be in the form of an injunction, like as not.  One must face the fact that some owners and tenants within a project will not think of a dispensary, cultivation site or not, as a “first class operation,” notwithstanding the fact that A.R.S. §36-2806(G) prohibits consuming marijuana on the “dispensary property.”  (Then too, the legislature didn’t define “consume on the property,” so we don’t know whether that impacts (i) leased premises that are not owned by the dispensary’s owners, or (ii) the common areas of a project, since often in a lease the common areas are “used,” but not leased, by the tenant.)  Some will not be able to avoid the mental image of persons “using” their prescription products within the boundaries of the project, including in the parking lot.  While Section 36-2802(C) doesn’t sanction smoking marijuana in “any public place,” typically the common areas of private property aren’t “public places,” so it’s quite unclear whether the state has solved the problem of loitering while ingesting Cannabis products.