REAL ESTATE FOR THE MARIJUANA INDUSTRYRobert T. Hoban, Esq.

Jean Gonnell, Esq.

I. Background

Hoban & Feola has been actively practicing in themarijuana legal field since it’s inception in Coloradoin 2009. Already a full-seasoned commercial, realestate and litigation practice, an expansion intomarijuana business law was natural for H&F’s attorneys.

Since then, we have successfully litigated dozens ofmarijuana related cases, represented clients athundreds of Marijuana Enforcement Division meetings andregulatory hearings, and negotiated countless businesstransactions on behalf of dispensaries, growers,commercial landlords and tenants. In 2013, Coloradopassed the nation’s first recreational marijuanaregulatory program, expanding the legal field toencompass recreational sales in addition to a boomingmedical marijuana industry.

Managing Partner Bob Hoban is currently a Professor atthe University of Denver Colorado Women’s College. HisFall 2014 research practicum course was The Efficacy ofMarijuana Regulation.

SEMINARS/CLE PRESENTATIONS:

Colorado Chapter of the Appraisal Institute -Featured Presenter concerning regulatory takings andthe emerging marijuana industry in Colorado -August, 2014

Pagosa Verde Renewable Energy Symposium - FeaturedPresenter concerning The Cannabis Question - LegalLandscapes - August, 2014

CLE International Eminent Domain Annual Conference –Featured Presenter concerning marijuana andregulatory takings – August, 2013

The Politics of Medical Marijuana – DenverUniversity –2012

Marijuana at the Crossroads – University of DenverSturm College of Law – 2012

Marijuana in the workplace – Denver University – MLAProgram – 2011

Eminent Domain Practice and Procedure – FirstJudicial District Bar Association CLE – 2010

The Business of Marijuana – CLE – 2010 Marijuana: Leases and Business Structure – CWA/WJEC

– 2010 Eminent Domain Practice and Procedure –1st J.D. Bar

Association – Featured Presenter – December 2009 Colorado No Till Convention – Eminent Domain and

Agriculture – 2008, 2009 Colorado Property Rights Coalition – Land Use Law in

Colorado – 2007, 2008 Eminent Domain Conference – CLE International –

Featured Presenter – August 2006 Real Estate Development Conference – CLE

International – Faculty/Lecturer – April 2006

Eminent Domain Conference – Lecturer/Faculty –November 2006

Colorado Dairy Farmers Association – LandUse/Eminent Domain – December 2006

Real Estate Development Conference – CLEInternational – Faculty/Lecturer – May 2005

Eminent Domain Conference – Lecturer/Faculty –August 2005

II. Market Impact

Legalizing marijuana has indeed created a land rush.Colorado law requires that the plant product has begrown indoors, but many layers of regulations intendedto curb non-resident ownership/investment andrestrictive zoning requirements have made real estatehard to come by for marijuana entrepreneurs.

Numerous local jurisdictions across the State ofColorado have elected to allow and regulate marijuanabusinesses of varying kinds. And the introduction ofstate-regulated legal recreational marijuana inColorado has been so popular that state-licensedcultivation facilities cannot keep up with the demand.This has caused state regulators to actually call onthe industry to ramp up production at certain points intime. This, of course, has led to a rush on industrialwarehouse space. Finding a suitable property isprobably the most difficult piece of putting a businesstogether in this industry right now, by far. Locatingsuch properties has created a whole new niche market

for Colorado real estate brokers, aiding the marijuanaindustry’s entrepreneurs in locating the properly zonedproperties for cultivation or retail.

Colorado’s marijuana industry needs a great deal ofreal estate: cultivation sites, retail outlets, testinglaboratories, extraction facilities, and kitchens toproduce the increasingly popular oils and edible items.In addition, the plant itself has to be grown indoors.This morass of state and local regulations definitivelyrequires professional assistance.

Cities and counties have been hands-on when it comes tocrafting zoning rules that ensure the marijuanaindustry can coexist with other land uses. Some havebeen more hands-on than others, leading to outrightbans on cultivation in some areas of the state toseparation requirements that give buffers to churches,schools, parks and residential areas. In Denver, forexample, marijuana grow facilities can only exist invery specific industrial areas with a permitted usedenoted as “plant husbandry.”

