WHAT'S IN THOSE BROWNIES? - COMMERCIAL REAL ESTATE AND THE DEVELOPING MEDICAL MARIJUANA MARKETPLACE - Sacks Tierney P.A.

JANET E. JACKIM, ESQ.
                  Sacks Tierney PA
                 September 21, 2018

WHAT’S IN THOSE
BROWNIES?
  COMMERCIAL REAL ESTATE AND
  THE DEVELOPING MEDICAL
  MARIJUANA MARKETPLACE…

2   Janet E. Jackim, Esq.   9/21/2018

MMJ IN ANCIENT HISTORY
 12,000  years in cultivation
in Mongolia and Siberia
 Ancient Chinese used
  every part of the plant
 Hemp replaced papyrus,
  silk and clay tablets as
  paper
 2,000 B.C. Egyptian scrolls
  depicted MJ for sore eyes
  and cataracts

3   Janet E. Jackim, Esq.   9/21/2018

ANCIENT
HISTORY
    Greeks used MJ
     for earaches and          1611 Jamestown
     inflammation               grew MJ alongside
    Spanish brought            tobacco
     MJ to the                 1900’s States
     Americas in                began prohibiting
     1500’s
                                MJ sales
    1799 Napoleon
     brought MJ to             Jan. 2018 US AG
     France from                Sessions ends Cole
     Egypt                      Memorandum

4   Janet E. Jackim, Esq.   9/21/2018

NATIONAL MARKETPLACE
 1996: MMJ first legalized in California
 2010: Arizona enacted AMMA initiative
  2011-2012:   Regulations promulgated,
   certificates awarded by lottery
  2013-2014: First dispensaries open
 2018: 1 state (Idaho) does not recognize
  MMJ’s benefits
 2018: 9 states legalized recreational MJ
 2018: > 80% of US adults: MJ has health
  benefits, MJ use rising among older
  Americans

5   Janet E. Jackim, Esq.   9/21/2018

ARIZONA MEDICAL MARIJUANA ACT
 Dispensaries    (100+) – non-profit LLC or corp to
  sell MMJ to public, other dispensaries
 Cultivation Facilities – profit LLC or corp to
  grow, cultivate, produce, cook, extract MJ
 Patients (200,000) – registered, with patient ID
  card, with qualifying medical condition
  (HIV/AIDS, cancer, Hep C, Alzheimer’s and
  others), limit = 2.5 oz./2 weeks
 Caregivers – registered ID card, can grow and
  dispense MMJ for 5 patients
 AZDHS: Arizona Dept. of Health Services

6   Janet E. Jackim, Esq.   9/21/2018

DEFINITIONS
  Cannabis:    tall plant with a stiff upright stem,
   divided serrated leaves, and glandular hairs.
   2 main species: sativa (stimulating), Indica
   (calming)
  Marijuana: psychoactive dried resinous
   flower buds and leaves of female cannabis
   containing THC (tetrahydrocannabinol)
  Useable marijuana: dried flowers of
   marijuana and mixture or preparation thereof,
   but not seeds, stalks or roots
  Hemp: cannabis sativa plant grown for
   industrial uses, e.g., fiber, rope, paper

7   Janet E. Jackim, Esq.     9/21/2018

TYPICAL ORGANIZATIONAL
STRUCTURE

                                      CULTIVATION FACILITY
                                              LLC

 MANAGEMENT
                                            $$$$
 COMPANY LLC
                     NON-
           $$$$      PROFIT
                  DISPENSARY
                              $
                              $
                              $

8   Janet E. Jackim, Esq.   9/21/2018

 CRE AND MMJ
I. Zoning, Licensing, Permitting:
    Usually SUP needed, but each jurisdiction
     differs – read the building, fire and zoning
     Codes
    County processes are easier
    City/County economic development
     department can assist
    Need ADHS certificate and approvals to
     operate dispensary, cultivation, kitchen
      No new certificates being issued
    Timing of applying for certificate, SUP,
     permits

9   Janet E. Jackim, Esq.   9/21/2018

CRE AND MMJ
II. Contracts:
 Lease or purchase agreement and
   licenses to use
    Dispensaries, extractors, kitchens: lease or
     sublease
    Cultivators: purchase or lease
    ‘Investor’: purchases, builds out for, leases
     to dispensary, which subleases to kitchen
    A lot of cultivation facilities in play now
 Management    agreements: cultivation,
 dispensary, others

10   Janet E. Jackim, Esq.   9/21/2018

CRE AND MMJ
III. Purchase Agreement:
 Conditions precedent are critical
       All permitting, zoning in place
       Certificate and ATO’s in place
       Kick out if change in law, loss of certificate
   Purchasing entity could be affiliate
       Allows siphoning off of $$
       Separates liabilities
   Finding escrow, title insurer difficult
       CC&R prohibitions
       Compliance with law issues
   Cash and SAR reporting to IRS
   Buyer’s lender approval

11   Janet E. Jackim, Esq.   9/21/2018

CRE AND MMJ
IV. Dispensary Lease:
   Kick-out if law changes or loss of certificate
   Must be “reasonable” per AMMA:
     Term, long or short
     Landlord’s lien // collateral
     Right to purchase, ROFR
     Substantial premium in rent -- no profit sharing
   Compliance with law at major cost to all parties
   Title issues (CC&R’s) and lender approval to use
   Cross defaults
   Right to expand into adult use
   Disclosure of MMJ use
   Exclusive use
   Special security, hours of operation

12   Janet E. Jackim, Esq,   9/21/2018

CRE AND MMJ
V. Cultivation Lease:
 All of bullet points re: Dispensary Lease
 Tenant/subtenant: dispensary, contractor
 Dispensary owns plants and products
       Cultivation operates only for benefit of
        dispensary (dispensary ‘attaches’ to cultivation
        site)
       Requires oversight of dispensary, landlord
   Indemnifications, audits are critical
   Termination = removal , destruction of plants
   Plant and product standards, testing
   Increased dispensary access rights
   Environmental issues

13   Janet E. Jackim, Esq.   9/21/2018

CRE AND MMJ
VI. Takeaways:
o Complex area of CRE, law (federal, state,
  local) and accounting
o Many unknowns
o Rapid expansion (opportunities), rapid and
  constant change (risks)
o High risk/reward
o Rapid change in Americans’ attitudes
o State v. Jones (Ariz. Ct. Appeals June, 2018) –
  market changer?
o Cash … cash … and more cash = Big Brother
o Risk of forfeiture by the feds and/or state