Prior to signing a letter of intent or drafting the lease text's first sentence, a leveraged prospective landlord must understand its obligations and rights under its mortgage loan documents. If the building has financing, before committing to a tenant, the landlord should discuss the proposed MBE tenancy with its mortgage lender. Institutional lenders are anxious about everything that impacts negatively on their balance sheets and publicly filed reports.1 For this reason, many large banks simply will not finance or refinance (when the mortgage comes due) properties housing an MBE.2 Following are a few perceived threats to lenders when an MBE occupant fails to comply with every material law and regulation. While reviewing these, keep in mind that banks, and insurance company lenders, have many regulatory compliance obligations, so the notion of "compliance" is programmed in their collective subconscious.
Forfeiture of the Collateral
Of course, institutional lenders and anyone else seeking to be a lender already has been advised by counsel of the dangers of forfeiture of the collateral (i) if an MBE tenant in a building is charged with criminal conduct or (ii) if the building itself becomes a defendant in a federal civil forfeiture proceeding. In addition, the lender will be concerned that the mortgage lien itself (and the lender's remedies) may be liable to forfeiture. If that last item sounds strange, know that in Canada, under its federal Controlled Drugs and Substances Act, the Crown moves a court that the lender not be permitted to foreclose on its collateral (under Canadian law, "offence-related property") prior to the Crown's criminal proceedings being wrapped up against grow-site occupants.3 In the United States, under the federal criminal forfeiture statute, the definition of "property" includes the real property as well as "interests" and "claims" in that property. That definition includes rights of lenders under liens against the real estate. The California banking industry, among others, is well familiar with that fact.4
Redoubtable former U.S. Attorney Melinda Haag sent JPMorgan Chase Bank, lienholder of the defendant real property at 6 School Street, Fairfax, California, the same letter she sent to Fashid Ezazi described in Chapter 6, in which she threatened forfeiture of the property—which included the lienhold "interest" of the bank.5 (Some criminal defense attorneys view federal prosecutors' "warnings" to mortgagees as transforming otherwise-uninvolved banks into persons that "manage and control" property to be forfeited under the federal "crack house" statute.)6 This federal statute presumes that mortgagees are aware of drug operations in the dispensaries or clinics and know about persons making the property available for MBE use. Ms. Haag continued her efforts, undaunted, to crack down on dispensaries, despite Attorney General Eric Holder's counseling federal prosecutors to focus on black-market traffickers—not those marijuana businesses operating legally under state law.7 Ultimately, she was deterred by the 2014 federal appropriations bill amendment (Rohrabacher-Farr amendment, as appended each year thereafter to the succeeding appropriations bill) banning use of federal dollars for medical marijuana dispensary prosecutions.8
Uninsured or Underinsured Damage Claims and Forfeitures
Even a certificate establishing its status as a named insured won't comfort a lender that the policy's coverage will meet or exceed the full amount of its loan. A lender therefore calculates that (a) it will have to front the premises' restoration costs, at least in the policy's deductible amount, and (b) the damage may not fall within a "covered" loss under the policy's definitions, which may exclude mold or indoor air quality problems contributing to personal injuries.9 In addition, pesticides or herbicides can damage portions of the property or contaminate soil or groundwater adjacent to the leased premises—events that may not be covered by insurance. Government action exclusions appearing in policies can defeat CGL policy insurance recoveries that otherwise might be covered losses under criminal acts coverage.
Accessibility for the Disabled
Suits by MBE clients against the owner for violating Title III of the Americans with Disabilities Act (ADA) are a possibility, since some medical marijuana patients have chronic pain and diminished mobility and the MBE buildings may not be accessible by debilitated customers.10 Building owner liability could arise without disabled persons' access to the MBE's premises or around the common area surrounding the building. A resulting injunction may obligate the owner (and perhaps the lender wanting to protect its collateral's value) to expend substantial sums to rebuild noncomplying facilities or to add other disabled accessible improvements. And in some states, the state statutory "partner" to the federal ADA may enable the unaccommodated person to recover damages.
Personal Injury Suits
If persons are harmed by MBE patients acting under the influence of Cannabis when alleged harm occurs, a lawsuit naming the landlord should be expected. Unless adequate insurance proceeds exist, a judgment for permanent injury or death could disastrously impact the financial viability of the building owner and its ability to pay the mortgage note.
MBE Action Voiding Its Lease
Avoidance of rent obligations by an MBE asserting a defense based on the lease's illegal purpose may postpone or terminate the premises owner's cash flow from the lease, also resulting in the landlord's inability to pay its mortgage note.11
Other likely creditor anxieties, whether legitimate or not, tied to potential failure of its borrower's performance include these matters:
1. The loss of occupancy/cash flow due to a tenant's exodus from a building or project (upon the scheduled expiration of the lease) as the result of the owner's leasing to an MBE, reducing the property's income (if lower rents from other building tenants result after the MBE's occupancy);
2. Judgments obtained by neighboring owners for private nuisance claims, resulting in termination of the MBE's tenancy;
3. Other tenants' terminating their leases, followed by costly constructive-eviction-based court proceedings, or by suits seeking money damages based on the landlord's breach of its covenant of quiet enjoyment due to the MBE's "undesirable" operations;
4. The MBE's bankruptcy;
5. Absolute lender liability for cleanup of a "release" of hazardous substances at the MBE's premises, a sanction imposed under federal and state environmental law;12 and
6. The landlord's accepting substantial amounts of advance rent by the MBE retained by the landlord (but unreported to the lender) in violation of the loan documents' covenants limiting or prohibiting prepaid rent.
Ultimately, there's the granddaddy lender angst, stationing it squarely between rock and hard place. Suppose the landlord misses mortgage note installments, even when the MBE is functioning according to its lease terms. Now the lender has accepted (as part of its loan collateral) an assignment of tenant rents and leases. In the normal course of realty-secured lending, following a default, the lender (typically after demand on the tenants) receives rents directly from the tenants (or maybe through a court-appointed receiver, but that circumstance changes nothing below). Many lenders are convinced that direct acceptance of cash rents from the MBE triggers potential federal action against them for violating the Bank Secrecy Act (31 U.S.C. §§ 5311-30) or federal statutes on money laundering. That impression has not changed after the James M. Cole (DoJ) memorandum dated February 14, 2014.
This 2014 Cole memorandum to U.S. Attorneys around the nation did not eliminate prosecution of financial institutions' marijuana-industry-related violations. Indeed, the 2014 Cole memo indicated that financial institutions conducting transactions using money associated with marijuana-related conduct still can face criminal sanctions under the Bank Secrecy Act if banks fail to identify or report financial transactions involving the proceeds of violations of the Controlled Substances Act. And this remains so even after Attorney General Sessions rescinded the 2014 Cole Memorandum on...