It is important to note that although state law allowspot shops to exist, Amendment 64 gives localgovernments the authority to regulate commercialactivities associated with the recreational use ofmarijuana. The majority of counties in Colorado haveeither already passed bans on recreational marijuanaretailers or have delayed making a decision and placeda moratoria on marijuana business; closely monitoringhow enactment is working in other parts of the state.

It looks as though recreational marijuana businesseswill be absent from large portions of the state for theforeseeable future.

That said, the economic impact is undeniable, as manyreal estate deals have put marijuana grows intobuildings that have been vacant for years; even decadesin some instances. Then, they are flipped intocultivation sites with lights and irrigation systems.This has also brought with it a building boom, as thereis a trend to more new construction versus just tenantfinish of existing buildings.

III. The Manner in Which Marijuana LegalizationImpacts Real Estate

As marijuana becomes legal in more parts of thecountry, those in the real-estate industry are findingthe new laws have implications for properties of everyvariety, from residential to industrial to retail.Some of the issues pertain to the growing andprocessing of the plants; others pertain to the use ofit in a rental property or one governed by ahomeowner’s association. There are also some thingsthat home buyers need to be aware of, to ensure theyknow what they’re purchasing.

At the same time, countless real-estate professionalsare using this as a business opportunity. For example,the 420MLS is a website where people can find and postmarijuana business opportunities, commercial space forfuture “cannabusinesses,” and marijuana-friendly living

spaces. Another listing site for Colorado isPotProp.com.

Twenty-three states and the District of Columbia havepassed laws that permit the use of prescribed medicalmarijuana and three states permit recreational use,according to the National Conference of StateLegislatures. But federal law prohibits use, possessionor sale of recreational marijuana. The contradictioncan make it a challenge for people to run a legalcannabis business.

One of the more popular marijuana products is hash oil,a more concentrated form of THC that you can ingest byputting it under your tongue or sprinkling it on food.Problem is, the process to make this oil involvesbutane, and that is a big reason why explosions canhappen during production. A number of these explosionshave gained media attention in the previous months.

There is also a danger of civil asset forfeiture.Whether you are the owner of a shopping center where adispensary wants to open; or you own an industrialproperty where marijuana could be grown; or you are alandlord renting an apartment to someone who uses orgrows marijuana, there is at least some realistic fearof civil asset forfeiture. Civil forfeiture is wherethe federal government can seize your property if itwas used to conduct illegal activity (that was known orshould have been known to the owner), or was purchasedwith the proceeds of an illegal activity.

Since recreational marijuana is illegal under federallaw, property owners may forbid the growing or use ofmarijuana, just to steer clear of the possibility thatthey would lose their property because of it. Thus,from the perspective of property managers, thechallenge is trying to come up with the best practicesfor operating properties in an environment where thereis not much clarity about the enforcement or theinterpretation of the laws.

It is also very difficult, if not impossible, formarijuana-related businesses to obtain mortgages. As ageneral rule, banks are federally chartered, andbecause recreational marijuana is illegal on a federallevel, most lenders have no interest in approving amortgage for someone interested in starting up somesort of marijuana-related business. Therefore,financing for these businesses is often done throughprivate investors.

Having a cultivation facility or a dispensary in yourneighborhood can carry stigmas. Even when it’s legalby state law, there’s often a stigma associated withhouses where cannabis is/was grown.

While there is certainly growing acceptance ofmarijuana use: Fifty-two percent of Americans said theuse of marijuana should be legal in 2014, compared with12% who said the same in 1969, according to the PewResearch Center. But that doesn’t necessarily mean thatpeople want it in their neighborhood.

IV. Zoning

Though technically medical marijuana dispensariesprovide a healthcare service, they have historicallybeen required to adopt the same zoning restrictions asbusinesses that sell alcohol, pornography, andfirearms. Generally, stores that sell these types of“vices” are prohibited from locating in residential ormixed-use neighborhoods and are pushed into much lessaffluent neighborhoods.

