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Marijuana-related Businesses Pose High Risks For Landlords

December 2013

Published in the Daily Journal of Commerce

The new year will usher in a new era in the state of Washington as Initiative 502 goes into full effect, decriminalizing the sale and possession of small amounts of marijuana. A similar initiative seems likely to appear on Oregon's ballot in 2014. Yet for landlords, lenders and financial institutions, the legalization of marijuana by states may simply lead to bigger headaches.

The primary reason for this is the inconsistency between the new relaxed state laws and stringent federal laws put in place over the past several decades to combat the drug trade and terrorism. The change from limited legalization for medical usage, to broader legalization by states such as Washington and Colorado, has not been matched at the federal level. Two areas of federal law, in particular, are problematic for landlords, lenders and financial institutions: civil forfeiture and money laundering regulations.

In recent years, the number of civil forfeitures has skyrocketed with federal and state governments seizing billions of dollars in assets. The Justice Department reported civil forfeitures greater than $4.2 billion for 2012 – an increase of approximately 140 percent from 2011.

One of the relevant federal statutes in the area of civil forfeiture is 21 U.S.C. §881, which states that certain types of property are subject to forfeiture to the federal government, including personal property used in the "manufacturing, compounding, processing, delivering, importing or exporting any controlled substance," "all moneys … or other things of value furnished or intended to be furnished by any person in exchange for a controlled substance … all proceeds traceable to such an exchange, and all moneys … used or intended to be used to facilitate any violation of this subchapter" and "all real property … which is used, or intended to be used, in any manner or part, to commit, or to facilitate the commission of, a violation of this subchapter punishable by more than one year's imprisonment."

These provisions make any sort of lending to marijuana operations all but impossible because marijuana remains a Schedule 1 controlled substance under federal law. As such, the money received by a lender in payment for a loan to a marijuana dispensary or growing operation that is legal under state law could nonetheless be seized by the federal government, as could any conceivable form of real or personal property collateral offered by such a business as security for the loan.

Landlords considering marijuana-related businesses as tenants also face the risk of civil forfeiture. They may also find that the presence of a marijuana-related business on their property limits their ability to finance that property or even to deposit rents with their bank. Traditional financial institutions, such as federal and state-chartered banks, steer clear of marijuana-related businesses, as a result of know-your-customer rules and money laundering regulations with penalties for violations, including forfeiture of the financial institution's charter.

These regulations effectively prohibit traditional financial institutions from dealing with marijuana-related businesses, whether for the purposes of lending or even accepting deposits. These regulations also deter financial institutions from including lease revenues from dispensaries and other marijuana operations when underwriting a financing secured by real property to the extent they will consider financing such a property at all with the risk of civil forfeiture or seizure.

The Justice Department issued guidance to the U.S. Attorneys' Office on Aug. 29, stating that the focus of enforcement activities with respect to marijuana would be: preventing distribution to minors; preventing revenue from marijuana sales from going to criminal organizations; preventing diversion of marijuana from states where it is legal in some form to other states; preventing marijuana activity that is legal in a state from being used as a front for the trafficking of other illegal drugs or other illegal activity; preventing the use of violence and firearms in the cultivation and distribution of marijuana; preventing driving under the influence and the exacerbation of other adverse public health consequences associated with marijuana use; preventing the growing of marijuana on public lands; and preventing marijuana possession or use on federal property.

This guidance is of little help to landlords and lenders because the standards are fairly subjective, as evidenced by recent federal raids of medical marijuana dispensaries in Washington and Colorado. As such, it is difficult for a landlord to know whether a tenant conducting a marijuana operation on its property might subject their real or personal property to seizure or for a lender to determine what collateral it might accept from a marijuana-related business that would not be subject to seizure.

This guidance was of no help to traditional financial institutions, many whom are interested in accepting deposits from what some project to be a multibillion-dollar industry. The Treasury Department is expected to meet with financial institutions later this month in order to address these issues, but without an act of Congress, these institutions are not likely to obtain a great deal of comfort in banking marijuana-related businesses.

Until there is more clarity at the federal level, financial institutions and other lenders are likely to avoid marijuana-related businesses. Clearly, some landlords have determined that the potential revenues are worth the legal risks; this is evident in the existing medical marijuana dispensaries in various states.

For the cautious landlord who chooses not to rent to those in the marijuana industry to avoid these risks, it is important to ensure that all leases contain a clause that provides that tenants will comply with all applicable state and federal laws so that, should the landlord discover that its tenant is growing or selling marijuana in violation of federal law, the landlord is not given a choice between risking seizure of its property or breaching its contract with its tenant.

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