14A — July 2023 — M id A tlantic Real Estate Journal
www.marej.com
C annabis I ndustry : R eshaping R eal E state M arkets By Marcia Nathanson and Bruce Puleo, Heritage Abstract Company Cannabis and Title Insurance: Can They Coexist? istorical Background Marijuana has been illegal at the posed legislation and has not been enacted. put a person at a high risk for developing a substance use disorder. Some familiar drugs
H
sey enacted the Jake Honig Compassionate Use Medi - cal Cannabis Act in July 2019. Lastly, Governor Mur - phy signed the New Jersey Cannabis Regulatory, En - forcement Assistance, and Marketplace Modernization Act into law, legalizing and regulating cannabis use and possession for adults 21 years and older and decriminalizing marijuana and hashish pos- session (P.L. 2021, c. 19). This law also created the Cannabis Regulatory Commission. The role of the Cannabis Regulatory Commission The Cannabis Regulatory Commission (CRC) was cre - ated to establish rules and regulations governing the sale and purchase of recre- ational cannabis, to admin- ister the state’s medicinal cannabis program, and to oversee licensing for all ar- eas of the cannabis industry. While the CRC regulates licensing, there is a large deference to the munici- palities in allowing them to determine their own regula- tions and zoning ordinances governing the number, type, and operations of cannabis businesses within their bor- ders. The CRC will not issue a license that would be in violation of a local ordinance or regulation. Federal Law vs New Jersey Law As mentioned above, the Controlled Substances Act (CSA) prohibits the cultiva - tion, distribution, and pos- session of marijuana, for any reason, regardless of state law. New Jersey’s cannabis regulations conflict with Fed - eral law, however states are not required to enforce federal law or prosecute people for engaging in activities prohib- ited by federal law; therefore, compliance with New Jersey’s law regulating and licensing cannabis activities in New Jersey does not put the State in violation of federal law, and State law further directs law enforcement in New Jersey to not cooperate with federal agencies enforcing the CSA for activities solely authorized by the New Jersey act. What About Title Insurance? With these foreboding downside risks, title insur- ers and settlement agents have historically been reluc- tant to conduct closings and issue policies for properties
where a cannabis enterprise was located. There is, how - ever, some room to deter- mine that the risk is not as great as an initial interpre- tation of the application of the law might suggest. • Cole Memorandum - In 2013, the Deputy U.S. Attor - ney General issued a memo- randum stating that given its limited resources, the Justice Department would not enforce federal mari- juana prohibition in states that “legalized marijuana in some form and ... imple - mented strong and effective regulatory and enforcement systems to control the culti- vation, distribution, sale, and possession of marijuana….” While this memorandum was rescinded in 2018, to date there has been no federal prosecution of the CSA in any state that has passed canna- bis enabling legislation. • Rohrabacher–Farr amendment (also known as the Rohrabacher–Blu- menauer amendment) is congressional legislation first introduced in 2001, which prohibited the Justice Depart- ment from spending funds to interfere with the imple- mentation of state medical cannabis laws. It passed the House in May 2014 after six previously failed attempts, becoming law in December 2014 as part of an omnibus spending bill. • The Secure and Fair Enforcement Banking Act of 2023 (SAFE Bank- ing Act) is another piece of federal legislation, a form of which has been pend- ing in Congress for over four years. It is designed to facilitate the provision of financial services – bank- ing and insurance – to the cannabis industry nation- wide, by declaring a safe harbor for financial services companies in that proceeds from a transaction with a cannabis related legitimate business or service provider would not be considered as proceeds from an unlawful activity. The SAFE Bank - ing Act would also removes the penalty of forfeiture for any depositary institution that would have a legal interest in the property of a cannabis-related legitimate business or service provider as collateral for a loan. Note that this is pending/pro-
