How federal marijuana rescheduling rewrites the rules for cannabis business leases

Key points:

• Federal medical marijuana rescheduling means qualifying operators can deduct rent from federal tax returns.
• Lease terms may also be renegotiated to reflect lower risk.
• The situation is more complicated for adult-use cannabis operators.

Federal medical cannabis rescheduling is creating opportunities for legal MMJ operators, starting with their real estate leases.

For operators who spent years paying rent they couldn’t deduct on their federal tax returns, the change translates into real dollars. For landlords, it reframes who counts as a low-risk tenant.

And for both, the reclassification of state-legal medical cannabis as a Schedule 3 drug opens a window to revisit lease terms written for a different legal reality, attorneys contacted for this article told MJBizDaily.

“It’s not like people need to run out and make changes,” said Sally Kent Peebles, a partner at cannabis law firm Vicente’s Florida office.

Peebles isn’t telling clients to overhaul everything overnight. Instead, operators should revisit their lease terms to see what can be adjusted. And at least for medical operators, rescheduling will mean some extra cash flow with which to do it.

Does marijuana rescheduling mean 280E relief with rent costs?

April’s Justice Department final order reclassifying medical cannabis as a Schedule 3 drug has meant new several opportunities for medical cannabis operators.

These include relief from Section 280E of the Internal Revenue Service Code, which blocked plant-touching cannabis businesses from deducting ordinary business expenses on their federal returns.

This includes rent. And the impact of claiming rent is profound.

“The deduction of cost of goods – we can now deduct rent for the first time – that’s by far the biggest immediate impact,” said Joe Puglise, CEO of Fino Cannabis, a Florida-based vertically integrated operator.

Florida remains the country’s biggest medical-only market.

“It helps us with margins,” said Puglise, who estimated the cost savings somewhere between 15% and 20%, depending on how a company is structured. That’s not a minor shift – and it changes the calculation on leasing versus buying, he said.

The price to acquire a location hasn’t gone up or down, but the net effect of me being able to deduct my rent could save me 15 to 20%,” he said. “It really makes renting versus buying more attractive on a relative basis.”

Should medical cannabis operators renegotiate their leases?

Many lease provisions that are painful for operators exist simply because landlords were hesitant about cannabis tenants. One of the most common examples is the personal guarantee.

“A huge pain point is a personal guarantee,” said Vicente LLP’s Peebles, whose husband formerly owned a Denver dispensary.

“Guaranteeing a lease for 10 years is terrifying,” she said. “The only reason is because of federal illegality.”

Now that medical operators are on steadier footing, there’s a real case for switching to a corporate guarantee or building in a burn-off provision that kicks in after a few years of on-time payments, she said.

She also advises operators to build in language that keeps pace with ongoing regulatory changes.

With the U.S. Drug Enforcement Administrative hearings on reclassifying all cannabis as a Schedule 3 drug concluded but the outcomes still pending, Peebles recommends interim clauses tied to the final ruling.

“Make sure there’s language anticipating a mid-lease change, saying it will automatically adjust pursuant to the federal rescheduling of marijuana,” she said.

There’s a new compliance layer to address as well. State-licensed medical businesses are registering with the DEA. Inspections are underway across the country. A landlord may “want to say the tenant must maintain DEA registration Peebles said, alongside existing state licensure requirements.

Is it better for cannabis operators to buy or lease real estate?

Puglise mentions cannabis rescheduling in lease negotiations. He tells landlords that better margins a mean lower risk of defaulting on a lease – and makes a cannabis tenant a better bet than before.

“Lower default risk and a stronger balance sheet means we can be more aggressive in negotiations,” he said. “It makes any MMTC more creditworthy and potentially a better tenant.”

The challenge is that most landlords don’t know what he’s talking about.

“I might mention rescheduling to a landlord, and they won’t know what I’m talking about,” Puglise said. “Most don’t know how to connect the dots to 280E relief that makes us a stronger tenant. I have to connect the dots for them.”

When operators bring rescheduling up as a bargaining point, some landlords become guarded.

“They don’t want to give up any leverage they have – they want to maximize rent – but they’ll politely acknowledge it,” he said.

Puglise believes the dynamic will shift over time as communication from operators convinces landlords that cannabis companies are strong tenants.

What about adult-use cannabis operator leases?

In states with both medical and adult-use licenses, the picture grows more complex.

Cassia Furman in Vicente’s California office noted that the state’s Department of Cannabis Control allowed retailers to split their medical and adult-use licenses into separate entities to make DEA registration easier.

“Those taking advantage of the rules now have two entities operating out of the licensed premises and should inform (landlords) of the arrangement and state regulations,” Furman said.

She also noted that registrants in states with adult-use cannabis should check whether their lease requires disclosure of permits.

Landlords “should consider adding DEA registration/permitting as part of their tenant diligence process,” she said, keeping in mind that not every operator will choose to register under the current medical-only program.

Operators should pull their current leases and flag any clauses tied to federal illegality, starting with personal guarantees, permitted-use language and insurance requirements.

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.