Navigating the Unstable World of Real Estate and Cannabis in California

Marijuana & Real Estate by Ashlee D. Gonzales, Esq.

Beginning this year, many Californians have rejoiced in the fact that recreational marijuana is now legal. Proposition 64, the California Marijuana Legalization Initiative, was voted on and approved by voters in November of 2016. Beginning January 1, 2018, adults aged 21 years or older are permitted to use and possess marijuana for recreational purposes in a private home or business licensed for on-site marijuana consumption. In addition to legalizing recreational use, Proposition 64 gave counties and cities broad authority to implement the law within their jurisdictions. Despite that, marijuana use is still illegal at the federal level, causing conflict with enforcement across the country. The threat of federal prosecution coupled with the uncertainties surrounding local counties’ and cities’ discretion to regulate, has resulted in concern for everyone involved in cannabis and the California real estate industry.

On January 4, 2018, Attorney General Jeff Sessions rescinded the 2013 Cole Memo, reinstating the federal government’s ability to enforce the Controlled Substances Act (“CSA”) against state-legalized marijuana businesses. Per the CSA, cannabis is classified as a Schedule I drug, and 21 U.S. Code § 881 provides for forfeiture of real property involved with cannabis in any way. Given the recent commercial real estate boom in cannabis cultivation, the rescission of the Cole Memo is substantial.

Prosecution under the CSA became a reality last month for over a hundred homeowners in Northern California. 106 homes involved in the illegal cultivation and distribution of cannabis were seized by hundreds of federal law enforcement agents in a month long investigation in the rural areas of Sacramento, Calaveras, Placer, San Joaquin, El Dorado, Yuba, and Amador counties. Additionally, more than 61,000 cannabis plants, 440 pounds of processed cannabis, and at least $100,000 in cash were seized during the raid. This raid is a clear indication that the federal government will be investing substantial resources in regulation and enforcement throughout the country, despite the increasing amount of states legalizing cannabis.

Immediately after Proposition 64 passed, hundreds of acres of agricultural land have been purchased all over California for the purpose of cultivation of cannabis. One county in particular, Calaveras, saw a boom in their applications for permits and licensing to commercially grow cannabis. Hundreds of acres of land were purchased, permits and licenses were issued, and significant taxes were paid, with the hopes of striking it rich in the cannabis industry in California. In fact, nearly $3.7 million in fees were collected by the County from over 700 cannabis cultivators. Even more substantial, the County has earned nearly $10 million in taxes from cultivators, significantly benefiting the County’s budget.

In January of 2018, the Calaveras County Board of Supervisors blindsided cannabis cultivators by voting to ban cannabis cultivation and related commercial activities, and asked that growers cease operations by June of 2018. Many growers had invested their entire lives into setting up their farms, pouring hundreds of thousands of dollars into getting their business started, and now are being required to shut down without any assistance or funding from the County. Arguably, the County has the right to do this under Proposition 64, but there are some inequities that need to be sorted out. It is suspected that a majority of these landowners are in the process of, or are already bringing a lawsuit against the County to recoup the fees and expenses paid for cannabis related activities, amongst other things.

Despite the widespread uncertainty with cannabis and its relationship to the real estate industry in California, one thing is clear, proceed with caution. Whether you are a landlord, real estate broker, or commercial cultivator, involvement in the cannabis industry comes with a slew of risks. At the local and federal level, landowners risk losing everything they have worked for, in exchange for the opportunity to capitalize on the cannabis boom. It will be interesting to see how the cannabis industry develops and its effect on the California real estate market in the future.

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