Accordingly, while many Underwriters and agents are still wary of the downside risk of insuring cannabis-related facilities. There are consider - ations that make it attractive: • Great opportunity to develop market share • Establish reputation as an innovator and collaborator • Establish name recogni - tion through early adoption of an industry that is destined to grow. No pun intended! In states where prescription and recreational marijuana use is legal, there has been a 35% to 36% increase in demand for warehouses for processing and storage, a 23% increased demand for storefront space for dispensaries, and a 18% to 28% in demand for land for grow facilities. Risk management strategy • Special Purpose Excep - tion in all commitments and policies limiting scope of cov- erage to title matters only • No CPL for transactions involving current/ongoing cannabis operations • Precaution or exclusivity in providing escrow services for current/ongoing operations • Centralized supervision and review of all files to en - sure consistent underwriting The cannabis business is clearly an emerging titan on the commercial real estate landscape, and the trend to- ward federal normalization of the laws to adapt to the laws of 38 states and the District of Columbia suggests that it is high time to identify ways to serve the needs of this business enterprise. Marcia Nathanson and Bruce Puleo are senior VPs for Heritage Abstract Company with offices in Morristown and Wall NJ. Combined they have over 55 years in the title insur- ance industry . Established in 1976 as a full service title agency, Heritage has be- come one of the largest and most respected indepen- dent agencies, with the abil- ity to handle residential and commercial transactions throughout the country. Heritage Abstract wish - es to acknowledge David Ewan and Richard Bram- hall of Westcor Land Title Insurance Company for their assistance in the prep- aration of this article. MAREJ
assigned a schedule 1 class include: • Ecstasy • Heroin • LSD • Marijuana • Peyote In 1996, California
federal level since 1937. The federal government continues to spell mari- juana and cannab i s “marihuana” and current-
Marcia Nathanson Bruce Puleo
was the first state to pass a law legalizing the use of marijuana for medicinal pur- poses. By 2006, ten other states followed suit, then in 2012 Colorado and Washing - ton adopted laws permitting the adult recreational use of marijuana. Today there are 38 states (plus the District of Columbia) that have passed either medical use statutes, recreational statutes, or both. In response to these develop- ments, businesses have come into existence to meet the demand created by these state laws; consequently, legal sales of cannabis products hit $30 billion in 2022. By the end of the decade, that num- ber is expected to be anywhere from $58 billion to as much as $72 billion. In spite of the proliferation of enabling state laws, and the corresponding explosion of the cannabis industry, there has been no change to the CSA, and as a result, regulated entities, such as federally insured banks and related financial services enterprises, have been re- luctant to provide services to the cannabis industry for fear of upsetting regulators and being in contravention of the CSA, for which there are serious sanctions including asset forfeiture, criminal pen- alties, and severe fines. Other potential challenges for the fi - nancial services industry are prosecution under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), another 1970 law, which carries both criminal penalties and enables civil claims to be presented, which include the award of attor- neys’ fees and treble damages to a successful plaintiff. Cannabis in New Jersey Cannabis legalization in New Jersey began with the enactment of the New Jersey Compassionate Use Medical Marijuana Act in January 2010. Additionally, New Jer -
ly classifies it as a Sched- ule 1 controlled substance, alongside hallucinogens, LSD, peyote, heroin, most opiates, methaqualone, and ecstasy. Marijuana was de facto criminalized by Congress with the passage of The Marihuana Tax Stamp Act of 1937. A vio - lation of the Marihuana Tax Stamp Act was a felony with a maximum fine of $2,000 and/ or 5 years in prison. The 1937 Marijuana Tax Stamp Act did not actually make possession or use of marijuana illegal. Instead, it required that the person possessing the mari- juana have a “tax stamp.” However, it was a legal impos- sibility to obtain a marijuana tax stamp. To obtain the tax stamp, you had to present the non-tax stamped marijuana. But, when you presented the non-tax stamped marijuana to get your tax stamp, you did not have a tax stamp on the marijuana, you were instantly guilty of a felony. It is no sur - prise that there has not been a single recreational marijuana stamp tax ever issued. In 1969, the United States Supreme Court finally deter - mined that the Marihuana Tax Stamp Act of 1937 was unconstitutional. Requiring a person seeking a “tax stamp” to incriminate themselves was a violation of the Fifth Amendment. The federal government swiftly responded by passing The Controlled Substances Act. Modern Law In 1970 Congress passed the Controlled Substance Act (the CSA), which consolidated several preexisting federal drug laws in an effort to regu- late the manufacturing, dis- tributing, importing/export- ing, and use of various drugs deemed to pose a risk of abuse or dependence. The CSA cat - egorized certain drugs as Schedule 1, defined as drugs that have no accepted medical use in the United States, and using schedule 1 drugs can
Made with FlippingBook - Online catalogs