In the 2010 general election, Arizona voters narrowly approved the Arizona Medical Marijuana Act (the “Act”). The Act legalized medical marijuana use by patients suffering from certain “chronic or debilitating” diseases and provided for the sale of marijuana to qualifying patients and caregivers through a limited network of registered nonprofit medical marijuana dispensaries (“dispensaries”). Because these dispensaries will be located throughout the state, and because the Act has given rise to a complex regulatory scheme replete with traps for the unwary, it is important that all Arizona commercial property owners understand the Act’s implications.

On March 28, 2011, the Arizona Department of Health Services (“ADHS”) released the final, unofficial version of the Medical Marijuana Program rules (the “Unofficial Rules”) that will be used to implement the Act. While the Unofficial Rules remain subject to change, ADHS does not anticipate making substantive changes before filing final, official rules with the Arizona Secretary of State.

The Unofficial Rules provide that only those parties allocated “dispensary registration certificates” will be able to seek and obtain ADHS approval to operate dispensaries. ADHS will be accepting applications for dispensary registration certificates from June 1 until June 30, 2011. As part of the application process, each applicant will need to inform ADHS of the physical address of its proposed dispensary. Accordingly, over the next two months, commercial landlords and brokers may receive a flurry of inquiries from aspiring dispensary operators hoping to nail down a suitable space.

Given current economic conditions, the prospect of a new and eager tenant pool will certainly be enticing to many Arizona commercial property owners. But the Act, the Unofficial Rules, and existing federal, state, and local laws and regulations combine to create a complex web of risks and obstacles that property owners should be aware of before moving forward. Here are five of the many key issues that might give would-be dispensary landlords pause:

  • Leasing to dispensaries violates federal law. Under the federal Controlled Substances Act, for example, it remains unlawful to “knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, [any property] for the purpose of unlawfully manufacturing, storing, distributing, or using” marijuana. See 21. U.S.C. § 856(a). And while the Department of Justice (the “DOJ”) has indicated that federal law enforcement officials should generally refrain from investigating and prosecuting individuals whose actions are in “clear and unambiguous compliance” with state medical marijuana laws, the DOJ’s guidelines are subject to change and do not provide a defense to parties charged with violations of federal drug laws. Landlords leasing to dispensaries in violation of the Controlled Substance Act may therefore risk severe penalties – including substantial fines, seizure of the leased premises, and even imprisonment.
  • There are limits on where dispensaries can be located. The Act prohibits any dispensary from operating within 500 feet of an existing school. Furthermore, the Act and the Unofficial Rules permit cities, towns, and counties to enact zoning regulations preventing dispensaries from operating in specified areas. Commercial landlords should review these zoning regulations to determine whether they currently permit dispensaries to operate at a particular location, but should note that some locations currently suitable for dispensaries may no longer be suitable by the time ADHS awards dispensary registration certificates.  
  • Only some applicants will be awarded dispensary registration certificates. Because the Act and the Unofficial Rules limit the number of dispensary registration certificates available both state-wide and within particular geographic areas, there is no guaranty that any one applicant who identifies a landlord’s property as a proposed dispensary location will be awarded a certificate. A landlord might improve its odds of securing a dispensary tenant by confirming that its prospective tenant meets all of the evaluation criteria set forth in the Unofficial Rules or by entering into contingent leases with several certificate applicants.  
  • Landlords will need to invest time and money in planned dispensaries long before knowing whether these dispensaries will be permitted to open for business. While dispensary registration certificates will be awarded beginning in August 2011, applying for and obtaining approval to operate a dispensary could take an additional year. The approval process will require close coordination between landlords and would-be dispensary operators to ensure timely submission of the required site plans, floor plans, permits, and other documentation. Moreover, an applicant who is awarded a dispensary registration certificate and builds out or modifies the proposed dispensary to meet ADHS’s stringent guidelines could still fail to obtain the final approval needed to operate. In addition to taking steps to ensure they are not blamed for an applicant’s failure to obtain final approval, landlords may want to think twice before offering generous tenant improvement allowances to prospective tenants hoping to operate dispensaries.  
  • Landlords leasing to dispensaries will need to rethink a number of standard lease provisions. For example, any reservation of a right to relocate tenants will need to be curtailed in light of the requirement that dispensaries seek and obtain ADHS approval before changing locations. Similarly, strict limitations on the parties permitted to possess medical marijuana or to access areas where it is grown or cultivated may necessitate modifications to landlord reentry and lien rights.  

As these examples demonstrate, the tension between Arizona and federal laws governing the distribution and use of marijuana and the highly-regulated nature of Arizona’s nascent Medical Marijuana Program require commercial property owners to wade through a number of challenging and novel questions. Accordingly, property owners will need to proceed with caution when evaluating proposals from dispensary applicants. In addition, property owners who are unsure of how the Act and the Unofficial Rules apply to them should consult with legal counsel before moving forward.