What Landlords Should Know Before Renting to a Marijuana Business

Wednesday, April 22, 2015

Melanie Sevcenko, GoLocalPDX Contributor

Come July, Oregonians will be blazing new ground with nothing to hide. Measure 91 goes into effect the first of the month and allows Oregonians to possess, use, and grow a limited amount of marijuana.

And with the legality of recreational weed, canna-business is sure to follow.

In January 2016, the Oregon Liquor Control Commission (OLCC) will start accepting licenses for four types of marijuana businesses: producer, processor, wholesaler, and retailer.

Already entrepreneurs are looking for the perfect spaces to launch new businesses.

“I’m seeing a large demand for commercial and industrial property in anticipation for 2016,” said Jacob Zahniser, attorney with Jordan Ramis PC, whose practice focuses on construction and real estate litigation. “I also expect to see a large increase in medical marijuana licensing as a ‘foot in the door’ to commercial licensing in 2016.”

A License is the Safest Bet

If you’re considering leasing a property to a canna-business, there are some legal underpinnings you should know as a landlord.

“With any business transaction, obviously you want to proceed with caution, and especially when you’re allowing someone to grow a federally controlled substance in your property,” said Amy T. Margolis, attorney with Emerge Law Group in Portland.

She stressed that as Oregon moves towards the business licensing of recreational marijuana next year, it’s important to deal with tenants who have the proper license.

“If you’re not dealing with an OLCC licensed cultivator, then you really want to deal with somebody who is at least following the medical marijuana rules.”

Other things to consider are a good credit score, no previous evictions, the usual. But a lot of it comes down to a landlord’s internal vetting process.

“You really do use – no pun intended – the smell test with these potential tenants,” continued Margolis, citing signifiers of a proper tenant as everything from good people skills to whether or not they have an attorney.

According to Jacob Zahniser, there are certain parameters a lease needs to address with a weed-based business.

At the very minimum, Zahniser suggests an early exit, or termination, in the event of law enforcement action. In addition, a detailed description of the permitted use of the property, a compliance with state rules and regulations, and insurance and indemnity clauses specific to a marijuana-related business.

Also, added Zahniser, “the landlord would be wise not to avoid including a percentage of tenant’s profits as a portion of the rent.”

A Legitimate Tenant

Philip, who declined to give his last name, manages Spot Properties LLC, which leases a small property to the Urban Farmacy medical marijuana dispensary in NE Portland.

He said his tenants are great, with no complaints. But Urban Farmacy was the only one out of 20 medical marijuana applications that made the cut.

“When you get into that realm there seems to be a higher level of people that that don’t have their organizational skills intact,” said Philip.

“I want to make sure the tenant has the right tools in the tool box to make a successful business,” he continued. “And also be able to tread lightly. There’s a lot of stigmatism with marijuana.”

Although Philip affirms he’s not a marijuana person, he said he would much rather rent to a marijuana-related business than a bar.

“I think marijuana is less impact, with less fighting and less weirdoes hanging out,” he said. “More people hang out outside of a hookah bar or a cigar bar than a marijuana dispensary, which is more of a boutique.”

But beyond the “mess” of bars or noise complaints from neighbors, Philip believes a marijuana business has a better chance of surviving than a pub or restaurant, where nine out of 10 fail.

The Right Kind of Property

Once OLCC applications for recreational marijuana start pouring in next year, landlords have to know which buildings are suitable for a canna-business.

The basic qualifications state that the building must be at least 1,000 feet from certain locations, like a school, with security features installed.

“Co-tenant perception should also be considered,” said Zahniser, “as other tenants in the building may not appreciate a marijuana-related business next door.”

Also, the owner or manager should consider the insurance on the building. If the marijuana-related business on the property alters the risk the insurance company agreed to, the business could void insurance coverage.

But perhaps most importantly, affirms Zahniser, the owner or manager should consider the impact on its bankruptcy rights.

“A landlord may not be able to seek bankruptcy protection if its tenants are in the marijuana business,” he said.

Who’s Afraid of the Feds?

The day the feds come knocking is a serious fear of some canna-business landlords.

In fact, a number of medical marijuana dispensaries in Portland declined to be interviewed for that very reason.

Although the Oregon Medical Marijuana Act was passed back in 1998, and Measure 91 is just around the corner, cannabis is still illegal under federal law.

But Amy T. Margolis says not to worry.

“I understand where the concern comes from. Those are big assets, and you might have your loan pulled… But I haven’t really seen a property forfeiture of a legal cannabis business for a very, very long time,” said Margolis.

She explains that federal law enforcement would have to be privy to knowledge that the landlord had gone beyond simply renting out the property, and was in addition aiding and abetting a criminal activity.

“We just don’t see that, almost at all anymore,” said Margolis.

One landlord who isn’t afraid is the property owner of Brooklyn Holdings Company, a prohibition-style “speakeasy” cannabis dispensary in SE Portland.

“I feel very confident because 23 states have medical marijuana, so it’s going to be real hard for the feds to eliminate that,” said Tom, who also declined his last name. “So I’m not that scared as to what the feds are going to do. I think they’d be pretty stupid to try to change that around.”

