DOJ Signals Shift on Medical Marijuana

Posted by Bill Kyriagis on October 03, 2011

Police Line.jpgIn October of 2009, the United States Department of Justice issued a memorandum (the "Ogden Memo") stating that scarce federal resources should not be focused "on individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." The Ogden Memo also emphasized the federal commitment to enforcing federal drug laws and that marijuana remained illegal, but it was widely perceived as marking a significant decrease in the risk of federal criminal prosecution of state-sanctioned medical marijuana activities. This perception was arguably the catalyst that sparked the rapid development of Colorado's commercial medical marijuana industry, which started toward the end of 2009.

In reaction to the development of the industry, the State of Colorado has spent the last eighteen months developing and implementing the most comprehensive medical marijuana regulatory system in the country. Operating under this regime is quite onerous for the regulated businesses, but the extensive amount of oversight involved, as well as the resulting elimination of more "amateur" businesses, has also tended to increase the perceived legitimacy of the industry. In turn, the development and institutionalization of medical marijuana as a legitimate, regulated industry has had a significant impact on real estate in Colorado, perhaps most notably by creating new demand for warehouse and retail space.

However, largely in reaction to the increase in the scope of the commercial cultivation, sale and distribution of medical marijuana, the DOJ issued a new memorandum in June of this year. It stated that the Ogden Memo was intended to refer to sick individuals and the individuals who care for them, and not to commercial medical marijuana operations. As such, the new memorandum stated that persons "in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities," are in violation of federal criminal drug laws. Those who "knowingly facilitate such activities" could include, for example, landlords that lease property to persons engaged in these illegal activities. The new memorandum also made clear that these activities should not be considered "shielded" by the Ogden Memo, and are properly the subject of federal prosecution.

Thus far, the federal government's hands-off approach in Colorado has not changed. However, the new policy makes explicit that the participants in Colorado's medical marijuana industry face a very real risk of federal criminal prosecution. This includes those who "knowingly facilitate" the business of cultivating, selling or distributing marijuana. Especially given the recent federal pronouncement, it is important for property owners to understand and recognize the risks associated with their participation in the medical marijuana industry. Though federal authorities have not clamped down on Colorado's medical marijuana industry to date, landlords of medical marijuana businesses could face federal criminal liability (for example, through "aiding and abetting" federal criminal statutes), and their properties could be subject to forfeiture.

Photo by Tony Webster (flickr)

Understand Factors in Lease Expansion Options

Posted by Chris Toll on November 29, 2010

The two most common types of lease expansion options are rights of first refusal and rights of first offer.  When negotiating these expansion rights, landlords and tenants should understand the factors involved.

What’s the Difference?  A right of first refusal provides that when the landlord receives an acceptable offer from a third party for certain space, then the landlord must offer such space to the tenant on the same business terms.  A right of first of offer requires the landlord to offer any “available” space covered by the right to the tenant before the landlord offers the space to the market generally.

Some of the factors that are common to both types of rights are as follows: 

  • Both rights should cover a finite area, although it is possible to have these rights apply to an entire building or project.  The lease should specify what space is covered by the right. Use a diagram or other clear method of defining the space.  Beware that the configurations of a suite can change over time, so suite numbers can be problematic. 
  • Both types of rights are encumbrances on the landlord’s ability to lease the space.  Landlords need to track and monitor these rights carefully to avoid violations.  The landlord’s failure to honor a tenant’s right can result in the landlord incurring liability.
  • Landlords should try to protect the right to negotiate extensions of existing leases with other tenants of the encumbered space without triggering the right, even if those other tenants do not have a renewal right.
  • Once the landlord makes the offer to the tenant, and if the tenant declines, does the tenant have an ongoing right to further offers?  Or is it a one-time right?

Factors particular to rights of first refusal are:

  • Because there is a third‑party offer involved, the tenant can be reasonably assured that the business terms of the offer approximate the fair market value for the space. 
  • Because the landlord has to identify a prospective tenant and negotiate a deal before making an offer to the tenant, these rights are more cumbersome for the landlord’s management of its property.
  • Consider whether the existing tenant has to accept the agreed-upon deal, or does the tenant have the right to adjust the offer to be more similar to the terms of the tenant’s lease?  For instance, the term of the offer may be shortened or extended to be “coterminous” with the tenant’s lease term.  Landlord’s should try to avoid any requirement to modify the agreed-upon deal. 

Factors particular to rights of first offer are:

  • Rights of first offer are easier for the landlord to manage because it can offer the space to the existing tenant before negotiating with any other potential tenant.
  • A right of first offer is less attractive to tenants because it can be difficult to know if the landlord’s offer is fair.  On the other hand, the offer that can be easier to customize to the existing tenant’s needs, such as requiring a coterminous term or the same rental rate as the tenant’s existing space.
  • When is the space “available” and therefore subject to being offered by the landlord?  Is it available when the space is actually vacated? Or, when the occupant of the encumbered space is otherwise obligated to vacate the space?  Landlords will want to preserve flexibility in case the existing occupant wants to renew its lease, or if the occupant holds over in the encumbered space.
  • How can the tenant know the offer is fair?  One method is to require that the landlord “re-offer” the space to the tenant if the landlord actually offers materially more favorable terms to a third party (and the parties should agree on what the phrase “materially more favorable terms” means).  Also, if a certain period of time elapses after the offer and the landlord has not found a tenant, then the landlord may be required to re-offer the space.

