Top Five Mistakes Real Estate Brokers Make Handling Oregon Marijuana Deals
Real estate transactions involving the sale of an OLCC license are complicated, and usually require multiple contracts working together harmoniously. These transactions can be difficult to navigate due to the interplay between real estate, corporate and regulatory law. For instance, a purchase and sale agreement (PSA) for the real estate and an asset purchase agreement (APA) for the OLCC license and other business assets are required, and often a management agreement will be needed because the buyer wants to start working in the OLLC licensed marijuana business before the transactions close.
Over the years, our firm’s cannabis attorneys have seen costly litigation arising when these transactions were bungled by real estate brokers who mistakenly think the multi-faceted deal terms could be crammed into the boilerplate real estate agreement (Boilerplate REA) commonly used by Oregon brokers.
Here are the 5 biggest mistakes made by Oregon real estate brokers:
Mistake #1: Brokers failing to refer clients to a cannabis attorney before any documents are signed.
Transactions involving the sale of property and an OLCC licensed business involve complicated real estate, business, and regulatory issues. Having a cannabis law firm assist with these issues at the outset benefits the broker and their client; engaging both sets of professionals, each with highly specialized knowledge, leads to a much higher success rate for our clients by working out the myriad issues in the beginning so the parties enter well-drafted contracts, the deal has its best chance of closing in a timely manner, and without litigation.
At a minimum, an APA must be drafted for the sale of the OLCC marijuana license and any other assets that will be sold. The OLCC license should not be included as personal property in the PSA for many reasons, one being that it is likely the OLCC license is owned by a different entity than the owner of the property. The buyer should also conduct a sufficient due diligence investigation of the status of the OLCC license and other business assets, which is separate from the due diligence investigation of the property.
Mistake #2: Not making the sale of the property conditioned on the issuance of a new OLCC license or license transfer.
The seller and the buyer both have an interest in the property closing only on the condition that the OLCC approves of the marijuana license transfer to the buyer. Without the condition, the buyer may be legally obligated to purchase the property even after the OLCC rejects the application for license transfer. It is highly unlikely the buyer will still want the property without the marijuana license, but the buyer is now faced with potential litigation if it backs out.
The purchase price was likely set at a premium because the property housed an OLCC license. This may make buying the property even more painful for the buyer. For the seller, not having the condition is a mixed bag. On the one hand, it could be a windfall where the buyer is forced to buy the property at a premium, and the seller could move the marijuana license to another property and sell it. On the other hand, the Seller could lose the marijuana license after selling the property because the license will not have a location. The OLCC has been more lenient lately in allowing marijuana licensees to change locations after a loss of possession of the licensed property, but there is still a risk that should be avoided.
Mistake #3: Setting the closing date based on a typical real estate closing timeline, not a timeline that accounts for OLCC processing delays.
The typical 60 or 90 day close on a real estate transaction is insufficient. While the OLCC is processing license transfers more quickly these days, the exact time remains uncertain. These deals require a flexible closing tied to the OLCC approval of buyer's application. It is crucial here for the PSA and the APA to be narrowly tailored to allow for the uncertainty of the closing date, yet remain binding on both parties.
Mistake #4: Closing is set in Boilerplate REA with a title company and the buyer is expecting title insurance.
With rare exceptions, a title company will not close a transaction with a marijuana business operating on the property. The brokers on both sides should advise their clients of this reality. The Boilerplate REA is geared toward closing with a title company and contains provisions for seller to purchase title insurance for buyer. If the parties enter a Boilerplate REA, neither buyer nor seller will be able to perform on the agreement. There are ways to close these transactions without a title company, but the parties need to agree on the alternatives and include them in a PSA.
Mistake #5: Brokers negotiating an Early Access Agreement instead of a Management Agreement.
It is common that the buyer will want to begin work in the OLCC licensed business it is purchasing while the parties are still waiting for OLCC approval of the marijuana license transfer. The buyer may want to begin making improvements to the licensed facility or begin implementing its growing technologies for a new marijuana crop. The boilerplate Early Access Agreement form commonly used by Oregon real estate brokers will not work in this situation and could result in a Category I OLCC violation and loss of license.
There are significant regulatory concerns involved when a buyer wants to begin work before the marijuana license transfers and a well-drafted contract is necessary to define the relationship between buyer and seller to past OLCC muster. Whether the contract is styled as Management Agreement or Service Agreement as examples, the OLCC requires that the owner of the marijuana license maintains sufficient control over the company. The contract also needs sufficient protections for the parties if the deal falls through or complicated issues arise such as rent/early access payments, ownership of product, and insurance.
Complex deals like these must be carefully discussed at the onset of a property and license transaction. Brokers, buyers, and sellers should ensure the correct experts are involved to ensure a smooth sale.
You can contact Bradley Blommer at email@example.com or 503-488-5424.