Rocky Mountain Real Estate Law - Development, Financing and Other Property News from Colorado's Leading Real Estate Law Firm

In 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)

Medical marijuana businesses, including grow operations and dispensaries, can now be found in many communities throughout Colorado.  The establishment and proliferation of such businesses has presented a number of issues for their neighbors. 

One issue: marijuana stinks.  It has a very strong odor, even before it is smoked. 

Odor emanating from medical marijuana businesses has led to complaints from neighbors, who are typically other businesses.  These businesses and their customers may find the strong marijuana smell that periodically permeates their neighborhoods offensive, or simply overwhelming.  The question then becomes how to deal with the problem.

Colorado’s Medical Marijuana Code, C.R.S. § 12-43.3-101 et seq. (the “Code”) does not directly address or regulate odors coming from medical marijuana businesses, and it does not appear that the proposed state regulations to implement Code will address odors either. 

Accordingly, if neighbors have complaints about odors emanating from medical marijuana businesses, they will either have to hope that local regulation addresses the issue, or be resigned to remedies under the law of nuisance. 

The Boulder Daily Camera recently ran an article addressing the City of Boulder’s regulation of odors from medical marijuana businesses. There have apparently been a number of complaints of wafting smells of marijuana, and the City is investigating.

Under Boulder’s medical marijuana regulations, “[a] medical marijuana business shall be properly ventilated to filter the odor from marijuana so that the odor cannot be detected by a person with a normal sense of smell at the exterior of the medical marijuana business or at any adjoining use or property.”  Boulder Municipal Code, § 6-14-8(h).  Violations can result in a loss of a license, and/or a fine of up to $1,000 per violation. 

According to the Daily Camera, it is difficult for medical marijuana businesses to comply with the requirement, and expensive equipment is needed to mitigate odors.  Medical marijuana businesses have also complained that the requirement is unfair, given that a great many other businesses are allowed to let odors leave their properties without consequence.  (Walking past a pizza parlor, you can often smell the umistakable mix of baking bread and garlic).  However, it appears that the City is intent on trying to enforce its requirement.  As indicated, businesses have a strong incentive to comply, as they risk having their businesses shut down if they do not.

Given Boulder’s odor regulation, neighbors of medical marijuana businesses in Boulder are probably far better off than those in other local jurisdictions that do not have similar requirements.  Without a code provision addressing odors, complaining neighbors would likely only have remedies in the law of nuisance.  While a nuisance suit could result in an injunction, thus cutting off the problem, bringing such a suit would be quite expensive and time consuming for the complaining neighbor.  In contrast, pursuing relief through local code enforcement would likely solve the problem more quickly, and would be carried out primarily at the expense of the local government. 

Colorado’s new licensing scheme for medical marijuana businesses under the Code goes into effect on July 1, 2011.  Local jurisdictions throughout Colorado are still in the process of updating their regulations to conform to this dual state/local licensing system.  As they do, it will be interesting to see if other jurisdictions will attempt to regulate odors as Boulder has.    

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 economy

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

The Governor recently signed into law House Bill 10-1278 (“HB 1278”), which creates the “HOA Information and Resource Center” and requires property owners’ associations (not just residential/homeowners associations) to register annually with the Division of Real Estate.  HB 1278 takes effect January 1, 2011.  Real estate owners and professionals should be aware of HB 1278 because failure to register has some potentially serious consequences including loss of lien power and because it grants the Division of Real Estate oversight and regulatory authority in an area that has not been regulated previously. 

HB 1278 creates the HOA Information and Resource Center which is to be headed by the “HOA Information Officer” appointed by the Executive Director of the Department of Regulatory Agencies.  The HOA Information and Resource Center is to (a) serve as a clearing house for information concerning the basic rights and duties of unit owners, developers, and unit owners’ associations under the Colorado Common Interest Ownership Act (“CCIOA”), and (b) track and report inquiries and complaints regarding HOAs to the Division of Real Estate. 

HB 1278 requires that all HOAs register annually with the Division of Real Estate and to submit general information about the HOA and pay a fee that will serve to fund the HOA Information and Resource Center.  The fee must not exceed $50.00 and is subject to adjustment to reflect the actual direct and indirect costs of operating the HOA Information and Resource Center.  Certain low revenue HOAs are exempt from the fee requirement.

If an HOA fails to register or is not current in its registration, it will be ineligible to impose or enforce a lien for assessments under CCIOA, which has priority over many other liens from the date of recording of the declaration creating the community.  Likewise, if an HOA fails to register or keep it registration current, it will lose its right to collection costs and attorneys’ fees expended in enforcing an owner’s assessment obligations. 

With some limited exceptions, before the adoption of HB 1278, the Division of Real Estate did not have any oversight over HOAs and related developments.  HB 1278 grants the Director of the Division of Real Estate the power to adopt rules as necessary to implement HB 1278.  Because HB 1278 speaks in fairly general terms, the operations and impacts of the HOA Information and Resource Center will likely be determined by the scope of the adopted rules.  Given that this is the Division of Real Estate’s first involvement with HOAs in general, it will be interesting to see if it seeks out additional oversight over the operations of HOA or new oversight over the formation of HOAs in the form of regulations or additional legislation.

HB 1278 repeatedly uses the term “HOA” which is misleading.  The term “HOA” is defined in HB 1278 to include “unit owners’ association” as defined in CCIOA, which can include residential, commercial and mixed-use condominiums, planned communities and cooperatives, and not just conventional residential planned communities headed by what a layperson might call a “homeowners association.”  CCIOA was initially effective July 1, 1992, and there is some ambiguity as to whether the term “HOA” includes and whether HB 1278 requirements apply to unit owners’ associations that were formed prior to that date.  We are hopeful that regulations to be adopted by the Division of Real Estate will clarify this point.