Oregon Marijuana Laws: Buying and Selling Land is a Trip

There are 48,699 registered marijuana growers under Oregon’s Medical Marijuana Program. Some of these growers grow a couple of plants for a patient or two, and others produce at the program limits of 24 mature plants. There are grow sites with just one or two growers, and others with dozens of growers and 100 or more registered patients.

Buying and selling farmland for cannabis has its own legal rules
Buying and selling (and lending on) land for cannabis has its own legal rules

Under the new recreational program, grow sites will be even larger. Outdoor limits are currently capped at 40,000 square feet in total canopy, per license. That is close to an acre. As we have written here before, marijuana is now an official “crop” in Oregon, protected by the state’s right to farm laws. For these reasons, Oregon marijuana cultivators are buying up land in grow-friendly counties at a pretty good clip.

As with marijuana leases, marijuana land sale transactions are not typical and we are already starting to see documentation drafted by lawyers without cannabis experience that fails to account for this. Bank loans are out of the question, as chartered lenders are unwilling to finance the purchase of an asset that could be seized at any moment under the federal Controlled Substances Act (CSA), 21 USC § 856. That statute, sometimes called the “crack house statute,” provides that using or allowing real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance, is a federal crime. Marijuana is a Schedule I controlled substance under the CSA.

Without access to bank loans, cultivators who are not independently wealthy must deal with hard money lenders, if they can drum up the collateral; or, more typically, convince the property seller to carry a loan. In either case, the buyer gives the lender or seller a promissory note. That note almost always carries a higher interest rate than a standard bank note. Recently, depending on the size of the transaction and the term involved, we are seeing interest rates in the 10 to 12 percent range, but they can be even higher.

And then there is the very interesting issue of security. No sensible seller will lend money based only on a borrower’s promise to pay. Like any seller, a seller who finances the sale of real property to an Oregon marijuana cultivator will insist on a first deed of trust. That way, if the buyer misses a payment, the seller can take the land back by foreclosing on the deed. If things are done correctly, the seller will have priority over any other creditor.

A savvy seller may also insist on a security interest in the marijuana “crop” itself. You may be wondering how a non-licensed entity, like a creditor to a marijuana business, could legally seize and sell an acre’s worth of marijuana. The Oregon Liquor Control Commission (OLCC) has considered this, and its draft rules currently provide that “the Commission may issue a temporary authority to operate a licensed business to . . . a person holding a security interest in the business for a reasonable period of time to allow orderly disposition of the business.”

The rules go on to provide for issuance of a “certificate of authority” to the temporary licensee (in this case, the seller or creditor). This means that if a seller has perfected her interest in the marijuana crop by filing the appropriate financing statement, and a buyer stops making payments, the secured seller can actually seize and sell the marijuana. This would be done in addition to taking back the property, if recovery of the property did not cover the outstanding debt. Of course, the seller would have to be willing to seize and sell the marijuana in violation of the federal CSA, but that’s another story.

These are just a few of the more interesting angles on the sale of real property for marijuana cultivation. There is much more on this topic than we have written here, from standard considerations like the form of deed exchanged, to industry particular contract terms, like those related to the failure of a buyer to obtain or maintain OLCC licensure. Both buyers and sellers in these transactions must take special care to ensure that their interests are protected.