Tom said he would definitely rent to a recreational weed dispensary, as long as they follow the rules.

Margolis confirms, “I never ever tell landlords, no problem, no risk. But I do think as we move forward that risk has become substantially less.”

Melanie Sevcenko is a journalist for radio, print and online. She reports internationally for BBC World Service and Monocle Radio (M24) in the UK, and for Deutsche Welle in Germany. Melanie also reports for the online news source GoLocalPDX, in Portland, Oregon. Her work has been broadcast by CBC in Canada and the Northwest News Network, and published by Al Jazeera English, Global Post, Pacific Standard, the Toronto Star and USA Today, amongst others.

Related Slideshow: Ten Things to Know About Marijuana Legalization in Oregon

Here are ten things you need to know now that pot is legal in Oregon.

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1) Drug testing will continue

Despite marijuana being as legally permissible as a pint of beer, many of the largest employers of Oregonians will continue to include marijuana in their employee drug screens.

Fred Meyer, one of the largest employers across the state, said the company plans to continue drug testing its Oregon employees regardless of the new law.

Melinda Merrill, Fred Meyer communications director, said the company employs truck drivers, heavy equipment operators and other positions that require drug screening.

“We have to make our employees safe,” Merrill said.

Companies that employ heavy equipment operators are required to buy insurance. Companies that employ workers who operate machinery while simultaneously employing workers who do not are sometimes offered a lower monthly deductible if they test all of their employees across the board, as opposed to only testing a portion.

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2) Your neighborhood dealer may be able to stay in business

The average price for marijuana in Oregon is among the lowest in the nation at sightly over $9 per gram, according to data collected by priceofweed.com.

The economy for recreational pot in Washington failed to gain the footing that was expected by some experts. The notion of Seattle being crowned as the new Amsterdam went up in smoke after consumers saw how the state’s taxes increased the price of marijuana - three joints can run a Washington customer $75, while a gram of the plant’s dried flowers cost around $30.

While the taxation in Oregon isn’t expected to bump prices that high, customers who have grown accustomed to the state’s high quality, low-price buds and hash oils may turn their noses up at even the slightest increase.

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3) Taxes on pot will be different than Washington and Colorado laws

Marijuana sold from licensed vendors in Oregon will carry taxes of $35 per ounce on marijuana flowers, $10 per ounce on all marijuana leaves and trimmings and a $5 tax on all immature plants or clones. The tax rates will be reevaluated every two years and adjusted for inflation. The revenue will be allocated to support government services - 40 percent will support public schools, 20 percent will support law enforcement, 20 percent will support mental health and 5 percent will support the Oregon Health Authority.

State-licensed vendors may still face obstacles, however, when it comes to their federal income taxes. Internal Revenue Section code 280E denies any tax deductions and credits for businesses that traffic any controlled substances that are prohibited under federal law.

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4) You can’t smoke up wherever you please

The law stipulates that use of marijuana, including injection, ingestion and inhalation of the drug is prohibited in public places. In other words, you won't constanty be seeing (or smelling) people lining sidewalks lighting up a joint.

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5) There are also restrictions on growing

No one is permitted to have more than four marijuana plants at a time - considerably less than the 12 plants that Washington residents are allowed to grow. The law also restricts plants being grown in public view.

Sorry, window-sill gardeners.

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6) Marijuana DUIs may be addressed in future legislation

Unlike the Washington law, which included attached regulations concerning driving impairment, Oregon’s law has more room for interpretation.

Driving under the influence of marijuana is classified as a class b traffic violation, which carries a presumptive fine of $260 and is not to exceed maximum fine of $2,000. The Oregon Liquor Control Commission has been tasked with researching the subject of drugged driving and presenting its finding to the Oregon Legislative Assembly no later than January 2017.

After reviewing the OLCC report, the state legislative assembly will decide whether passing more extensive driving regulations will be necessary.

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7) Legalization won't take effect until summer.

Anyone over 21 will be allowed to possess small amounts of marijuana for their personal use from July 1, 2015.

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8) Crossing the Columbia River with a state-licensed spliff will catch you a felony

Although marijuana is simultaneously legal in Oregon and Washington, it's illegal to transfer the drug between the two states.

Measure 91 is only applicable to Oregon and marijuana remains illegal under federal law. Even with a physician’s subscription, marijuana is classified as a Schedule I controlled substance - meaning that anyone transporting it across state lines is prosecutable by federal agencies.

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9) Legalization could mean big money for financial service startups

It’s not just the vendors whose businesses will grow under legalization - companies like Greenpay are expected to expand rapidly once the new legal market gets its footing. Greenpay would allow consumers to instantly purchase marijuana using their smartphones.

Greenpay is a wholly-owned subsidiary of MyEcheck - a publicly traded company whose shares typically trade for less than ten cents on the New York Stock Exchange. With legalization efforts gaining momentum around the country, companies providing auxiliary services for the marijuana industry may create an economic boom.