Understanding some of the major issues regarding commercial cannabis leasing.
We at California Commercial Realty Advisors pride ourselves as being experts in the commercial cannabis real estate market. While many clients come to us expressing an interest in renting out their commercial spaces to cannabis cultivation or distribution, they often do not know what to expect. To educate yourselves on some of the challenges and concerns related to commercial cannabis real estate, here are the answers to come frequently asked questions.
1) “As a commercial landlord, what are the risks of renting to a cannabis tenant?”
While cannabis is legal in the state of California, the federal government continues to view it as an illegal substance. This means that, according to federal drug enforcement laws, landlords could risk having to forfeit their property and assets for knowingly renting to cannabis tenants. While this sounds bad, the federal government does seem to be taking steps toward legalization. Recently, the government has abandoned its federal crackdown on cannabis and taken other steps that indicate that its stance on marijuana may soon align with public opinion. If you are a commercial landlord leasing to a cannabis tenant, you need to ensure that your lease agreement is in strict compliance with state law, ensure your tenant is following the necessary guidelines, and ensure that you have termination contingencies in the event of law changes or federal drug enforcement actions.
2) “My property insurance will increase, should I pass this cost to my cannabis tenant?”
Rather than remaining with your current insurer, you will need to secure new insurance if you are renting to a cannabis tenant. This is because your insurer will probably drop you when they find out who you are renting to. So, before you make an agreement with your tenant, make sure you secure coverage from an insurer who will offer policies to cannabis businesses. As the cost of your new insurance may be high, you can charge your tenant a premium to make up for this additional cost.
3) “Will the mortgage on my building be affected if I rent to a cannabis tenant?”
While every mortgage contract is different, chances are that renting to a cannabis tenant will impact your mortgage agreement. Most loan agreements contain wording that requires the property be used according to “all laws.” As cannabis still isn’t federally legalized, renting to a cannabis tenant could violate your building’s lease agreement. To ensure that you do not lose your financing, you may need to shop around for hard-loans. It’s best to do this before you make an agreement with a tenant.
These are the answers to some of the most frequently asked questions about commercial real estate leasing to cannabis tenants. Do you have additional questions regarding cannabis leasing or your commercial or industrial real estate needs in general? If so, contact the team at California Commercial Realty Advisors, Inc. Our dedicated team is ready to assist you today.