Cannabis Legalization in New Jersey: What Commercial, Industrial & Agricultural Property Owners Should Know.

Cannabis Legalization in New Jersey: What Commercial, Industrial & Agricultural Property Owners Should Know.
By: Edward W. Purcell, Esq.

On February 22, 2021, Governor Phil Murphy signed the New Jersey Cannabis Regulatory Assistance and Marketplace Modernization Act, also known as P.L., c. 16 (“Chapter 16”) into law. Many commercial and industrial property owners, starved for tenants during the ongoing COVID-19 pandemic, have cheered this news regarding legalized recreational cannabis. Even agricultural property owners have viewed the news as a net positive. Chapter 16 positively impacts the market for commercial, industrial, and agricultural properties in this state because it creates an entirely new market for the growth, manufacture, retail sale and delivery of cannabis in the State of New Jersey. These operations must take place somewhere and New Jersey’s property owners, by all accounts, appear happy to assist. However, property owners should be aware of few potential complications – and potential surprises – before embracing these new opportunities.
The laws among the states, including here in New Jersey, are evolving, but cannabis remains illegal at the federal level as a schedule 1 drug. In 2018 Congress de-scheduled hemp and hemp derived products like Cannabidiol. Recently, Congress renewed the Rohrabacher-Farr amendment, a law that prohibits the Department of Justice from spending funds to stop the implementation of state medical cannabis laws. There is no corollary for recreational cannabis. The Trump administration officially opposed state legalization of recreational marijuana, and the Biden administration has yet to take a formal position.

There are three important takeaways for property owners related to the state of Federal law. First, there is a possibility, however remote, that the federal government could arrest a property owner for violating the Federal Controlled Substances Act when it permits his or her lands to be used for a recreational cannabis business. Second, because of this violation of federal law, the federal government could seize a property owner’s real property through criminal or civil asset forfeiture. Federal law provides an “innocent owner” defense. However, when the property owner knowingly permits the growth, manufacture or sale of cannabis—such a defense would not become effective. Lastly, cannabis businesses are not able to access banking services and the credit market and must, of necessity, be “cash” businesses. This, of course, may impact the financial dealings between a property owner and a tenant cannabis business.

Chapter 16 created six (6) different classes of licenses and an endorsement for cannabis consumption areas. Class I “Cannabis Cultivator” licenses authorize the premises where the growth or cultivation of cannabis will take place. Class II “Cannabis Manufacturer” licenses authorize the premises at which cannabis items are manufactured. Class III “Cannabis Wholesaler” licenses authorize the premises at which cannabis items are warehoused. Class IV “Cannabis Distributor” licenses authorize the premises from which a cannabis distributor will conduct operations to transport cannabis items in bulk. Class V “Cannabis Retailer” licenses authorize the premises at which cannabis items are retailed, which may include purchase orders for off-premises delivery. Class VI “Cannabis Delivery” license authorizes the premises from which the cannabis delivery service will conduct operations. Chapter 16 also provides for a “consumption area” endorsement that would permit the consumption of cannabis items on-site.

Municipalities may, pursuant to Chapter 16, prohibit the operations of any one or more the various classes of cannabis licensees. Municipalities, however, may not prohibit the delivery of cannabis items by a Class VI “Cannabis Delivery” service in their municipality. Chapter 16 requires that any such prohibitory ordinances must, to become effective, be adopted by August 21, 2021.

If a municipality does not prohibit the above referenced cannabis licensee activities by August 21, 2021, then certain cannabis activities will, by operation of law, be permitted or conditionally permitted in certain zoning districts within that municipality. In such an instance, Chapter 16 provides that the following shall be permitted uses in all municipal industrial zones: growing, cultivating, manufacturing, and selling and reselling of cannabis, as well as operations to transport cannabis in bulk by a cannabis cultivator, cannabis manufacturer, cannabis wholesale, cannabis distributor or cannabis delivery service. Further, Chapter 16 provides that the selling of cannabis from a retail store shall be a conditional use in all commercial and retail zones, subject to meeting the conditions of the applicable zoning ordinance or receiving a conditional use variance. In contrast, cannabis consumption areas are treated differently under Chapter 16 in that a municipality must affirmatively permit their operation before the state will authorize same.

Municipalities can enact a local transfer tax on the sale of cannabis. Such a tax, if adopted by a municipality, cannot exceed 2% of the receipts from each sale by a cannabis cultivator; 2% of the receipts from each sale by a cannabis manufacturer; 1% of the receipts from each sale by a cannabis wholesaler; and 2% of the receipts from each sale by a cannabis retailer. The law also permits the imposition of a user tax at the equivalent rate of the transfer tax.

Importantly for property owners, Chapter 16 provides that a municipality can recover unpaid cannabis taxes through the placement of a municipal lien on licensed properties—even properties not owned by the licensee. The law provides that unpaid taxes, and any unpaid interest, “shall be a lien on the parcel of real property comprising the cannabis establishment’s premises in the same manner as all other unpaid municipal taxes, fees, or other charges.” By authorizing the use of a lien, the legislature has permitted municipalities to recover unpaid taxes from the owner of the property where a cannabis licensee operates, in addition to the licensee itself. With this provision in mind, care should be taken to draft leasing provisions to ensure that the property owner can recover these funds from the tenant licensee.

Lastly, Chapter 16 raises some important issues related to the right-to-farm and farmland assessment laws. Under Chapter 16, a cannabis cultivator cannot operate on land that is subject to farmland assessment. Furthermore, growing cannabis would likely not be protected by the New Jersey Right-to-Farm Act because that law requires that commercial farms be in compliance with all federal or state statutes or rules and regulations to qualify for right-to-farm protections. Because cannabis cultivation is illegal as a matter of federal law, the growing and processing of cannabis would not be protected under this law.

In conclusion, Chapter 16 will affect the market for industrial, commercial and agricultural real estate in New Jersey. Any property owner that wishes to market and lease their property to a cannabis licensee for a regulated cannabis use should understand the Chapter 16 and the other state and federal laws at play so that they can understand the risks and adjust their business plan and leasing terms accordingly.

Ed Purcell is an associate with Price, Meese, Shulman & D’Arminio, PC, to contact him via email