The 3 Most Common Types of Cannabis Real Estate Agreements

As you determine the type of license and the location of the property, there are different cannabis real estate agreements (transactions) to choose from to acquire possession of the property.

Typically, possession (not necessarily ownership), of the property is required to apply for a license with the municipality where it’s located. 

Types of Cannabis Real Estate Agreements

Each type of cannabis real estate transaction has certain advantages and disadvantages including those that are specific to the cannabis industry.

There are many different types of cannabis real estate agreements.

However, there are three we see (and execute) most often.

Interested in finding or purchasing cannabis friendly real estate? Request a consultation now.

Commercial Purchase Agreement

The most common type of cannabis real estate agreement we see is the purchase of a marijuana facility by a commercial purchase agreement. 

This is a contract that outlines the terms of a property deal between a buyer and a seller.

Owning the property provides ultimate control of the property and is therefore considered a company asset. 

This means you don’t need the landlord’s permission to use the property as a marijuana facility.  

Even though cannabis is legal in Michigan, marijuana continues to be classified as a Schedule I drug under the federal Controlled Substance Act (CSA). 

For that reason, many expenses aren’t granted to marijuana facilities that are otherwise available to other businesses. 

For cultivation and processor licenses, depreciation is part of cost of goods (COGS) sold.

This is why an expense for depreciation is allowed.

Additionally, purchasing the property by a commercial purchase agreement provides the owner title to the property.  

Disadvantages of Commercial Purchase Agreements

The major disadvantage of purchasing a property by a purchase agreement, is the major out of pocket expense of purchasing the property. 

Additionally, purchasing the property may cause liquidity issues, as money is tied into the property.

Often, in the cannabis industry, major banks aren’t willing to provide a mortgage for a marijuana facility.

Interested in finding or purchasing cannabis friendly real estate? Do you need an attorney to create and execute a real estate contract? Request a consultation now.

Land Contract

A land contract is cannabis real estate agreement between a buyer and a seller.

The contract states that the buyer purchases the property, but won’t receive the legal title until the debt resolves.

This type of real estate agreement provides an ownership interest in real estate. 

A land contract is an opportunity to receive seller backed financing where many banks may be unwilling to finance a marijuana facility. 

A land contract may attract buyers who would otherwise not be able to purchase the property.

Disadvantages of Land Contracts

On the downside, the seller retains the title until the contract debt fully resolves.

In the event the buyer defaults on even one payment, the seller may proceed in forfeiture removing the buyer from the property.

Interested in finding or purchasing cannabis friendly real estate? Request a consultation now.

Lease Agreement

A Commercial Lease Agreement is another type of cannabis real estate agreement.

This is when you rent a business property to or from another individual or company.

But what’s the major advantage of leasing a property?

Significantly less cash is tied up in the property. 

In many cases, banks may not provide lending for a marijuana facility and a lease agreement provides more flexibility. 

Leasing provides a fixed monthly cost to allow for maintenance. 

A lease agreement will provide an opportunity to possess property for a shorter period of time. 

Additionally, many cannabis lease agreements provide an opportunity to purchase the property at a later date. 

This would allow the tenant to confirm that the business is profitable before deciding to purchase the property.

Disadvantages of Lease Agreements

The major disadvantage of is this type of cannabis real estate agreement is the loss of property control.

Landlord must be willing to consent to the use of the property as a marijuana facility. 

Additionally, you will not be gaining equity in the property and in some cases, rent may be more expensive than a mortgage payment.

Interested in finding or purchasing cannabis friendly real estate? Request a consultation now.

What are the Contingencies of Cannabis Real Estate Agreements?

To best protect the parties, contingencies often exist in cannabis real estate transaction agreements. 

This is in the event you can’t obtain proper approvals for the marijuana facility. 

Often times, the purchase price of qualified cannabis properties is inflated.

For that reason, contingencies must be in place to protect buyers from purchasing a property that would otherwise not hold the same value. 

Contingencies are often placed by the buyer to first gain municipal approval before gaining control of the property.

This is why you need a cannabis attorney familiar with these contingencies.

The due diligence period within a cannabis real estate agreement often provides an opportunity for the buyer to:

1. Gain exclusive access to the property
2. Review zoning requirements, and
3. Prepare a municipal application.

In the event a municipal license is denied, you might receive a full or partial refund of the security deposit.

This of course, depends on the contract’s language.

Furthermore, the due diligence period must be fully outlined within the agreement.

Additionally, the agreement must provide a certain time period before the security deposit becomes wholly or partly non-refundable.

This is why additional due diligence periods exist within a real estate agreement.

Interested in finding or purchasing cannabis friendly real estate? Request a consultation now.

How to Execute Cannabis Real Estate Agreements

Each type of cannabis real estate agreement has its own benefits. 

Based on a buyer’s resources, liquidity, location and type of property, an experienced cannabis attorney can work to acquire a property based on the requirements of the buyer and the zoning restrictions of the municipality. 

An experienced cannabis attorney will also include contingencies and specific due diligence period within the real estate transaction to best protect the parties.

Interested in finding or purchasing cannabis friendly real estate? Request a consultation now.