In California, every business that wants to obtain a cannabis license needs to buy or lease property because the license is related to property. Given the uncertainty of obtaining licenses or business success, and sometimes capital constraints, cannabis companies usually choose to lease rather than purchase.

As part of the licensing process, state and local agencies require real estate (locations) to have certain security features and other features, which in most cases requires some type of expansion. It’s worth mentioning that I have worked with a large number of cannabis companies, and I don’t remember one time there was no need for improvement. In this article, I will look at the seven most important issues that I think cannabis tenants face in terms of tenant improvement.

#1 cost

When I talk to people who want to start a cannabis business, the first thing I want to tell them is that it will cost a lot ofGenerally speaking, the most expensive part of this process is expansion. In some cases, only modest improvements are needed, but in most cases, a major redesign is required. We have seen companies spend millions of dollars and even build facilities from scratch.

In fact, one of the more common types of financing we engage in is to provide loans or investments to cannabis companies to assist in the improvement of tenants.Cannabis companies starting from scratch need to fundamentally understand the cost of making improvements and decide whether they need third-party funding and how they will structure these transactions (see my post Here Regarding different types of investments and loans).

#2 time

The next thing I tell cannabis startups is that this process is slower than watching the paint dry. Forget the time spent by cannabis agencies reviewing applications-expansion is usually the longest part. If the building needs to undergo multiple appearance changes, then the expansion will take at least a few months, and it is not uncommon to spend more than a year or even many years.

There are many factors at play here: CEQA questions, Land use approval, types of changes that need to be made, obtaining correct construction and other similar permits, availability of parts in the supply chain, and contractors in use. Any one of these factors may cause the process to take a long time and may be slower. No two builds are the same.

#3 Landlord Approval

A kind a lot of Of marijuana tenants seem to cover up their leases when remodeling their houses. This is a bad idea. Almost any value-for-money lease will have active landlord control over changes in the house. Most things require the landlord’s approval. In some cases, the landlord has a lot of discretion that can affect the tenant’s ability to complete the job.

The tenants who are best at gaming usually make at least some expected changes to the house before executing the lease, and even prepare an exhibition that allows work. Some tenants even doubled their efforts to get the landlord to commit to some work (after all, if the house is in poor condition, repairing it is good for everyone, I will discuss this in detail in Article 5 below).

#4 Improved ownership

In order to explain this issue in detail, I have to use some legal terms. First, there is a difference between real property (real estate) and personal property (tangible property such as automobiles, machinery, clothing, commodities, etc.). Usually, the personal property brought into the leased premises belongs to the tenant and remains the tenant’s. However, when personal property is attached or built in a house, problems arise.

In the case of no legal weeds, there are differences between the two: a) On the one hand, they are improved or remodeled to change the characteristics of the place or become a basic part of it (for example, building walls or stairs), b) fixed in Personal property on the house can be easily removed without substantial impact on the property. This type of personal property is often referred to as a “trade fixture” (think of a machine that can be removed without affecting the property).

Leases usually take a lot of time to define changes/improvements (usually non-removable and become part of the property, unless the landlord specifies otherwise) and transaction fixtures (usually free to remove and remain as tenant’s property). Failure to define these things in property may lead to various disputes.

It should be noted here that the rules I mentioned in the previous paragraph are not set in stone. If the tenant defaults, some leases provide the landlord with a security interest in trade fixtures or even equipment and inventory (for cannabis companies, there are many tricky issues, especially if the landlord is trying to obtain a security interest in the tenant’s cannabis inventory, which is not allowed ). Most leases stipulate that if the lease ends and the tenant leaves the property in the house, the landlord can keep it and sell it or destroy it.

as a other caveat. Although I mentioned the general rule that improvements become part of the house and belong to the landlord, given that some of them need very special machines, cannabis tenants may have some very interesting problems. Cannabis companies often use HVAC and other odor filtering systems, which are much more complex (and much more expensive) than ordinary HVAC systems. We have seen many tenants want to keep their HVAC equipment leases, although many times this is considered to be part of the property renovation. This is another reason for tenants to be cautious when renting.

#5 Tenant Improvement (TI) Allowance

Sometimes, the landlord agrees in the lease to provide a certain amount (usually a fixed amount) for the tenant to improve the property (commonly called the tenant improvement allowance or TI allowance). This example can explain the basic principle well: a tenant wants to rent out a suite in a multi-tenant building to grow cannabis, but needs to upgrade the building’s electricity to get enough juice. This upgrade benefits landlords, who can get more electricity in the building. Therefore, the landlord may agree to donate some money to help—especially if the landlord may realize depreciation (tax) benefits.

All in all, for obvious reasons, TI subsidies can bring huge benefits to capital-strapped cannabis companies. If the landlord does not agree to pay the TI bills, the tenant can persuade the landlord to pay at least these expenses first and amortize them with other payables during the lease term.

#6 tax issues

In some cases, the improvement of real estate may result in a reassessment of the tax on the real estate, leading to higher real estate taxes. Leases usually place at least part of their tax obligations on the tenants who make improvements, which in many cases does not seem to be disputed. However, there may be a lot of negotiations around these increases (especially in multi-tenant properties, the improvement of one tenant may theoretically affect the taxation of the entire property). This is another factor that cannabis tenants need to consider, because they are almost guaranteed to make improvements. Landlords must also carefully consider any potential tax implications of improving their property.

#7 regulatory issues

In California (I assume that all other states also regulate marijuana), the regulator maintains very strict control over changes in venues. Any and all changes need to be approved by the regulatory agency before being made. It needs to be clear that this is in addition to the requirements for obtaining building and other construction permits. Without pre-approval, cannabis regulators almost allow no changes to the premises that affect it. This can be many things-throwing away walls or doors, changing the use of the room or space in the room, etc. If the supervisory inspector comes in and the venue does not match the chart on file by the agency, then the winning will end badly.

All in all, there are many factors that make cannabis leases challenging for both landlords and tenants. You can read more about them in some of our previous posts: