Recreational Pot In 2018: High-Times Or A Buzz-Kill For California Real Estate?

Legal Update and Real Estate Law by Adam Pedersen, Esq.

California is set to roll out new guidelines implementing the voter-mandated legalization of recreational marijuana use and production in January of 2018.  At the same time, cities and counties are scrambling to implement their own regulations before the state rules take effect.  The Adult Use of Marijuana Act, approved by voters in 2016, gives local jurisdictions almost unlimited authority to regulate the commercial sale and cultivation of recreational cannabis.  However, if local authorities don’t have rules in place when the state begins issuing permits in 2018, they risk losing some of that control.

To avoid this, many cities and counties immediately banned the production or sale of all commercial cannabis.  To date, local regulations have largely been concerned not with the now legal use of recreational cannabis, but with regulating how property can be used in connection with the cannabis industry.  Specifically, most local regulations aim to limit, if not prohibit, the use of local land for the cultivation or sale of recreational marijuana.  These regulations, and the legalization of cannabis in general, stand to have a great impact on the rights and obligations of property owners, landlords, real estate professionals and many others.

The concerns of property owners vary widely and depend, in part, upon social, economic or political views regarding the legalization of recreational cannabis.  Some farmers, ranchers and residents of rural agricultural areas fear the cultivation of cannabis will bring with it security concerns, given the industry’s sometimes shadowy past.  Others also fear that the industry will squeeze out traditional agricultural uses, such as grazing, in favor of higher-value cash crop.  In urban areas, residents share similar safety and security concerns.  Many Bay Area cities and counties have reacted by placing limitations on the number and location of dispensaries, keeping them away from schools and other sensitive areas.

On the other hand, many property owners have shown excitement at being either directly or indirectly involved in the industry.  Relatively easy to grow and with a high value per square foot of growing space, cannabis is an attractive crop for agricultural and/or industrial landowners who have otherwise fallen on hard times.  For example, space once used for the cut-flower industry on the Peninsula and for berries in Monterey County, space now fallow due to cheap overseas imports, is well suited for marijuana growing.  Rents for greenhouse space in some of these areas has tripled due to the anticipated demand for cannabis growing space.  This has understandably generated interest amongst struggling property owners looking for a new stream of income.

However, social and environmental concerns aside, the drive to repurpose land for use in cannabis cultivation can present thorny legal issues.  Local regulations vary widely.  Moreover, a state license may be meaningless absent compliance with local laws.  A landlord may be in for a rude awakening, and some missed rent payments, when a tenant’s operations are shut down for failure to adhere to complex local laws.  Property owners must contemplate legal compliance, and the result of non-compliance, in any agreement related to cannabis cultivation or sale.  Finally, given the continued nationwide illegality of the industry, property owners continue to risk legal consequences at the Federal level.

Lastly, just like rent-control, historic preservation or other local controls, the new regulations present an area of law that real estate professionals need to be prepared to discuss with their clients.  This is especially true for those representing potential buyers or lessees.  If an agent knows her prospective buyer or commercial tenant is interested in a property for use in the industry, the agent should at least be sufficiently knowledgeable to direct the client to the appropriate professionals and/or local authorities.  As another example, knowing which jurisdictions absolutely bar, versus conditionally allow, any such activity will help that client locate the right property.

What’s the takeaway?  Regardless of where you stand on the moral or social issues presented by recreational cannabis, themes outside the scope of this article (and outside the practice of this attorney), it is clear that savvy landowners, investors and professionals need to know how local regulations impact their property.  Whether that means assessing the potential negative impacts of nearby cannabis operations or the viability putting a given property to work in the industry requires analysis on a case-by-case basis.

The key is to pay attention the industry’s impact, keep updated on changes to local regulations and to not assume that, just because something was permissible in one locale, it will be allowed in another – even just one city down the road.  Importantly, getting a qualified legal opinion regarding relevant land-use restrictions and regulations at the outset of a transaction or venture will go a long way toward reducing costly surprises down the road.

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