Money and Dirt: A blog on legal issues impacting California real estate investment, development, and secured lending

California Enacts New Regulatory Framework for Medical and Recreational Cannabis

This blog usually explores the relationship between real estate and one green substance — money.  But cannabis is the greenery getting a lot of recent attention in California, and its impact on real estate will be difficult to ignore as the industry grows like a weed.  (According to some estimates, California’s cannabis industry will reach $5-$7 billion.)

Earlier this week, the Governor signed California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), otherwise known as Senate Bill 94.

Here is a quick summary of the MAUCRSA and its potential impacts on owners/lessors of real estate connected to the cannabis industry:

Key Points from the MAUCRSA

  • The Act essentially folds certain key components from the pre-existing Medical Cannabis Regulation and Safety Act (“MCRSA“) with the recent voter-approved Control, Regulate and Tax Adult Use of Marijuana Act (“AUMA,” otherwise known as Proposition 64, which passed on November 8, 2016).
  • Any person aged 21 years or older may possess and use up to 28.5 grams of cannabis, up to 8 grams of concentrated cannabis, and up to 6 living cannabis plants.
  • The Act establishes a licensing and regulatory scheme for those who participate in commercial medical cannabis activity or commercial adult-use cannabis activity.
  • The Bureau of Marijuana Control is re-named the Bureau of Cannabis Control, which will be responsible for licensing issues.  (“Cannabis” is the historical scientific name for the plant, while “marijuana” is said to be the racially charged term born from the 1930s efforts to ban the plant led by Harry Anslinger’s Federal Bureau of Narcotics — see articles here and here for background.)
  • The Act establishes testing laboratory licenses for the testing of both adult-use and medicinal cannabis.  Holders of testing laboratory licenses are not allowed to engage in any other commercial cannabis activity.
  • The Act imposes detailed restrictions on the transportation, delivery, packaging, advertising, and marketing of cannabis products.
  • A Cannabis Control Appeals Panel will hear and resolve disputes regarding licensing.
  • An excise tax will be imposed on cannabis transactions.  The excise tax will be measured by the average market price of a retail sale instead of by the gross receipts of a retail sale.
  • The Act imposes additional restrictions and guidelines on the source of water supply and the use of pesticides in cannabis cultivation.
  • Of course, since this is California, there will be a program for organic certification for cannabis, comparable to the federal National Organic Program and the California Organic Food and Farming Act.
  • The Act exempts adult-use cannabis-infused butter from the Milk and Milk Products Act of 1947.
  • The Act authorizes the formation of “cannabis cooperatives” — business entities consisting of 3 or more persons engaged in the cultivation of cannabis products.
  • Significantly, the Act eliminates asset forfeiture as a penalty under State law for actions of a cannabis licensee, its employees, and its agents that are permitted under State and local law, and also for any person who, in “good faith,” allows his or her property to be used by a cannabis licensee, its employees, and its agents as permitted by State and local law.

Potential Impact on Owners/Lessors of Real Estate Used for Cannabis:

Owners of real estate used for cannabis cultivation or sales will need to pay close attention to the details of the MAUCRSA in order to minimize potential liability.  Property owners who plan to directly participate in the cannabis industry will need sophisticated legal guidance, as do participants in any heavily regulated industry.

The same is also true for owners who passively lease their property to cannabis industry participants.  While the risk of asset forfeiture under State law is decreased by the MAUCRSA, lessors would be wise to pay special attention to ensure that their tenants’ activities are “by the book” and comply with the new regulations.

A lessor’s protections against asset forfeiture under the MAUCRSA depend on the lessor’s “good faith.”  Specific lease provisions (such as warranties regarding the tenants’ compliance with the MAUCRSA regulations) and other lease performance practices can go a long way toward establishing the lessor’s good faith and insulating against the risk of asset forfeiture.

Of course, none of these safeguards can protect against the risk of federal enforcement, since cannabis is still considered a dangerous Schedule I substance under the federal Uniform Controlled Substances Act.  The new Attorney General Jeff Sessions has rattled the nerves of some cannabis industry participants with comments seemingly resurrected from the 1980s War on Drugs heyday.  But many expect that federal agencies will continue focusing on bigger, more important issues than cannabis — including the deadly impacts of legally prescribed opiate drugs — especially as massive tax revenues continue to stream in from the newly regulated cannabis industry.

Look for a more detailed analysis of the MAUCRSA soon on Wendel Rosen’s Cannabis Law Blog: https://calcannabislawblog.com/

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