Even though the impacts of dispensaries on crime,property values, or quality of life are still unclear,residents tend to be against these businesses in theirneighborhoods. As such, City’s tend to use zoningrestrictions, proximity buffers and density controlswith regard to these businesses. As medical marijuana has become legal in 23 states andWashington, D.C., municipalities must determine wherethese businesses will be allowed to operate. This is adifficult task; especially where the social stigma isever-changing and the “norms” surrounding thesebusinesses have yet to evolve.

V. Leases

Structuring a lease to deal with marijuana issues canbe a very difficult task. Because of the issuescreated by the Federal Controlled Substances Act,marijuana businesses know that securing commercialleaseholds can be very difficult.

As alluded to earlier, the Controlled Substances Actputs landlords at risk of their property beingforfeited if they are caught by the feds leasing tomarijuana businesses. However, this has been mitigatedby the recent 2015 spending bill from Congress.Furthermore, the August 2013 Cole memo has emboldenedlandlords to rent to marijuana businesses.

These leases are a challenge. The following issues areimportant to consider.

“Force Majeure.” When events happen over which neitherparty has any control, a typical lease will have what’scalled a Force Majeure clause. That kind of clauserelaxes certain provisions in the leasehold, givingboth parties a “reasonable amount of time” to performtheir duties under the lease which may have beendelayed by the unpredictable event. In the marijuanaindustry, a good example of when a Force Majeure clausecomes in handy is when local governments change theirregulatory rules over zoning and/or permitting that mayaffect the eligibility of the property as a marijuanafacility. In this scenario, the Force Majeure clausecould give the landlord or the tenant the time toobtain the necessary permits without invalidating theleasehold.

Permitted Use. Every lease contains a permitted useprovision to govern the activities that can take placeon the leased property. The permitted use shouldaccurately and succinctly identify the types of

activities you are allowed to undertake on theproperty. For example, if you are a retailer ofmarijuana, your permitted use should be something like“the retail sale of marijuana.”  If the permitted useis not clear, you run the risk of breaching the leaseby conducting an activity not permitted on theproperty. In well-regulated marijuana states, you aregenerally going to be better off being upfront aboutyour state-legal marijuana activities than in trying toobscure them with an ambiguous permitted use clause.

Escape clauses. Federal prohibition complicates everyleasehold. It has become a sort of trend with U.S.Attorneys that they issue cease and desist letters tomarijuana landlords before trying to take thelandlords’ property under applicable federal forfeiturelaws. Of course, that “trend” can change depending onthe U.S. Attorney, but the bottom line is thatmarijuana leaseholds should account for what happens tothe lease and to the relationship between the partiesin the event of federal intervention. Most often inthat context, parties agree that the lease should becancelled with both parties walking away without anyfurther obligation to each other. Going a step further,conservative landlords will also address local andstate intervention in their leases — if the tenant’sbusiness becomes illegal under local and/or state law,certain duties and obligations will trigger for thetenant.

Defaults. Leaseholds essentially create codes ofconduct between the parties in relation to the

property. Defaults are those actions that constitutebreaches of the lease (for example, the failure to payrent on time). In a typical Commercial Broker’sAssociation lease, any illegal activity on the propertyconstitutes a default. To navigate and surmount thiskind of provision in states where marijuana is legal,landlords and tenants should both agree that the leasebe upheld pursuant to only state and not federal law.In the marijuana industry, lease defaults should alsocover (among other things) hours of operation, tenant’streatment of its surrounding commercial neighbors,loitering, odor, the use of hazardous substances, thenumber of people permitted on the property, andcompliance with any and all regulatory rules and themost recent Cole memo.

Whether you are a landlord or an aspiring tenant, thereare many more issues you should address for anymarijuana leasehold.

