How Do Marijuana Dispensaries Pay Rent

As 33 states and the District of Columbia legalized marijuana, it is not uncommon to see a marijuana dispensary in major cities today. However, like any other business, dispensaries are subjected to the same laws and can't operate in their own homes or backyards.

It means they must have some sort of commercial space with a landlord who is willing to lease them the property for an agreed-upon amount of money on a monthly basis or year-to-year agreement, just like any other tenant would need.  

Unfortunately, under the controlled substances act, marijuana is still considered a Schedule I drug by the DEA (Drug Enforcement Administration). Since states and the federal government have different rules, landlords find them difficult to navigate. Therefore, real estate investors and landlords are reluctant to lease a place to cannabis-related businesses. 

In this context, the question of how marijuana dispensaries pay rent is one that many entrepreneurs are grappling with. This article will explore some of the most popular ways that dispensaries manage to stay afloat.

Cash Payment Or Other Solutions

Since federal law makes marijuana business illegal, federally insured banks can not cash rent checks from tenants involved in the marijuana business. Moreover, federal law makes marijuana business owners obligated to report if they receive cash payments over $10,000 in a single transaction. 

Thus, landlords are left with the option to accept cash rent payments, raising serious security risks and costs. Local banks, credit unions, and specialized third-party banking companies could serve as a better alternative in such a situation. 

Landlords should specify in their leases how much rent must be paid. On the other hand, tenants should seek liability protection by registering their marijuana business as a formal entity such as a corporation or LLC (Limited Liability Company). This will save the personal assets of tenants if their rent check bounces or they face any other business liability.

Standard Lease Terms Do Not Fit The Marijuana Industry

If you are a landlord and your tenant has applied for a license to operate on-site marijuana sales, it is important that you understand that general lease terms don't fit the marijuana industry.

Typically a lease agreement states that tenants must comply with all federal, state, and local laws that regulate the use of the property. However, marijuana industry tenant's use will not comply with federal law owing cannabis to be a schedule I substance. Therefore, it is best to remove the requirement related to property compliance fully and entirely with federal laws. 

However, your tenant should agree in writing on the following terms:

• The tenant will comply with all state and local laws related to the cultivation, distribution, and sale of marijuana. 

• Landlords should be able to inspect the premises at any time without prior notice.

• Restriction on the entry on those other than the party holding license to operate the cannabis business unless with proper permission by both parties involved.  

• Short lease terms with fewer renewal options. In the case of any federal enforcement action against the tenant or if the tenant fails to comply with state or local marijuana licensing requirements or law, the landlord would have termination rights.

• Marijuana cultivation facilities require a large amount of water, janitorial, security services, and other utilities. The lease should clearly state that the tenant is responsible for these extra costs.

Do Not Agree On Percentage Basis Rent

Landlords and tenants should be careful while agreeing on the rent based on a percentage of sales or profits of the marijuana-related businesses. In the marijuana licensing process, state regulators closely scrutinize the owners of businesses and how much they make. 

If revenues are being shared with other entities such as landlords, which do not show up in any public list as business owners, regulators may consider this sharing arrangement a clever way to evade ownership disclosure requirements. 

In such situations, a tenant may put their business license at risk, and the landlord may face a legal inquiry. 

Coverage For Marijuana-Related Losses

Landlords should be aware that property insurance companies may deny coverage for losses related to the use of marijuana. However, new specialized policies specifically written for cannabis can help tenants and landlords overcome the limitation of traditional insurance companies.

The landlords should make it obligatory for tenants to get self-insurance or purchase marijuana industry-specific coverage. This clause should also be written in the lease agreement.

Final Words

As we mentioned earlier, federal law may be conflicting with state laws when it comes to selling weed for recreational or medicinal purposes; but for now, it's legal on a local and state level.

If you're considering opening a dispensary in the next few months or having a tenant asking you to rent your property for a marijuana-related business, the guidelines mentioned above might be helpful. You can ensure that your lease and rental agreement comply with the law by following these simple steps.

References

• https://www. irs.gov/about-irs/providing-resources-to-help-cannabis-business-owners-successfully-navigate-unique-tax-responsibilities

• https://www. americanactionforum.org/research/federal-taxation-of-cannabis-a-primer/

• https:// americassbdc.org/making-sense-of-marijuana-use-how-do-state-laws-affect-your-business/