Whatever the parties decide to do, they should be aware of the various issues involved in right of first refusal and right of first offer.

Commercial/Retail Eviction Basics - Part 1: Approaches for Dealing with a Struggling Tenant

Posted by Bill Kyriagis on November 22, 2010

For landlords, a late or missed rent payment might be the first sign that one of its tenants’ businesses is struggling or even failing.  In this economy, a landlord facing this kind of situation should keep certain things in mind in order to minimize potential lost revenue and expense.  

Quick action is critical in this economyforrent.jpg

It is important for landlords to ensure that they understand the struggling tenant's situation, and be able to quickly react.  If the tenant is in default for nonpayment of rent because its business is failing, a prompt eviction is typically appropriate.  Especially now, quick action in these cases is critical, since the passage of time may make it much more difficult for the landlord to recover its damages.  If the tenant’s business has failed, there will likely be little to recover from the tenant entity.  Additionally, if the only guarantors are the tenant’s principals, they will very likely also be facing precarious personal financial situations, making it difficult to recover from them.  Moreover, the longer the landlord waits to evict, the longer it will delay the landlord's efforts to try to find a new, paying tenant.

Sometimes, eviction is not the best option

While it is appropriate in the case of a tenant with a failing (or failed) business for the landlord to quickly evict the tenant and attempt to re-let the premises, other situations may call for a more measured approach.  In some circumstances, the tenant's business may simply be suffering a temporary setback, which the parties can often address through communication.  In other cases, the tenant’s business may be facing a permanent decrease in activity and resulting decrease in revenue.  Sometimes, this leaves a tenant unable to afford its rent payments. 

If the tenant's business could remain viable if it were paying a lower rent, it may be in the landlord’s interest to consider restructuring the lease.  This is especially true for tenants with leases that were entered into prior to the economic downturn, since these leases may provide for a rental rate that is significantly higher than current market rates.  Considering that the tenant is "locked-in" at a high rent rate, some landlords may be inherently reluctant to even consider decreasing the tenant's rent.  However, there are at least two reasons why it might be appropriate to restructure a lease for a tenant who, in absence of a rent reduction, will default and vacate the premises.  First, if the tenant is forced to vacate the premises, it may cause the tenant to fold completely, precluding it from generating any revenue.  This carries with it the risk that the landlord’s collection of damages will be very difficult.  Second, if a judgment based on the higher rate will be very difficult to collect, and if current market rates are significantly below what is provided for in the lease, the landlord may have little to lose by agreeing to decrease the lease rental rate to the current market rate.  Any new tenant would only be willing to pay current market rates, and keeping the existing tenant in place after restructuring the lease may allow the landlord to keep a paying tenant in the premises without having to go through a potentially long vacancy period.   

Obviously, the right approach will ultimately depend on the circumstances, and it is often helpful, even at the early stages, to involve an attorney with experience in landlord/tenant disputes and evictions to help the landlord best protect its interests.  For example, lease amendments and concessions should be carefully documented to ensure that the landlord does not inadvertently waive any of its rights, and it may be appropriate to address a number of contingencies when dealing with these situations. 

Regardless of the landlord’s chosen course of conduct, it is clear that, in the difficult leasing market we are currently experiencing, it is important for landlords to be very diligent at the first signs of problems with their tenants.  If a landlord does nothing in the face of months of unpaid rent, it may already be too late for the tenant's business to survive, and the landlord will have missed out on months of time during which it could have marketed the premises to potential new tenants.   

This is the first part in a series in this blog on commercial/retail evictions.  In the next part, I will discuss the basic procedures for evictions under Colorado's unlawful detainer statute. 

Photo courtesy of http://passionatephoto.com

 

Capital Expenses in Green Leases

Posted by Chris Toll on September 08, 2010

green-brick.jpgI recently attended a webinar in which Jacob Bart of Stroock & Stroock & Lavan LLP spoke about how the costs of going “green” can conflict with the provisions in many existing leases.  It is common for landlords to “pass through” operating expenses to their tenants, but those expenses are usually limited to non-capital expenditures.  However, any changes to make a building more energy efficient or to reduce carbon emissions will likely be capital in nature.  Therefore, it is difficult for a landlord to make those green changes because the landlord will not be reimbursed for the cost from the tenants.  One way to address this is to allow the landlord to pass through capital expenses if they result in a savings of operating expenses.  

But what if the new equipment is better for the environment, but won’t save much money?  I recently had a chance to speak with Lee Johnson and Michael Noyes from the Greenwood Village office of the accounting firm Clifton Gunderson LLP about a tax deduction for energy saving improvements in commercial buildings under Section 179D of the Internal Revenue Code.  This may provide an incentive for Landlord’s to make cost-saving capital improvements even if the landlord cannot pass them through to its tenants. 

As tenants desire green buildings, not only for cost savings, but also for prestige and marketing purposes, it will be interesting to see if there are changes in the traditional allocation in leases of capital and operating costs between landlord and tenant.