VI. Brokers

Now that Colorado is the first state in the nationwhere adults 21 and over can purchase recreationalmarijuana legally, numerous broker businesses startedto capitalize on the green rush. As such, numerousbrokers have begun to specialize in cannabis friendlyreal estate locations. However, many of the largerbrokerage firms have yet to enter into this arena.This has caused a patchwork of independent brokers,calling themselves canna-brokers, to emerge and occupythis space in the real estate market. Finding a broker

with specific knowledge of the applicable rules andregulations is essential. Otherwise, you will findyourself in a lease or purchase contract with no canna-business value, and the lawsuits flowing therefrom canbe extremely time consuming and very costly.

VII. Takings

The issue of regulatory takings of businesses inrelation to newly enacted state laws, stateregulations, and local rules/ordinances concerning theemerging and very profitable commercial cannabisindustry in Colorado. Specifically, the actions of(mostly) local governments that have passedlaws/regulations that would ban, eliminate, ortemporarily suspend (often times retroactively)commercial cannabis businesses in Colorado. Much ofthis debate was previewed (perhaps prematurely giventhe emerging issues faced by cannabis businesses inColorado today) in Mr. Hoban’s co-authored article:“Colorado’s Emerging Medical Marijuana Legal Frameworkand Constitutional Rights,” The Colorado Lawyer,November 2011.

In a nutshell, it would appear that local governmentsexceed their statutory and constitutional authority byeliminating existing medical marijuana businesses whohave vested rights without paying just compensationunder C.R.S. §38-1-101(3)(a). The Colorado Court ofAppeals recently held that Constitutionally protectedproperty interests are a matter of statewide concern

and must be treated uniformly throughout the state;this includes actions by a local government. JAMRestaurant, Inc. v. City of Longmont, 140 P.3d 192(Colo.App. 2006); Colorado Constitution Article II,Section 15; Colorado Constitution Article XVIII,Section 14(2)(e).

C.R.S. §38-1-101(3)(a) states that:

(3) (a) Notwithstanding any other provisionof law to the contrary, a local governmentshall not enact or enforce an ordinance,resolution, or regulation that requires anonconforming property use that was lawful atthe time of its inception to be terminated oreliminated by amortization.

This statute was passed in 2006 in order to providecompensation to businesses that were eliminated throughlocal government zoning or regulatory measures. Duringthe aforementioned Centennial proceedings, the primarysponsor of said legislation, (former) Sen. RobertHagedorn, testified as to its intent and meaning, andaffirmed that it was intended to be a vehicle fortakings compensation in the event of a businessshutdown, such as those occurring in the commercialcannabis industry. This statute was specificallyenacted to protect and defend fundamental civil rightsof persons to property and to ensure that personsthroughout the State are not unjustly deprived of theirproperty rights. In fact, the Legislature expresslyidentified termination of uses as a problem that should

be dealt with in a uniform manner throughout the State.More importantly, the case of JAM Restaurant, Inc. v.City of Longmont, 140 P.3d 192 (Colo.App. 2006),connected said statute to the constitutional rights andjust compensation at issue.

Thus, the question becomes when and how a vested rightcomes to fruition. “In order to have a propertyinterest in a benefit, a person clearly must have morethan an abstract need or desire for it. He must havemore than a unilateral expectation of it. He must,instead, have a legitimate claim of entitlement to it.”Bd. of Regents of State Colls. V. Roth, 408 U.S. 564,577 (1972); accord Pub. Serv. Co. of Colo. v. Pub.Utils. Comm’n of Colo., 653 P.2d 1117, 1121 (Colo.1982). And until a state or local government issues alicense or approval to operate a business, thatbusiness does not have a property interest. See Proutyv. Heron, 255 P.2d 755, 758 (Colo. 1963). Many, if notmost, commercial cannabis businesses meet thisstandard. Yet, they have been shuttered without justcompensation.

In addition, it would appear that Section 14(2)(e) ofthe Colorado Constitution provides for a vestedproperty right in that it states as follows:

(e) Any property interest that is possessed,owned, or used in connection with the medicaluse of marijuana or acts incidental to suchuse, shall not be harmed, neglected, injured,or destroyed while in the possession of state

or local law enforcement officials where suchproperty has been seized in connection withthe claimed medical use of marijuana. Anysuch property interest shall not be forfeitedunder any provision of state law providingfor the forfeiture of property other than asa sentence imposed after conviction of acriminal offense or entry of a plea of guiltyto such offense. Marijuana and paraphernaliaseized by state or local law enforcementofficials from a patient or primary care-giver in connection with the claimed medicaluse of marijuana shall be returnedimmediately upon the determination of thedistrict attorney or his or her designee thatthe patient or primary care-giver is entitledto the protection contained in this sectionas may be evidenced, for example, by adecision not to prosecute, the dismissal ofcharges, or acquittal.

