Real Estate and Local Challenges in the Cannabis Industry

The content of this presentation is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Your use of the presentation does not create an attorney-client relationship between you and Genova Burns LLC.
Real Estate and Local Challenges in
the Cannabis Industry
April 22, 2021
Jennifer Mazawey – Genova Burns LLC
Ashley Kettler - Withum

Presenters
Jennifer Mazawey, Esq.
Partner
Genova Burns LLC
jmazawey@genovaburns.com
Ashley Kettler, CPA
Senior Manager
Withum
akettler@withum.com

Today’s Agenda
• Location considerations depending on your business type
• Local and state developments and zoning ordinances (drug-free
zones, impact zones)
• Site control issues
• Real estate investment trust (REIT) financing for building operations

Location Considerations

Location, Location, Location…
Suitability
• Does the site suit the needs for
the license
Zoning
• Municipal requirements

Local and State Developments and
Zoning Ordinances

Local Ordinances and Control
• Ordinances passed before the law’s passage are void
• Municipalities have until August 21 to pass new ordinances regulating
cannabis-related businesses

Local Ordinances and Control
Municipal zoning and land use controls
• Is your proposed use a permitted use, a conditional use or a prohibited use?
• Why does that matter?
Is there support for your project?
• Meetings
• Community involvement
• Letter of support

Taxes
Law allows municipalities to
impose up to 2% tax as incentive to
permit cannabis businesses

Impact Zones
• What is an Impact Zone?
• Why is that important?
• Applicants that identify a site location within an impact zone get prioritization

Drug free zones
• New Jersey drug free zone laws and Federal Drug Free Zones Act
• Keep an eye on local restrictions that could be more stringent

Site Control

To Buy or Not to Buy…That is the Question
• Potential licensee must demonstrate “site control”
• Do not need to own the property in order to show control
• Options include
• Fee simple ownership
• Option to purchase
• Lease

Site Control Issues
Cannabis remains a schedule I drug under the Controlled
Substance Act, so may create issues related to:
• Property/commercial liability insurance
• Title insurance
• Financing restrictions

Landlord/Tenant Issues
• Federal and state enforcement actions
• Permitting cannabis related businesses under any class of
license deems property owner ineligible for state and local
economic incentives
• Does the landlord have an incentive from EDA?
• Will a lease with a cannabis tenant mean a landlord default?

Landlord/Tenant Issues (cont.)
Key provisions for leases
• Landlord wants all rights and remedies to protect the property owner
 Indemnification
 Early termination rights
 Premise inspection rights
 Insurance pass-through
 Nuisance provisions
• Tenant wants different rights and remedies
 Lease conditioned on license approval by state
 Representations with respect to restrictions in law
 Covenants against other tenants’ uses

SAFE Banking Act

SAFE Banking Act
• Aims to create a safe harbor for banks and credit unions so they
cannot be held liable or subject to federal forfeiture action for
providing financial services to a cannabis-related business.
• The bill would exempt cannabis business transactions from being
considered proceeds from illegal activity and subject to anti-money
laundering laws.
• House passed act on Monday

SAFE Banking Act
Under the Act, federal banking regulators cannot:
• Terminate or limit the deposit insurance or share insurance of a depository
institution solely because the institution provides financial services to a
cannabis-related business;
• Prohibit or discourage an institution from offering financial services to a
cannabis-related business;
• Recommend or otherwise encourage an institution not to offer financial
services to an account holder solely because the account holder is affiliated
with a cannabis-related business; and
• Take any adverse or corrective action on a loan made to a person solely
because the person either owns a cannabis-related business or owns real
estate or equipment leased to a cannabis-related business.

Non-traditional Funding
through a REIT

Real Estate Investment Trusts
What is a REIT?
• Company that owns or finances income-producing real estate
• Allows investors to own a piece of real estate without funding entire building
• C corp that acts as a flow through entity (get to take a dividends paid
deduction to reduce taxable income)
• Typically pay out all their taxable income as dividends to shareholders
(steady, passive income)

Real Estate Investment Trusts
What is a REIT?
• Can be publicly traded or private
• Have many requirements – asset testing, income testing, organizational
requirements, distribution requirements
 Idea here is that the REIT is set up to invest in rental real estate not operate as a service
business
• Equity REITs (own real estate) vs mortgage REITs (purchase or originate
mortgages and mortgage-backed securities)

Cannabis REITs
• Cannabis REITs can act as a funding source to provide capital
• Avoids major hurdle of obtaining financing from traditional
banks
• Two major types of transactions:
• Sale/leaseback
• Mortgage REITs

Cannabis REITs
Sale / Leaseback – How it works
• Outside investors invest in REIT stock to fund real estate
• Cannabis company sells its real estate to the REIT then leases back the
property at an arms-length rate
• Gives company an influx of cash for operations and passes off operational
burdens of owning a building
• Recommend transfer pricing study to determine what is “arms-length”
REIT
cash
real estate

Cannabis REITs
Mortgage REIT
• Outside investors invest in REIT stock
• REIT enters into loan with company to buy or build out their real estate (REIT
acts as the bank)
• REIT makes money on loan interest
• Cannabis company has another option to finance its real estate through non-
traditional financing
REIT
loan

Cannabis REITs
Considerations:
• Potential gain on sale in sale/leaseback transaction
• Setting up and maintaining a REIT
• Beneficial for foreign and tax-exempt investors
• REITs have a long-standing history as steady investment vehicles
for investors

Qualified Opportunity Zones

Incentives
OZ program offers three incentives for putting capital into rebuilding
economically distressed communities:
1. Temporary Deferral: A taxpayer can defer capital gains taxes until earlier of
sale date or 2026 by putting and keeping realized gains in a special purpose
vehicle that self certifies as a QOF.
2. A reduction: The original amount of capital gains on which a taxpayer has to
pay deferred taxes is reduced by 10% if the OZ investment is held for 5 years
and another 5% if held for 7 years. Note, reduction is limited to 10% if invested
after 12/31/19.
3. An exclusion: Any capital gains on investments in the OZ accrue tax-free as
long as the taxpayer holds them for at least 10 years. Can accrue tax-free
through 2047.

Testing Requirements
• Qualified Opportunity Fund must hold 90% of its assets in qualified
opportunity zone property (QOZBP)
• Qualified opportunity zone business must hold at least 70% of the
tangible property it owns or leases in QOZBP (working capital safe
harbor)
• Tier Structure recommended

Sin Businesses
• Applies at QOZB not QOF level
• QOZB cannot lease more than 5% of its property to a sin business
• Internal revenue code does not explicitly name cannabis as a sin
business, but proceed with caution!

Next Webinar in Series
May 13 – Cannabis
Licensing and
Avoiding Litigation:
What to Know

Thank you! Questions?
Jennifer Mazawey, Esq.
Partner
Genova Burns LLC
jmazawey@genovaburns.com
Ashley Kettler, CPA
Senior Manager
Withum
akettler@withum.com

Real Estate and Local Challenges in the Cannabis Industry

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