The Business of Marijuana
Marijuana use for medicinal purposes can be traced to 2737 BC China where it reportedly was used to treat multiple ailments. Its use as a recommended treatment for certain ailments can be found in U.S. medical journals by the late 1700s. The landscape changed, however, and marijuana ultimately became, and remains, a Schedule I drug under the federal Controlled Substances Act. Nevertheless, presently twenty-eight states have legalized marijuana for medicinal purposes and 8 states and the District of Colombia for recreational. It is predicted that the field will grow to a $50 billion industry by 2026. The impact of the cannabis industry on real estate markets with legalized recreational use has been extraordinary. Industrial rents are reported to have risen 33% from the first quarter 2014 through May 2017 in Denver, and 27% in Seattle and Portland, compared with a 19% increase in 54 of the other largest U.S. markets. Sales price premiums are reported between 20% - 40%. Although New Jersey legalized medical marijuana, only 6 facilities have been licensed. If Governor-elect Murphy’s stated intention to legalize recreational marijuana is successful, the expectation is that New Jersey will rapidly become one of the major cannabis markets in the country. Legalization will present a number of issues impacting the use, growing, selling and dispensing of marijuana. As marijuana remains illegal under federal law, landlords and tenants will have to properly address lease provisions that are otherwise “boilerplate,” including compliance with laws, permitted use, maintenance, common area responsibility, default, termination, abandonment and indemnity. Property managers need to consider a host of issues, including, as an example, tenants’ rights to reasonable accommodations, the right to grow and smoke marijuana, and security concerns. Marijuana operations also pose unique insurance issues that stem from the high usage of water, the highly flammable nature of certain processing techniques, and the increased need for security. There also are title insurance issues, as title insurers have indicated they will not close or insure a transaction involving land associated with the marijuana industry. Tax and other economic issues also must be addressed. Section 280E of the I.R.C. disallows deductions for expenses incurred in the business of producing or selling marijuana. There are a series of Justice Department guidance documents that enable the industry to exist. FinCEN has issued guidance for banks to provide services to the marijuana industry while abiding their obligations under the Bank Secrecy Act. And recent federal appropriations bills (set to expire December 22nd) have barred the Department of Justice from utilizing appropriated funds to interfere with states implementing their own medical marijuana laws. It will be important to keep abreast of the federal guidance and Congressional appropriations. A comprehensive bill presently is pending (S3195 - Scutari) to legalize recreational marijuana in New Jersey. Although a host of issues will require resolution before such a bill is passed, or implemented via corresponding regulation, there are preparatory measures that should be examined for those contemplating entry into the field. * Copyright 2017, All rights reserved. Mr. Fersko is a partner at Greenbaum, Rowe, Smith & Davis, LLP where he Co-Chairs the Real Estate Department; Ms. Gambale is an associate in the firm’s Tax, Trusts & Estates Department; Mr. Kay is an associate in the firm’s Real Estate Department. This article should not be used as, nor is it intended to give, legal advice. Any opinions set forth in this article are of the authors only and not of the firm.