CREJ - Journal

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March 18-March 31, 2015 — COLORADO REAL ESTATE JOURNAL — Page 33
Law & Accounting
C olorado has set the legal
and policy standards
for implementation of
the legalization of medical and
recreational marijuana sale and
use. In its first report, the Colo-
rado Department of Revenue's
Marijuana Enforcement Division
indicated that in 2014 nearly
$700 million of medical and rec-
reational marijuana was sold in
Colorado and at the end of 2014,
322 retail stores were licensed,
833 licenses were issued to retail
businesses in general and 1,416
medical marijuana businesses
were approved by the state.
All of the licenses involve a
real estate component. Repre-
senting a party in a commercial
real estate transaction related to
the marijuana industry requires
additional due diligence and
documentation of the transac-
tion, regardless of whether the
party is a tenant, landlord, seller,
buyer, lender or developer con-
nected to real property – docu-
ments that paper real estate
transactions should be revised
to reflect changes in state law
regardless of whether or not the
transaction involves medical
or recreational marijuana if the
drafting party wants to control
the use of its real property. It
is not sufficient to rely on the
generic no violation of law cov-
enants in documents to control
the use of the property.
Additional provisions, cov-
enants and representations are
necessary to protect all of the par-
ties to the transaction. No other
industry has the tension between
state law and federal law that
could potentially result in dra-
matically different outcomes at
the state level compared with
the federal level. Until marijuana
is removed as a Schedule 1 drug
from the Controlled Substances
Act, this tension will remain and
the papering of the deal requires
addressing head-on the addi-
tional issues created by this ten-
sion. All aspects of the marijuana
industry remain illegal under
federal law and are beyond the
scope of this article.
Assuming the represented
party has compliedwith the state
law requirements for medical or
retail marijuana, (See Colo. Rev.
Stat. §§ 12-43.3-101 to 1102 and
recreational marijuana, Colo.
Rev. Stat. §§ 12-43.4-101 to 1101,
the “Act”), and understands
the risks of
the potential
liability for
violations of
the federal
law, due dili-
gence is still
required by
all parties to
the transac-
tion to protect
its interests.
Henny Penny
may be right;
the sky may
be falling, but isn’t that when it
is most important to have all the
ducks in a row?
Due diligence items to
consider related to the
property
n Encumbrances. Review all
encumbrances recorded against
the property. Is the property held
free and clear or is it encum-
bered by a loan? Are there cov-
enants and other conditions that
restrict the use of the property?
If the property is encumbered
by a mortgage, both landlord
and tenant should review the
mortgage and loan documents to
determine if the use is prohibited
by the documents. If the docu-
ments are silent with respect to
prohibiting amarijuana use, each
party will have to determine its
threshold for risk given the mul-
titude of federal laws that are
implicated in the financing and
banking aspects.
n Zoning and local law com-
pliance. Of the 321 jurisdictions
in Colorado, only 67 allow the
sales of medical and recreational
pot, 21 allow only medical sales,
while five allow only recreational
sales. The majority of jurisdic-
tions prohibit medical and rec-
reational sales. If the property is
located in a jurisdiction that per-
mits the desired use, the property
must still be zoned to permit the
use, whether it is retail, medi-
cal, cultivation, manufacturing or
testing.
n Physical condition of prop-
erty. Most buildings are not
designed for any marijuana use.
This is an area in which working
with an industrial design consul-
tant who understands the specif-
ic needs of the use would benefit
both the owner of the property
and the tenant.
n Licensing requirements.
In addition to the act, regula-
tions enforced by the MED dic-
tate licensing requirements. All
parties should understand the
various steps, necessary docu-
ments to obtain a license and the
implications of failing to obtain
a license for the parties and the
transaction.
n Insurance. Each party
should determine whether the
policies required to be carried by
it adequately provide coverage as
required by the transaction and
sufficiently cover the risks.
Various documents
n Lease Issues. Tenants should
insist that the use provision state
the licensed marijuana use is
permitted under the lease. The
landlord and tenant each need
the right to terminate the lease,
but for different reasons. Both
parties will want the right to ter-
minate if federal policy changes
to enforce the CSA in the states
that have legalized marijuana. If
the license is lost, each party may
want the right to terminate, again
for different reasons. The lease
should also address security
issues, alterations to the property,
abandonment and other issues
related to furniture, fixtures and
equipment. The guaranty or
other security also will be a criti-
cal issue to landlords.
n Loan documents. Any per-
son making a loan secured by
real property in Colorado should
review his documents to include
affirmative and negative cove-
nants related to the intended use
of the property.
n Purchase and sale agree-
ments. Consider the implications
in a sale of property that has been
used for a marijuana use or will
be used for a marijuana use on
the disclosures and representa-
tions in the purchase agreement
to protect the represented party.
Additionally, numerous other
documents such as covenants
and restrictions and recorded use
restrictions in deeds or easement
agreements may be required to
document how the owner of the
property desires to control the
use.
Parties involved in the transac-
tion will benefit from upfront
due diligence and thorough
documentation of the parties’
intent with regard to use of the
property.s
Amy Brimah
Managing partner,
Brimah LLP, Denver
6400 S. Fiddler's Green Circle
Suite 1000
Greenwood Village, CO 80111
Phone (303) 796-2626
Fax (303) 796-2777
Deals. Litigation. Great Service.
Merc Pittinos Matt Dillman Abe Laydon
Attorneys at Law