The legalization of marijuana presents significant opportunities for property owners looking to cash in on California’s budding cannabis industry. But what do people really know?

Connect Media turned to a pair of panelists at our recent Connect Los Angeles conference, Cox, Castle & Nicholson’s Amir Sadr and David Wensley, for a deep dive into a burgeoning CRE sector. The lawyers shared insights into what’s taking place, how it impacts landlords, lease considerations, rent, security deposit, and collateral issues and what commercial real estate industry players need to know now.

Look for our special three-part report on cannabis and CRE in the coming weeks. In this week’s installment, Sadr and Wensley cover the regulatory framework and local jurisdiction licensing.

By Amir Sadr and David Wensley

With voter approval of Proposition 64, the Adult Use of Marijuana Act (AUMA), in November 2016, the recreational use of cannabis by adults age 21 and older became legal in the state of California. Over 56% of voters expressed their approval of AUMA, indicating that a significant portion of California’s population no longer stigmatizes cannabis use, even for recreational purposes. Broad voter support may also suggest that commercial property owners view the cannabis industry as a legitimate opportunity to secure new tenants and increase returns on their investments.

As of January 1, 2018, when the state began issuing temporary licenses for recreational cannabis operations, the growing consensus is that the legal cannabis industry will develop exponentially. The rise in consumer demand for legal cannabis has led to increased prices for raw land and industrial buildings for grow operations, industrial facilities for manufacturing and distribution, and retail space for the sale of cannabis and cannabis-related products. Annual gross revenue projections for the nation’s legal cannabis industry are estimated to grow from approximately $6.7 billion per year in 2016 to more than $20 billion by 2021, and California is expected to garner a material share of the country’s overall cannabis market.

Regulatory Framework

With the passage of Proposition 64, state regulators faced a dilemma whether to continue with two separate regulatory tracks for legalized cannabis—one for medical use under MCRSA and another for adult recreational use under AUMA—or to consolidate them. In June 2017, Governor Jerry Brown signed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which called for merging the medical and recreational laws into one unified system. Under MAUCRSA, three regulatory agencies govern legal cannabis in California:

1) Department of Consumer Affairs, Bureau of Cannabis Control
2) Department of Food and Agriculture, Manufactured Cannabis Safety Branch
3) Department of Public Health, CalCannabis Cultivation Licensing.

Acting as the lead regulatory agency, the Bureau of Cannabis Control is tasked with issuing state licenses for dispensaries, distributors, testing labs, and the many anticipated micro-businesses that will develop to serve the industry and consumers. The California Department of Food and Agriculture is responsible for issuing state licenses to cannabis cultivators, and operating a “track-and-trace” system to track the seed-to-sale process for cannabis in the state. Finally, the Department of Public Health issues state licenses to businesses that manufacture cannabis products such as edibles, oils, lotions, and other cannabis-containing products. Cannabis operators may apply for and obtain one or more of the various available business license types, with the exception of test lab operators, which are prohibited from licensure for any other commercial cannabis activity.

Local Jurisdiction Licensing

California’s cannabis laws grant local governments the authority to allow, limit, or ban the number of cannabis operations within their city or county limits. State agencies may only issue a temporary or permanent license to a cannabis operation if the applicant has a valid permit, license, or other form of authorization issued by their local jurisdiction. Therefore, ultimate control over a prospective cannabis operator’s ability to conduct business lies with the city or county.

The lack of uniform laws among cities and counties across California means property owners interested in leasing to a cannabis operation must first determine if their local jurisdiction permits cannabis operations within its borders. If cannabis operations are locally permissible, property owners and their legal counsel must carefully examine the intricacies of local requirements and restrictions for the property and cannabis business type in question. For example, many local jurisdictions impose greater limitations than those set forth under MAUCRSA, including, without limitation, requirements limiting proximity to schools and government buildings, hours of operations, the onsite use of cannabis in open areas and the total number or concentration of cannabis operations within a city or county. A locality may also require the cannabis operator to show proof that it is current on local, state, and federal taxes. Finally, many local jurisdictions require evidence of sufficient funds to operate a cannabis business.

Property owners and their legal counsel must also consider specific restrictions under MAUCRSA, including, among other things, the fact that cannabis operations must be located at least 600 feet away from a K-12 school or youth center, the licensed premises must contain digital video surveillance throughout the space, and retailers may only sell and operate between the hours of 6:00 A.M. and 10:00 P.M. Pacific Standard Time. Also, under MAUCRSA, an applicant may obtain more than one cannabis license type for a specific location (with a few exceptions), provided the licensed premises at the location are “separate and distinct.” Commercial property owners and cannabis applicants must also consider the potential costs in connection with constructing demising walls and additional entrances to meet the “separate and distinct” standard.

Furthermore, under MAUCRSA, the cultivation licensing application requires the cannabis operator to meet the “average electricity greenhouse gas emissions intensity required by a local utility provider” under California’s existing Renewables Portfolio Standard Program.

For comments, questions or concerns, please contact Dennis Kaiser