United States: The Potential Legalization Of Cannabis In New Jersey: Real Estate Considerations

The likelihood of legalization of cannabis in New Jersey under state law necessitates the consideration of many legal issues. Aspects of legalization that are often overlooked, given New Jersey's unique real estate regulatory regimen, are the potential real estate considerations resulting from the cultivation, production and sale of cannabis if permitted under New Jersey (as opposed to federal) law.

Governor Phil Murphy has promised to legalize the production and sale of cannabis in New Jersey within his first 100 days as governor. On January 4, 2018, U.S. Attorney General Jeff Sessions rescinded the so-called "Cole Memorandum," which changed federal law enforcement priorities with respect to prosecution of cannabis-related crimes during the Obama administration. Therefore, cannabis remains a Schedule I controlled substance under federal law, and the possession, sale and distribution of cannabis are federal crimes under the Controlled Substances Act. If passed and signed by the governor, New Jersey's legalization bill, currently in committee, would allow cannabis to be taxed by both the state, initially at 7 percent, and by municipalities that allow lawful cannabis production and sales, initially at 1 percent but up to 3 percent after the first three years.1

Lawful cultivation and therefore production of cannabis can be undertaken in two ways. The first is warehouse or greenhouse production with hydroponics, where cannabis is grown as a perennial and the buds are harvested regularly, dried and sold for use. This method of production, which is used in Colorado, where cannabis is legal, has resulted in an uptick in the demand for warehousing facilities for use in cannabis production. The second cultivation method is growing it outside as a crop, either as a perennial or an annual, depending on the climate. While New Jersey's climate is likely too severe to make growth of cannabis as a perennial crop viable, there is ample agricultural land, particularly in the southern and northwest portions of the state, currently under farmland assessment for property tax purposes; this land is used mostly to grow hay, corn and soybeans. Cannabis could be cultivated in these areas in lieu of these and other crops. Typically, seedlings would be cultivated initially in greenhouses and transplanted in mid-April to mid-May, when the fear of frost has dissipated. Other reasons outdoor cannabis growth is problematic from a cultivation standpoint include the risk of pests, so plants will have to be treated with pesticides much like conventional crops, and outdoor cannabis plants are best grown trained, which means the utilization of trellises and cages, which makes farming more labor-intensive and expensive. The plants mature during the growing season, and buds are harvested, dried and sold, likely in September. Some growers in Colorado use this method, though it is not as productive as hydroponic cultivation.

In terms of production of cannabis, many municipalities, particularly urban or suburban ones, do not permit cultivation of crops or farming operations in most zoning districts. The current New Jersey bill would not permit homegrown cannabis, and experience in states with legalized cannabis has shown that permitting homegrown cannabis is problematic. It is difficult to regulate and therefore tax. In New Jersey's municipalities that permit annual crop farming, typically in so-called rural or agricultural zones in certain areas of the state (mainly in northwestern and southern counties), cannabis farming would be permitted unless expressly prohibited by the municipality. There are likely hundreds of thousands of tillable acres of farmland in New Jersey that could be converted to annual cannabis production. It remains to be seen whether the enacted enabling statute, or the regulations established pursuant thereto, will permit outdoor farming of cannabis. It probably will not, since security and regulatory concerns make exterior farming of cannabis problematic on a variety of levels, although farming in greenhouses, which is a traditional farming and agricultural operation, rather than warehouses, may be viable and permitted.

New Jersey's Right to Farm Act does not permit farming as of right, and it applies only to farming in zoning districts where farming is a permitted use as of December 31, 1997, or zoning districts that thereafter permit agricultural use. However, the Right to Farm Act can pre-empt municipal ordinances regulating commercial farming in certain circumstances, and these pre-emption issues are addressed on a case-by-case basis. For pre-emption, typically a commercial farm must provide a legitimate agricultural reason for not complying with local standards. Pre-emption most often comes into play when local regulations burden agriculture. The state's guidebook on the Right to Farm Act is available here. This is an issue to be considered if municipalities permit but intensely regulate cannabis cultivation and production.

There are various aspects of property taxation that lawful cannabis production will impact. As an initial matter, unless the enacting statute changes the farmland taxation structure in New Jersey, the state's Farmland Assessment Act will apply to effectively minimize property taxes on farmland placed under cultivation for cannabis production in the event exterior or greenhouse cultivation of cannabis is permitted. In this context, the Farmland Assessment Act applies to lands under cultivation at a minimum of five contiguous acres in size, and gross sales of products from the land must average at least $1,000 per year for the first five acres cultivated, plus an average of $5 per acre for each acre over five acres. The land must have been actively devoted to agricultural or horticultural uses for at least two years prior to the year in which farmland assessment is sought. For most existing farms, which would be converting from hay, corn or soybeans to cannabis, this would not be a problem. While the Farmland Assessment Act applies to land only as opposed to buildings, farming in greenhouses is considered actively devoted to agricultural or horticultural use under the act. The appropriate paperwork (Form FA-1) setting forth the crops cultivated and gross sales, among other information, must be filed with the assessor prior to August 1 of the immediately preceding tax year. It is reasonable to assume that cannabis crops would be rotated from year to year as are other crops. A good primer on the Farmland Assessment Act can be found here. In the current bill as proposed, there are no limits on the "canopy," or amount of space, that could be devoted to cannabis growth. However, that may change, and there may be limits placed on the amount of cannabis in cultivation.

