New Hampshire and Massachusetts Real Estate Issues For the Cannabis Industry

Cannabis has been legal for medical purposes under New Hampshire law since 2013, and there are currently five medical marijuana dispensaries in the state, while use of marijuana for both medical and recreational use by persons twenty-one and older is legal under Massachusetts law. Despite legalization under state law, there are many real estate related regulations and restrictions associated with owning, operating and leasing to a cannabis related business.

1. Cannabis Illegality Under Federal Law Impacts Real Estate Related Considerations.

Under federal law, Cannabis remains a Schedule 1 substance under the Controlled Substances Act, 21 USC §801 et seq., and the processing, sale and use of cannabis remains illegal. A material consideration for cannabis businesses, as well as landlords who lease to them, is that under Section 208E of the Internal Revenue Service’s Tax Code (“208E”), federal tax deductions and credits cannot be taken on gross income derived from a cannabis business, as set forth below:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consist of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Further, even if only part of a business is focused on cultivation or distribution, 280E may still apply. See Patients Mutual Assistance Collective Corp. (d.b.a. Harborside Health Center) v. Commissioner, 151 T.C. 11 (2018). 208E has potential implications for lessors to cannabis businesses because the IRS has recently expressed intention to apply 280E to other aspects of the marijuana industry, including owners of real property that lease to marijuana tenants. While many experts to do not expect such efforts to be successful, this is something that lessors and lessees should continue to monitor, and while uncertainty remains, cannabis related businesses can seek to mitigate the risks of a 208E application through tax planning and consideration to legal structure.

2. Additional Leasing Considerations.

Challenges for leasing space to a cannabis business also include that many commercial mortgages restrict the use of mortgaged property for illegal purposes, banks are reluctant to lend to cannabis businesses, and many insurers will not issue policies in connection with such businesses. Further, such businesses must obtain any licenses required in the jurisdiction in which they operate, as well as comply with zoning regulations. For these reasons, consideration must be given to the provisions of any such lease, including:

  • Provisions related to tenant compliance with all state and local regulatory laws (including maintaining licensure);
  • Termination clause related of tenant’s failure to obtain or maintain licensure;
  • Personal guarantees to offset cash flow risks;
  • Insurance provisions shifted to lessee;
  • Indemnification provisions for unique lessor exposures from third parties;
  • Governing Law, Dispute Resolution, and Venue clauses;
  • Representation and Warranties;
  • Severability clause;
  • Illegality defense clauses; and
  • Waste manage and disposal clauses.

Given the complexity of considerations facing cannabis related businesses, as well as those who wish to lease property to said businesses, it is advisable to consult legal counsel early to address real estate related issues.