There has been surge of interest in converting old flower-growing greenhouses in Monterey County to cannabis cultivation. Though this has brought a welcome increase in real estate values and, in some cases, a lifeline for family-owned greenhouses hit hard by the growing international flower trade, prospective buyers or commercial tenants looking to convert these properties to cannabis grows should take a hard look at the legal landscape and the suitability to the locality before jumping in.
In many ways, dilapidated greenhouses and cannabis cultivation would seem to be a perfect fit. Greenhouse owners see increased property values and a seller’s market. Cannabis cultivators see rural or semi-rural commercial space prebuilt for optimal plant cultivation conditions. And local governments see increased tax revenue and a welcome improvement of rundown properties.
However, such deals are far from turnkey transactions, as there remain important existing controls at the municipal, county, state, and federal level that must be considered and accounted for before putting pen to paper. Here are a few of the many things to consider as part of your real estate business plan:
- Local Regulations. This remains by far the most important factor for determining the viability of real property for medical cannabis business use. Under California’s Medical Cannabis Regulation Safety Act (MCRSA), local governments retain control over whether, how, and when cannabis businesses can operate and this is in addition to traditional local controls over zoning, land use, building safety, and occupancy. Monterey County (which has had an interesting history with cannabis regulation), has decided to allow old greenhouses to be converted to medical cannabis indoor cultivation operations, but under a strict set of requirements. Applicants must obtain a commercial medical cannabis permit and a use permit, which is allowed only for greenhouses within certain specific zoning districts and only under certain conditions related to on-site renewable energy generation, water conservation, offsite plant visibility, and security measures, among others.
- State Regulations. As we’ve been writing about for a while now, California is in the process of enacting a massive new regulatory regime for all types of medical cannabis businesses, including cultivation. If you intend to operate in California as a state-licensed cannabis cultivator and you haven’t yet formulated a business strategy for making that happen (e.g. corporate form, financing, local code compliance, environmental review, etc.) you are already behind the curve. Under MCRSA, California will not issue you a state cannabis license unless you can demonstrate local approval.
- Land Financing. Though some California banks, savings and loans and credit unions are dipping their toes into providing cannabis businesses with banking services, your chances of getting a traditional mortgage on a property that will be used for cannabis are slim to none. Consequently, most land deals end up being either all-cash deals or supported by secured notes. If a purchaser with a standard mortgage later leases the property to a cannabis business, because of federal cannabis illegality and anti-money laundering laws, the bank can call the loan, putting both the landlord and the tenant at risk. Bottom line: do not expect standard financing options if your greenhouse will be used for any kind of commercial cannabis activity.
- Commercial Lease Considerations. Commercial leases in the cannabis industry are not only unique in their requirements, they are now part and parcel of both the local and state licensing schemes because to get a state license as a tenant you need to show that your lease allows you to use the space for cannabis. It is essential for both landlords and tenants to have a properly drafted commercial lease that is tailored specifically to the proposed cannabis use and to the locale.
- Federal Enforcement. Cannabis remains federally illegal in all forms and uses. The recently renewed Rohrabacher-Farr amendment and current controlling case law prevent the federal government from enforcing the Controlled Substances Act against medical cannabis businesses in compliance with state law, but this is hardly a guarantee against federal civil asset forfeiture. One interesting effect of this federal-state legal purgatory is the protectionist benefits given to cannabis businesses. Whereas a Monterey greenhouse flower business would find it hard to compete with imported flowers, a cannabis cultivator in that same greenhouse benefits from the prohibition on interstate commerce in cannabis. In other words, because cannabis cannot legally be transported across the border (or even across state lines), cannabis businesses in California are NAFTA-proof.
Bottom Line: The cannabis industry, real property, and California state and local regulations are a complicated mix of legal issues, and whether you’re buying or renting, you need to invest real time and effort into sorting these things beforehand to prevent worlds of trouble down the road.