12-28-18

2A — December 28, 2018 - January 10, 2019 — M id A tlantic

Real Estate Journal

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M id A tlantic R eal E state J ournal Publisher, Conference Producer . .............Linda Christman AVP, Conference Producer ...........................Lea Christman Account Executive ........................................... Steve Kelley Account Executive ............................................. Kim Brunet Account Executive ........................................ Marisol Chase Account Executive .........................................Alyson Parker Senior Editor/Graphic Artist ..........................Karen Vachon Office Manager ...............................................Kerrin Devine Contributing Columnists: ............Beth Azor, Azor Advisory Services; Brian A. Haskel, Sills Cummis & Gross P.C. Mid Atlantic R eal E state J ournal ~ Published Semi-Monthly Periodicals postage paid at Hingham, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal 350 Lincoln St, Suite 1105, Hingham, MA 02043 USPS #22-358 | Vol. 30, Issue 24 Subscription rates: $99 - one year, $148 - 3 years, $4 - single copy REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Phone: 781-740-2900 | Fax: 781-740-2929 www.marejournal.com The views expressed by contributing columnists are not necessarily representative of the Mid Atlantic Real Estate Journal

M id A tlantic Real Estate Journal

Brian A. Haskel

Cannabis – Real estate and related legal concerns A majority of states in the United States permit the regulated sale of cannabis products. The federal government does not, with the exception of Epidiolex, which the FDA recently approved for the treatment of two rare and severe forms of epilepsy. In fact, at the federal level cannabis is in the same class with drugs like heroin and LSD, as drugs with no currently accepted medical use and a high poten- tial for abuse. The penalties for violations of federal law with respect to cannabis may in- clude lengthy prison sentences, significant fines and property forfeiture. Accordingly, man- aging the legal challenges pre- sented by the conflict between state and federal law raises a number of issues for those en- gaging directly or indirectly in the business of manufacturing and selling cannabis products, including leasing, banking, fi- nancing, insurance, tax deduc- tions, and restructurings. Under the Obama admin- istration, Deputy Attorney General James Cole provided guidance to federal prosecu- tors to prioritize the prosecu- tion of activities that posed a serious threat to public safety (the “Cole Memo”). Subse- quently the Financial Crimes Enforcement Network issued a memorandum in February 2014 clarifying what services financial institutions are per- mitted to provide to canna- bis-related businesses while remaining compliant with the Bank Secrecy Act. Whatever comfort cannabis-related busi- nesses gained was diminished on January 4, 2018, when then U.S. Attorney Jeff Sessions rescinded the Cole Memo. In addition, the Rohrabacher-Farr Amendment, which bars the DOJ from funding the prosecu- tion of conduct that is in strict compliance with applicable state medical cannabis laws, was due to expire December 7, 2018 but was extended for a short period. It remains to be seen whether it will be extend- ed when the current spending bill expires on December 21st. The law in this area continues to evolve; Kentucky Senator Mitch McConnell included provisions in the proposed 2018

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Farm Bill, which, if approved, would fully legalize indus- trial hemp, a common source of CBD. Despite being nonpsy- choactive, CBD is currently illegal as a cannabis extract. While at the state level many states are seeking to provide guidance and legal protections for cannabis-related businesses that operate legally, absent definitive federal regulation or law, the uncertainty, doubt and limitations presented by the inherent conflict between state and federal law still exist. Under the applicable federal law, not only is the property of an owner who engages in the manufacturing or distribution of cannabis products subject to forfeiture, but so is the property of an owner who knowingly leases property for the purpose of manufacturing or distribut- ing cannabis products. Accord- ingly, landlords typically seek significantly higher rents to compensate for the additional risk. Furthermore, the leas- ing of mortgaged property to a cannabis-related business may be a violation of the law or the terms of the underlying financ- ing agreements. A Landlords' counsel need to incorporate appropriate protections into the relevant agreements to ensure that the lessee complies with state and federal laws, regulations and guidelines, as well as local zoning and other agreements that are relevant to contemplated use of the property. Moreover, due to the continued illegality of cannabis at the federal level, purchasers of real estate will have a dif- ficult time obtaining mortgage financing or title insurance from traditional sources where they intend to use the property for a cannabis-related business. Cannabis businesses legally operating at the state level are also unable to obtain tra- ditional sources of financing as banks and credit card com-

panies in the United States adhere to federal policies that disallow service to cannabis businesses. In April 2018, the Small Business Administration published guidelines that make clear that cannabis-related businesses are not eligible for SBA loans. In addition, cannabis businesses legally operating at the state level face challenges obtaining insurance because of the conflict between federal and state laws. Even if there is a valid insurance policy in place, insurers may seek to challenge the scope of loss coverage or rely upon spe- cific exclusions that are often set forth in insurance policies based on the business’ under- lying violation of federal law. In addition to the foregoing challenges, cannabis-related businesses may not be able to take advantage of tax deduc- tions for expenses incurred in connection with the sale of cannabis-related products. Moreover, in the event that a cannabis-related business fails, it may not avail itself of the protections of the United States Bankruptcy Code if its activities are illegal activities under federal law. The law in this area is com- plex and evolving, and those engaging or investing in busi- nesses in the cannabis indus- try should consult with quali- fied counsel. Brian A. Haskel is aMem- ber of Sills Cummis &Gross P.C. in New York City, where he practices in the firm’s corporate group. He has represented individu- als, businesses and funds involved in the cannabis sector in connection with offerings, financings and other transactions.  The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis &Gross P.C.

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