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10.18.21

Leasing to indoor food growing & cannabis companies

BY , Andreas Wagner

Indoor farming—of both food and cannabis—is on the rise, and with this increasing popularity comes many new business opportunities.

The prospect of producing food closer to where consumers live has always been an attractive option. COVID-19 accelerated the trend as growers looked for creative ways to compensate for unprecedented supply chain disruptions. And indoor farming of cannabis continues to flourish as more states legalize the plant.

Indoor food and cannabis production are promising, but businesses hoping to adopt these practices face a unique set of challenges.

In our latest edition of the Nixon Peabody & WSP Global Food and Beverage webinar series, we discuss the legal and environmental frameworks that impact indoor farming companies and the landlords leasing to them.

One of the major issues at the crux of the cannabis market is the plant’s conflicting status on the federal and state levels. While more than 30 states have legalized recreational or medicinal cannabis, the product remains federally illegal—a significant obstacle for the cannabis industry. Banking and insurance options are limited because handling funds or performing financial transactions for cannabis-related businesses could run afoul of the law.

The legal challenges of cannabis are matched by the equally complicated logistics of growing the plant indoors. The optimal environment for cannabis growth requires very specific humidity levels, fertilizers, and chemicals. Failing to create this carefully controlled environment can result in mold contamination, unhealthy carbon dioxide levels, increased expenses for specialized equipment and waste management, and concerns about worker safety. Most of these challenges apply to indoor food growers, as well.

With these challenges in mind, it’s important that any entity leasing to an indoor farming company know their tenant and stay abreast of the rules governing their industry. Landlords should carefully perform their due diligence on any potential tenant, including its finances, legal structure, and reputation.

In the cannabis context, landlords should also be aware of their tenants’ licensing requirements. Cannabis companies must obtain state licensing in addition to local use permits and approvals. Before they can apply for these licenses, they oftentimes must secure a location first. Landlords, then, should take certain precautions, such as requiring robust guaranties under the lease and reserving the right to evict a tenant if they fail to maintain their licenses when leasing to cannabis companies. On the flip side, tenants will want to be able to get out of a lease if they run into road bumps in the approval process.

Both the indoor food growing and cannabis industries are expanding rapidly and ripe for further growth. Going forward, both landlords and tenants connected to these industries should be aware of any new environmental and health regulations, as well as the potential for future automation.

We look forward to continuing to help landlords and tenants navigate the evolving cannabis and indoor food farming industries. Please reach out to either of us—Ian O’Banion at iobanion@nixonpeabody.com or Andreas Wagner at Andreas_Wagner@golder.com—with any questions you might have.

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Author

Ian T. O'Banion

Counsel

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