In the preceding post, I covered the MME’s prospective landlord’s review and consideration of the regulatory environment, both public and private, governing such growing and prescription-filling operations. The landlord who reviews the state statutes and administrative regulations in its jurisdiction, and (if any) the CC&Rs that may apply to his building, will be able to calculate its risk in becoming an MME landlord. More than likely, a landlord will determine it’s worth the risk to proceed cautiously with lease negotiations with an MME. If so, the next imperative is to understand the types and extent of problems that can arise in the operation of an MME within commercial real estate improvements, and this post deals with that inquiry. Here are illustrations of what tenancy elements are unique to MME operations.
Environmental Constraints:
Smoke and odors: In a circumstance of multitenant buildings, but for A.R.S. §36-2806(G), smoke seepage into the air circulation system of the building would be a problem. If, however, “consume” includes smoking (an odd verbal construction, but ingestion can be through the lungs as well as through the stomach, I suppose), then customers and employees cannot smoke Cannabis within the interior of the premises – and perhaps not in the common areas, either.
In addition, Cannabis in its natural state gives off certain distinctive odors in the growth process that other tenants sharing an air handling system in a multitenant building may not desire to inhale. As the Cannabis plants resins age, the heads of the trichomes rupture, exposing terpines to the air (Clarke, Robert Connell, Marijuana Botany [1981] at 95).
Mold: The growth of mold is a real issue during the raising of the Cannabis plants. Among the best resources for reading on this topic are grower sites on the Internet, but the scientific explanation in brief is this: if the grower’s containers are too tight during the curing process, there will be a failure to vent gasses that will cause the formation of mold (See Clarke at 153).
Bugs: Leading pests in the indoor growth of Cannabis are spider mites and white flies (See Clarke at 165). Spider mites are especially aggressive pests during portions of the Cannabis growth cycle.
Root fungus infections: these occur as a result of high indoor humidity; ironically, high humidity is desirable during the curing process. (See Clarke at 165)
Fertilizers and pesticides/herbicides: There is a push in the grower community to “go organic” in the use of fertilizers and pesticides. This will not aid the marginal tenant struggling to generate revenue and has a lagging supply due to a dying or infested crop, or an insufficient inventory of Cannabis plants or buds. Consequently, there is real risk that some MME growers, pushed to the limit, will deploy fertilizers, herbicides and pesticides that contain components of “hazardous substances” or toxic materials regulated under federal or state environmental laws.
Water consumption: Growing Cannabis requires more water than many industrial/commerce park/back office occupants, which raises the issue of who appropriately is charged for the disproportionate use. The apparent solution is separate metering for the portion of the building where growing activity occurs; and this entails additional expense to the landlord unless this cost is passed through to the MME. If this is not possible for some reason of logistics or engineering, the landlord must arrange for the MME grower to be subsidizing the other tenants, instead of the other way around, in order to keep peace in the multitenant building or project with shared metering.
Economic Constraints:
Insurance problems arising from environmental/economic constraints: Mold is a four letter word in the insurance underwriter lexicon. Some landlords I represent are already being advised that no coverage will be afforded for the adverse consequences of indoor cultivation of Cannabis on the building’s systems and its other occupants. Indoor air quality, property damage and theft issues all require the underwriter’s consideration in the context of a MME operation.
Traffic, parking and vehicular operation impact on future tenant opportunities: if the MME operation generates a lot of traffic due to its location, then parking may become an issue within the project; this impacts not only existing occupants but potential future occupants with concerns about the parking stall to requirements ratio. Additionally, customers of the MME, who may be “under the influence” at any time during their visits to the dispensary may set other tenants or visitors to the project on edge. As stated in part one of this series of posts, the state statutes may not prohibit use of marijuana products in the parking areas of private property; therefore, landlords should not count on law enforcement to intervene with MME visitors.
Suits from deprivation of quiet enjoyment covenants: other tenants who are inconvenienced in any material way from any of the environmental or other issues that strike them as nuisances may lead to legal claims from breach of contract to gross negligence in admitting the MME tenant to the building or project. Gross negligence, ironically, at times is negotiated to be a carve-out from the tenant’s obligation to indemnify and hold harmless the landlord.
Image issues (on site visitation of other tenants, crime prospects): there is the potential that other tenants in a project hosting a MME will see fewer customer visits as a result of a revised “reputation” of the project. This later may translate into other building or project tenants declining to renew their leases or demanding a reduction in rent stemming from the diminution in image of their business premises. It is human nature to expect that crime in the project will increase as persons sufficiently desperate for drugs or cash attempt to break into the dispensary and/or the cultivation site. Owners and tenants of neighboring projects may be concerned about the value of their tenancies or property values by being adjacent to MME operations. This atmosphere may make the project or building more difficult to lease up in the post-MME occupancy period.
Volatility of MME tenancies: while there will be some experienced MME operators entering the Arizona (or any jurisdiction newly creating a clinical marketplace) MME market. Even given the governments’ requirements for experience in operating a dispensary and medical expertise, there is no guarantee that most of the MME operators will have the seasoning to operate a new MME facility. This creates the potential for failure of these operators to fulfill the full terms of their leases.
These issues are raised only to alert landlords to the opposite face of the revenue stream coinage. The negative potential consequences do not mandate that MME tenancies are doomed to create unacceptable risks. However, they do caution prudence on the landlord’s part. If the landlord is merely “hanging on” to the building or project where the MME is to locate, it is worth asking whether the landlord can survive until the MME proves itself to the landlord and to the other occupants of the building or project. The economics of the new tenancy versus the long term potential economic consequences may militate against making a deal with the new MME. Second, as this is a new paradigm in landlord-tenant relations, the landlord is well-advised to keep its MME tenant on a short leash, indeed. My next posts will address two matters: First, dealing with the landlord’s lender, if there is one for the lender’s building or project. Afterwards, a post will discuss lease provisions to tighten up the tenant’s obligations within the building or project, in an endeavor to allow the MME tenant latitude while maintaining good relations with the balance of the occupants that have long-term relations (in the form of leases with renewal options, one hopes) with the landlord.