In the aforementioned Centennial case, District CourtJudge Christopher Cross agreed, in his December 30,2009 bench ruling on this matter, that this Sectionappears to provide some form of a property interest toa marijuana business. Given these factors, it isarguable that a property rights exists perhaps evenwithout regard to the particular business’s licensingstatus.

Finally, many of the local governments have banned orotherwise eliminated existing approved commercial

cannabis businesses in a manner that applies lawsretrospectively. Article II, Section 11 of theColorado Constitution prohibits the enactment of a lawthat is "retrospective in its operation." The test fordetermining whether a particular law constitutesretrospective legislation centers on whether it "takesaway or impairs vested rights acquired under existinglaws, or creates a new obligation, imposes a new duty,or attaches a new disability, in respect totransactions or considerations already past." Denver,South Park & Pacific Railway Company v. Woodward, 4Colo. 162, 167 (1878); accord, e.g., Continental TitleCompany v. District Court, 645 P.2d 1310 (Colo.1982);Jefferson County Department of Social Services v.D.A.G., 199 Colo. 315, 607 P.2d 1004 (1980); Spiker v.City of Lakewood, 198 Colo. 528, 603 P.2d 130 (1979).“A….permit can provide the foundation for a (commonlaw) vested right, and thus be constitutionallyprotected from impairment by subsequent legislation, ifthe permit holder takes step in reliance upon thepermit.” P-W Investments, Inc., v. City of Westminster,655 P.2d 1365, 1371 (Colo. 1982). In fact, the generalprohibition against retrospective legislation isintended to prevent any unfairness that might resultfrom the application of new law to rights already inexistence. In re Estate of DeWitt, 54 P.3d 849, 854(Colo. 2002). In sum, the nature of the laws passedaffecting these businesses opens the possibility that avested right does indeed exist, and that compensationshould apply accordingly.

With all of that said, these issues have been raised byH&F in three consecutive appeals, with the ColoradoCourt of Appeals electing not to address the takingsissue. In addition, the Colorado Supreme Court hadrecently denied two of H&F’s petitions (to the ColoradoSupreme Court) for certiorari concerning the exact sameissue of taking/compensation. While these cases willlikely go no further, it is important to note thatJustice Coats does comment that he:

WOULD GRANT [certiorari] as to the followingissue:

Whether the court of appeals erred byimpermissibly abrogating Cannamart’s vestedright to operate its business by holding thatLittleton could enact a new ordinancelimiting the number of medical marijuanacenter (“MMC”) licenses to four, despite thefact that six businesses were lawfullyoperating before Littleton enacted theordinance.

I&S, LLC, et al v. City of Littleton, Supreme Court Case No:2012SC1006 (June 10, 2013).

In conclusion, given the federal preemption issues at playconcerning cannabis, the Colorado appellate courts have beenreluctant to squarely address this issue thus far. Butgiven the explosion of this industry, it is essential thatthe Colorado Supreme Court address these issues in the shortterm. More importantly, the issues surrounding vested

rights and compensable takings have presented lawyersworking in this industry with the ultimate fact pattern froma hypothetical law school exam. And equipped with the rightinformation, a compelling case can be made for justcompensation in this context.

VIII.Consult an Attorney

With all of the foregoing issues critical to understandingand evaluating your options and legal confines, it isessential that you consult with an experienced real estateattorney with cannabis law experience. An attorneyexperienced in real estate law alone will not suffice.There have been too many unnecessary law suits caused byexperienced real estate attorneys who did not understand orevaluate the impacts of the myriad of cannabis regulations.This can easily be avoided with the assistance ofexperienced cannabis counsel.