While cannabis farmers could reap the benefits of reduced farmland assessments, those who produce cannabis hydroponically in warehouse space could see increased property taxes. It is arguable that such warehouse production would result in the warehouses being classified as income-producing property, and therefore local assessors could arguably take into account the amount of net income from cannabis production for purposes of real property taxation. Assessors can seek income and expense information from income-producing properties pursuant to N.J.S.A. 54:4-34 and can establish assessments based on comparable income production, including the net income of the subject facility. Landlords who lease to cannabis-production operations might see higher property taxes based upon higher rents paid for production facilities compared with conventional warehouse storage space. Warehouse space used for cannabis production will require more complex electrical, plumbing and discharge components than average warehouse space and therefore may command higher rents.

Likewise, there will likely be a proliferation of cannabis dispensaries statewide. Municipalities will be given the option to permit them. Due to the fact that the dispensaries may be permitted in relatively few areas of perhaps a small cross-section of the municipalities in New Jersey, rents for dispensary space may be substantially inflated resulting in higher property tax assessments for dispensary outlets.

Municipalities have the authority to regulate land use by virtue of the Municipal Land Use Law of 1975. A municipality may not exercise its authority, however, in conflict with the authority exercised by the state, county or federal government. Although the federal Controlled Substances Act prohibits the possession, cultivation and distribution of marijuana and the Constitution of the United States pre-empts any state law that conflicts with federal law, most states that have legalized marijuana have determined that doing so, and enacting zoning laws regulating marijuana-related businesses, does not trigger a pre-emption issue. Nonetheless, it is worth noting that those able to secure real estate for the purpose of engaging in the marijuana business have faced non-real-estate–related difficulties — for example, finding banks and financial institutions willing to engage or invest, and risk running afoul of federal law.

Following legalization of cannabis, municipalities may choose to regulate dispensary outlets as they do other businesses deemed potentially dangerous to sensitive populations, such as adult stores, gentlemen's clubs, or smoke shops. Many municipalities that allow adult-oriented or "obscene" businesses prohibit such facilities within a certain distance from daycare centers, libraries, schools, substance abuse treatment centers, religious institutions or other similar adult-oriented businesses in an attempt to shield sensitive populations such as children and individuals with a history of substance abuse from the perceived negative impacts and to prevent clusters of such businesses in a small geographical area. Many municipalities have also limited the signage and related advertising permitted for adult-oriented businesses in order to similarly shield the public from any harm caused by the nature of the business. Using similar justifications, many municipalities have barred adult-oriented businesses entirely. Cannabis dispensaries will likely be subject to similar location restrictions, or municipalities may prohibit the use entirely, thus vastly limiting viable options for those interested in entering the marijuana and marijuana product dispensary business. And in those cases where a cannabis dispensary is a permitted use, a fee simple owner may not be willing to lease to a tenant interested in engaging in such business.

If, as expected, many municipalities prohibit marijuana dispensaries entirely and those that do permit such businesses enact narrowly written zoning ordinances strictly regulating the location and signage of such businesses, given that New Jersey is a densely populated state, the number of feasible dispensary locations is likely to be low even after the legalization of marijuana. Depending on the demand for such space, would-be dispensary owners and/or operators will likely encounter competition to purchase or lease property where a cannabis dispensary would be permitted under local zoning laws. Purchasers, landlords and tenants of cannabis-related businesses should be wary, because given the state of federal law, contracts for sale and lease of property for cannabis businesses may be ultra vires under federal law. Parties who ultimately attempt to enforce breaches or defaults under such contracts or leases may be faced with the defense of the illegality of such contracts.

Footnotes

1 Notwithstanding the legalization of cultivation, production, sale and possession of cannabis under New Jersey law, unless federal law changes, the cultivation, production, sale and possession of cannabis in New Jersey would remain federal offenses, and therefore, engaging in such activity would expose the actor to prosecution by federal authorities for the aforementioned acts as well as other related offenses, including, for example and inter alia, transportation of a Schedule I controlled substance across state boundaries or using the financial system to store or transfer funds from the sale and production of same, including aiding and abetting and conspiracy. In addition to criminal penalties, there can be a civil forfeiture of property in connection with cannabis-related crimes under federal law. Counsel should be consulted before any activity in connection with cannabis is commenced, even if it is technically legal under New Jersey law.

Click here to read further Insights from Day Pitney

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Katharine A. Coffey
Rachel A. Gonzalez
Christopher J. Stracco
Steven A. Cash
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions