It’s important for real estate professionals to understand the implications of a cannabis business whether you’re representing the seller, buyer, or a tenant. (See our related post on property managers and cannabis businesses.)
Your role isn’t to provide legal or tax advice, but to understand when you might need to refer your client to another professional or use appropriate disclosures to protect yourself and your clients.
Representing a Residential Lessee or a Buyer in California
If your clients are renters or buyers interested in the cultivation or distribution of cannabis, you should recommend that they talk with an expert CPA and an insurance agent.
The client needs to understand that the law is changing fast, and an expert CPA should be engaged before the client is even ready to look for a property. The taxes for cannabis business are very high. Because California is serious about collecting tax revenues from cannabis businesses and the tax calculations are extremely complex, there are many challenges. (This also opens the door to a high volume black market of cannabis business.)
In addition, the tenant may not be able to obtain renters insurance. A potential home buyer may want to determine if homeowner’s insurance will be affected by running a cannabis business on the property.
As a real estate professional, you’re not expected to be an expert in determining whether the business properly pays its taxes and is properly licensed, or whether it is a black market business. However, if you are representing a residential lessee, the landlord or property manager will likely request some details of the business. Have your client put all details requested in writing, and present that document or documents to the landlord or property manager.
Listing and Selling Disclosures
Selling a property that was used for cultivation, manufacture or distribution of marijuana would require disclosure, to the extent the broker is aware. Properties where marijuana was being grown indoors could have had impacts such as mold from the high humidity levels needed for growing. Other issues can be toxic fumes embedded in the walls or carpet.
Selling a property that is in the vicinity to a property that is being used for a cannabis business may have other issues. Those issues can include: expensive utility costs for lights and water (if meters are shared), impacts on neighbors such as smoke and odors, and even the possibility of explosions during manufacturing of related products.
To what extent should brokers be aware that a property was used as a cannabis business? Civil Code section 2079.3 states that a due diligent visual inspection of the licensee is limited and does not include areas ‘off the site’ or ‘public records.’
Case law suggested that Section 2079.4 (statute of limitation) does not apply to selling brokers who owe a fiduciary duty to the buyers. It is therefore unclear to what extent a broker needs to ask questions and investigate the neighborhood. Does the broker need to question the neighbors? Look for police reports regarding any criminal activity? Ask the seller if the property was used for growing marijuana?
If all the Realtors® will start doing that, this will surely raise the standard of care. As a rule of thumb however, brokers should be alert to a cannabis business the same way they are alert to construction done without permits. You should look for ‘red flags.’ If exceptionally high utility bills are noted for example, then further inquiry should be done.
To conclude, a broker should not give a buyer/seller or landlord/tenant any advice about a cannabis business. A broker should direct his/her clients to the appropriate CPA/attorney as well as their insurance agent. Finally, in a sale of real property, a broker should be alert to any red flags.
There are also real estate E&O insurance implications for marijuana-related claims that you should consider.
Rinat B. Klier-Erlich
Manning & Kass Ellrod, Ramirez Trester
Ms. Erlich is a professional liability defense attorney specializing in defending real estate professionals including, real estate brokers, escrow officers, appraisers, and design professionals. Graduate of Tel-Aviv University (BA 1992, magna cum laude), Whittier Law School (JD 1997, magna cum laude) and California State University (MA, Philosophy of Law 1998). In the last 18 years she has defended many professionals through trial and appeal. Ms. Erlich is a member of the Real Estate Executive Committee of the California State Bar and a member of the Legal Affairs Forum, California Association of Realtors. She is a Specialized Litigation Group chair and she is on the steering committees of several Defense Research Institute groups, Professional Liability Underwriters Society Southern California Chapter, and the Southern California Chapter of Claim and Litigation Management Alliance. Ms. Erlich is a recipient of Rising Star and Super Lawyers awards, and is an author and frequent speaker on professional liability topics. Ms. Erlich is a former Israeli Defense Force officer and a mother of 4 children.