Landlord Considerations: Medical Marijuana Cultivation Centers and Dispensaries

On March 30th the District of Columbia Department of Health announced the first group of businesses that are eligible to establish marijuana cultivation centers as part of the District’s medical marijuana program. The businesses that will be eligible to establish marijuana dispensaries are expected to be announced in late June. The implementation of D.C.’s medical marijuana laws, which were enacted in 2010, presents a new twist on otherwise standard leasing considerations for local commercial landlords who are contemplating leasing space to such operations.

The Obama administration announced during its first year in office that it would not prosecute patients or operators of cultivation centers and dispensaries provided they comply with state medical marijuana laws. However, that statement of enforcement policy does not negate the fact that such activities are still a violation of federal controlled substances laws. One possible consequence for a landlord who permits a tenant to operate a medical marijuana facility in the landlord’s building is that the building could be subject to forfeiturebased on the illegal activity.

Given that medical marijuana operations can be shut down at the will of the federal government (or the D.C. government if the operator violates the terms of its permit), a landlord could unexpectedly find itself with an empty storefront. Landlords may want to consider exit strategies in case the business is shut down or the landlord becomes concerned that the property could be in peril, such as:

- Require a substantial security deposit.

- Require a personal guaranty from the principals of the tenant regarding the tenant’s obligations under the lease.

- Make the lease terminable by the landlord if governing authorities signal a change in enforcement of federal laws.

- Have the tenant pay for its own build-out as a way of minimizing the landlord’s losses in the event the lease is terminated before the end of the term.

Neighborhood associations in areas where the cultivations centers and dispensaries are slated to go often assume the worst and imagine that these operations will bring crime into their neighborhoods. However, the regulations in D.C. require that medical marijuana facilities maintain strict security, so a landlord might find that its building is more protected than if it had leased the building to a less controversial tenant. The neighborhood may also benefit from the security measures that are required of cultivations centers and dispensaries.

A landlord’s hazard insurance premiums might increase as a result of having a cultivation center or dispensary as a tenant in the building because insurance companies are not used to underwriting the risk of such operations. To account for this possibility, a landlord can include language in the lease stating that any increase in insurance premiums as a result of the tenant’s use of the premises shall be paid by the tenant as “additional rent.”

If a landlord’s building is encumbered by a mortgage, the landlord should also look closely at its loan documents to see if the lender is allowed to approve all leases. If so, its lender may be concerned about approving a lease for an “illegal use” given the possibility, however remote, that the collateral could be forfeited or that it might be subject to unexpected vacancies.

Thus, when negotiating a lease with a cultivation center or dispensary, landlords should focus on the provisions described above in light of the unique challenges that these operations face and the fact that insurers, lenders and regulatory authorities are not accustomed to them.

Related topics: Landlords, Leasing