Leasing Due Diligence Checklist for California Cannabis Businesses

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For any new commercial business, the decision to purchase or lease a building is an important one—even more so for the cannabis industry.

While buying a building may be appropriate for a well-capitalized cannabis business that requires large-scale facility improvements, such as cultivation and volatile manufacturing, leasing a building is generally the most feasible way to start operations. Not only does leasing offer affordability and flexibility; but for delivery, distribution, retail, and even infusion manufacturing businesses, a leased industrial or retail space can be perfectly suitable for the operation, provided adequate protections are built into the lease. There are, however, substantial risks to taking on a long-term and expensive lease, especially when tenant improvements are required.

By spending time upfront performing a thorough due diligence review of the space, operators can avoid potentially costly leasing blunders. Performing diligence on the space is especially important if the landlord disclaims all warranties that the space is fit for the particular purpose, which is often the case in cannabis. Without a due diligence review of the space, a new operator may end up with a space that costs substantially more to operate than originally anticipated; or, worse yet, a space unfit for use altogether due to permitting, zoning, or other regulatory restrictions.

Below are items a potential cannabis tenant should review when considering a new space for lease.

Zoning and Sensitive Uses

Is the building zoned appropriately?

In the cannabis industry, it is vitally important that the building or unit is zoned appropriately for the intended use. Do not just take a landlord or broker’s word for it. Take the time to review the local cannabis ordinance and zoning map to verify for yourself that the property is appropriately zoned for your intended use.

Is the building or unit within a setback radius of sensitive uses?

Once you’ve made sure that the property is appropriately zoned, the second inquiry should be whether it is located the correct distance from any sensitive uses, such as schools and playgrounds. Again, check the local ordinance to see which sensitive uses the jurisdiction calls out, and then check an aerial map to see if there are obvious potential knockouts. The local planning department will usually be willing to look up your proposed address and confirm whether the property is eligible for cannabis permitting, so don’t hesitate to reach out to them as part of your due diligence process.

Is there a limit on cannabis business concentrations?

Some jurisdictions limit the concentration of cannabis businesses near each other. In this case, look not only for open and operating cannabis businesses nearby, but also ask the planning and building department if there are local cannabis applications in process. Applications that are already being processed by the planning and building department will likely be approved before yours, and therefore could make your building nonviable if there is a restriction on concentration.

Local Cannabis Permitting Process

Have you verified the local permitting process?

Once you’re satisfied that the property is zoned correctly, is not within the setback radius of any sensitive uses, and otherwise satisfies all regulatory restrictions related to its location, make sure to verify the local permitting process so that you know what to expect once the lease is signed. Many properties are advertised for lease or sale with a permit, but whether a local permit is transferrable is entirely up to the local jurisdiction (state licenses are not transferrable).

Is there already a Conditional Use Permit for the property?

Most jurisdictions in California have combined their local land use permitting process with a special business permit process to create their cannabis permitting system. Land use permits, such as Conditional Use Permits (CUPs), run with the land and can generally be transferred from one business to another. Accordingly, if a previous owner or tenant has already gone through the process of obtaining a CUP for the property, it’s often not an issue to change the name on the CUP. You can and should verify this with the local planning department. You should also request to see the CUP and review its conditions since these also run with the land and bind any new cannabis tenant.

Do you need to apply for a new special business permit?

In contrast to CUPs, special business permits are specific to the business, so there may be restrictions on their transfer from one business to another. Some jurisdictions do not allow any transfer of a cannabis business permit, in which case your company will need to apply for a new one. Again, check the local ordinance’s transferability provisions and contact a local government agency to verify any special procedures involved. If you have to apply for a new permit, make sure the local jurisdiction is still accepting new applications. You can also ask how long it might take to process a new application since you won’t be able to receive a state license until you obtain a local permit. You may be able to negotiate for reduced rent during the licensing process, but your start-up budget should factor in rent payments prior to operations.

Building Permits and Certificates of Occupancy

Does your jurisdiction require a Certificate of Occupancy?

Almost all jurisdictions require a Certificate of Occupancy if a property is being permitted for cannabis for the first time. Obtaining a Certificate of Occupancy can be costly. First, you must hire an architect and engineer to draw specialized plans showing the existing and proposed layouts of the property, including its mechanical, electrical and plumbing systems. Some jurisdictions require Certificates of Occupancy even if no improvements are proposed. You should verify the requirements for particular premises with the local building department.

Has past work been done on the unit without a building permit?

If you do plan to make tenant improvements, ask the landlord whether work has previously been done in the unit without a building permit. If it has, you may be required to remove some of that work or bring it up to code. The building department will have a record of all previous building permits for the building or unit, so reach out to them for the building permit record for the building or unit. Be especially cautious if the lease discounts any landlord liability for unpermitted work.

Is the building or unit up to code?

A new Certificate of Occupancy requires that the building be brought up to current code, so your due diligence process should include a review of the building or unit’s code compliance. Many new cannabis tenants have been dismayed to learn that they would be required to install a new sprinkler system, upgrade an old sprinkler system, or bring corridors and bathrooms into compliance with the Americans with Disabilities Act (ADA) and California’s disabilities access regulations. Sprinkler and ADA upgrades in particular can add tens of thousands of dollars to your buildout costs.

If you have questions about the property’s sprinkler system, reach out to the local fire department or a fire suppression consultant for an analysis of the existing system. If you have questions about ADA compliance, an architect or engineer can perform an access compliance evaluation.

Lastly, if you’re a manufacturer looking to rent a space in a multi-tenant building and you need to store hazardous materials onsite, check with the local fire department to ensure that the building has not reached its allowable capacity for hazardous materials (especially if there are other manufacturers in the building).

Performing Due Diligence Now Can Prevent Future Headaches

When it comes to cannabis leases, closing the deal can feel especially urgent. However, taking time up front to make sure that the property will work for your business can save you some terrible headaches and expenses after the lease is signed. If nothing else, it’s helpful to know exactly what lies ahead for your permitting and regulatory process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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