Part II – Additional Considerations for Licensees and Property Owners
by Nicholas L. DePaolo, Esq., and Daniel Pierre, Esq. of Genova Burns LLC
Potential Problems to Avoid
The current version of the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act, which was passed by the state Legislature on December 17, 2020, provides a framework for legalizing recreational cannabis in the state, including six different classes of licenses to be considered by those looking to enter the cannabis business marketplace. As we discussed in Part I in our series on cannabis, early identification of an ideal region and/or municipality for the proposed licensed premises is critical to success. However, there are a host of other factors and potential snags that an applicant must take into consideration before selecting a location. For example, applicants will want to pay particular attention to the requirements of the New Jersey drug-free zone laws and the Federal Drug Free Zones Act which will serve to prohibit any class of license from operating within a certain distance of “sensitive uses” such as schools, places of worship, parks, playgrounds and children centers, as well as any other proximity restrictions that may be imposed at the municipal level (i.e., proximity restrictions with other licensees, as is often the case with liquor licenses throughout the state). This issue is compounded by the density of the state, resulting in historically low inventories of industrially zoned locations needed by most classes of licensees.
One potential solution to this problem that both potential applicants and property owners alike should consider is the recent amendment to the Local Redevelopment and Housing Law which equips municipalities with the ability to designate shopping centers and office parks with significant vacancies as properties that qualify as areas in need of redevelopment pursuant to the Local Redevelopment and Housing Law. The amendment encourages the redevelopment of underutilized retail districts, shopping centers and office parks throughout the state, which could prove to be a huge asset to potential applicants when searching for a suitable location in a competitive market by providing an opportunity to work with municipalities to develop redevelopment plans that would permit additional industrial uses in these areas.
Applicants will also need to focus in on the particular class of license that they will pursue, which will allow them to identify additional obstacles and potential pitfalls. For example, those seeking Class 1 and Class 2 licenses will necessarily require industrial space where an in-depth environmental analysis of the property will be needed in order to safeguard against unknown environmental liabilities under New Jersey’s comprehensive environmental regulations. Prospective Class 1 licensees must also be aware of the bill’s prohibition against cultivation operations on lands valued/assessed/taxed as agricultural or horticultural uses, as defined in the Farmland Assessment Act of 1964. On the other hand, applicants seeking Class 5 licenses, who may be seeking to rent commercial space in a multi-tenant building or shopping center, will have different concerns, such as existing tenant mix, and the impact they might have on proximity restrictions (i.e., the bill provides that a cannabis retailer’s premises is prohibited from being located in or upon a premises engaging in the retail sale of food or alcoholic beverages) or other aspects of the cannabis business. Applicants should also consider whether the location will provide for any anticipated future expansion (i.e., when restrictions on vertical integration are removed). In all cases, applicants will want to inventory all obstacles and potential pitfalls with the help of a team of professional planners, architects, engineers and attorneys in order to be sure that the documents related to the applicant’s particular real estate transaction (e.g., contract of sale, lease agreement, etc.) provide the applicant with adequate protections that are narrowly tailored to this emerging industry.
Issues to Consider as a Property Owner
It is also worth noting that the legalization of recreational use cannabis will undoubtedly present prospective landlords in New Jersey industrial, commercial and retail markets with excellent business opportunities to engage potential long-term tenants in a coveted new industry. However, before engaging such tenants, landlords must conduct their own due diligence to carefully analyze and protect against potentials drawbacks related to title insurance, property/commercial liability insurance, financing restrictions and federal and state enforcement actions, both related to federal restrictions (i.e., the Controlled Substances Act and the Crack House Statute) and state licensure regulations imposed by the Cannabis Regulatory Commission. Perhaps most significantly, property owners should be aware that permitting cannabis related uses under any class of license will deem the property owner ineligible for State or local economic incentives in relation to the property. Landlords should also consider whether the use will present a nuisance (e.g., odor), actionable by other tenants or the municipality, and take inventory of their current lease agreements (in the context of a multi-tenant building or shopping center) to analyze whether entering into a lease agreement with a prospective cannabis tenant will trigger an event of default on the behalf of the landlord. Accordingly, a landlord engaging a cannabis tenant will want to ensure that the governing lease agreement is narrowly tailored to provide the landlord with all rights and remedies needed to adequately protect the landlord as the property owner, including but not limited to indemnifications, early termination rights, and premises inspection rights that align with state regulations, all of which will be paramount.
While we await Governor Murphy’s signature to the pending bill, would-be licensees should prepare for the recreational use marketplace now. Regardless of the type of cannabis license sought, it is very likely real estate will play a big role in furthering the cannabis business plan. In short, don’t be left in the smoke as New Jersey’s cannabis industry takes over the industrial, commercial, and retail real estate markets in the state.