Authored By: Steven Monahan

Pot stocks have set the market ablaze in recent months. Heavyweights in the beverage industry are looking to incorporate marijuana in their portfolios after years of sitting on the sidelines. Constellation Brands made news when it bought a 9.9% stake in Canopy Growth for $191 million dollars.1 Since then Constellation has doubled down on marijuana and forked over an additional $4 billion to give it a 38% ownership in the company.2 Even Coca-Cola has started talks with Aurora Cannabis to produce a CBD infused drink, rather than a THC infused drink that presumably the alcohol companies will produce.3

Many investors would be mistaken if they believed that pot stocks have just arrived on the New York Stock Exchange. Before companies selling pot outright were listed, it was the marijuana ancillary businesses that were all the buzz. Companies such as Scotts Miracle-Gro and lighting companies were looked to as a way to earn returns off of marijuana operations. These ancillary businesses did not own or control the marijuana plant which is the reason that investors felt safe to invest their capital in them. This belief that if a company merely does not touch the marijuana plant, that they are free from prosecution is severely mistaken.

Innovative Industrial Properties (IIPR) is a real estate investment trust. Many marijuana companies run into problems raising capital to fund their operations because banks will typically not lend them money due to fears of money laundering charges among others. IIPR recognizes this problem that marijuana companies face and proposes a solution. They would act as a bank would by purchasing the marijuana company’s building where it manufacturers its marijuana, thereby giving millions of dollars of much needed capital to the company while also entering into a long-term lease with the company so operations may continue uninterrupted.4

In the flurry of excitement, what many seemed to forget or simply disregard is the fact that marijuana is still an illegal substance.5 The federal government is able to prosecute marijuana crimes through violations of the Controlled Substances Act (CSA). As a schedule I drug, marijuana has no stated use for medicinal purposes and is highly addictive.6 The Cooperative in U.S. v. Oakland Cannabis Buyers’ Coop. argued that marijuana can be medically necessary in spite of it being a schedule I drug.7 The court determined that it was clear from the text of the CSA that there were no medical benefits of marijuana worthy of an exception and they were “unwilling to view this omission as an accident, and unable in any event to override a legislative determination manifest in a statute.”8 Even if people believe differently, it does not change the fact that marijuana is still a schedule I drug and it is illegal under the CSA to manufacture, possess, and use.9

The problem that IIPR encounters is that their entire business model runs directly counter to the CSA. Section 856 of the CSA states that it shall be unlawful to:

(a)(2) “manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”

Put simply, “‘§ 856(a)(2) was intended to prohibit an owner from providing a place for illegal conduct, and yet escape liability on the basis either of lack of illegal purpose, or of deliberate ignorance.’”10

The court in Tebeau found that the defendant violated § 856(a)(2) when he charged people $60 to attend festivals held on his land.11 The defendant admitted to knowing that drugs were being sold on his land at his festivals.12 He restricted dealers from selling near the front gates and only allowed certain drugs to be sold.13 The court held that the defendant need only intend to make his property available to others who had the purpose to use, manufacture, sell or distribute controlled substances to be guilty.14

The Tebeau court in its analysis cited the Harrison case, which is analogous to the current situation that IIPR finds themselves in to a certain extent.15 As the court stated in Tebeau, Harrison allowed a “neighbor to manufacture methamphetamine in a trailer on his property.”16 “The jury instructions had stated that the government was ‘not required to prove [the defendant] intended to use the building for the prohibited purpose,’ but only that ‘the proscribed activity…was present and that [he] knew of and intentionally allowed the activity to continue.’”17 The court determined that Harrison “knowingly and intentionally rented or made his property available for the manufacture of methamphetamine.”18

Lastly, the bankruptcy court in In re Rent-Rite Super Kegs W. Ltd provides great insight into violations of § 856(a)(2) and defenses.19 The debtor seeking bankruptcy protection in this matter admitted to leasing out warehouse space to tenants for the cultivation of marijuana.20 The court determined that the debtor was “engaged in an ongoing criminal violation” of which the debtor argued that the marijuana law was in flux.21 The debtor argued that Colorado law allows for the cultivation of marijuana and that federal authorities never charged, convicted, nor even notified them that they were in violation of any federal law.22 The court determined that state law does not nullify the CSA and “the fact that a violator is never charged, tried or convicted does not change the fact that the crime has been committed.”23

For the government to prove a violation of § 856(a)(2) they must prove that IIPR (1) manages or controls (2) as an owner and (3) knowingly and intentionally rents the building (4) of which the tenant’s purpose is to unlawfully manufacture a controlled substance.

As seen in all three of the aforementioned cases, IIPR likewise manages or controls its properties through its ownership of the buildings.24 Although if ownership is not enough, IIPR collects a “management fee” from every tenant and in some situations may even monitor its tenants by “periodically conducting site visits and meeting with tenants to discuss their operations.”25 IIPR’s actions satisfy the first and second elements.

As to the third and fourth elements, IIPR knows and intends to lease out its buildings to tenants that have the purpose of manufacturing marijuana. The definition of “manufacture” as defined under the CSA means “production, preparation, propagation, compounding, or processing of a drug or other substance.”26 The CSA proceeds to define “production” as including the “manufacture, planting, cultivation, growing, or harvesting of a controlled substance.”27

The debtor in In re Rent-Rite and defendant in Harrison were both landlords. In each case the landlord knew that drugs were either being manufactured, sold, used, or distributed on their own property. In the case of In re Rent-Rite, the debtor was in the same position as IIPR by leasing out warehouse space to marijuana cultivators with the knowledge that its tenants were growing marijuana, for which he was found to be in violation of § 856(a)(2).28

IIPR is a landlord and similarly knows and intends to rent out space to tenants that have the purpose of growing marijuana in violation of the CSA. IIPR purchases the buildings in its portfolio from marijuana growers with the knowledge that its future tenants intend to continue to grow marijuana once they become tenants.

IIPR’s business as stated on their corporate website makes it clear that the company’s intention is to “act as a source of capital to these licensed medical-use cannabis growers by acquiring and leasing back their real estate locations. By selling the real estate to us, and then leasing it back, growers have the opportunity to redeploy the proceeds into their company’s core operations allowing them to focus their resources on reaching as many patients as possible in need of treatment.”29

IIPR’s entire business model is based on leasing out their properties to marijuana growers of which they know intend to manufacture marijuana in violation of the CSA.

In conclusion, maybe IIPR themselves state it best:

Cannabis is a Schedule I controlled substance under the CSA. Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the possession, use and cultivation all remain of federal law that are punishable by imprisonment and substantial fines. Moreover, individuals and entities may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them. The U.S. Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. We would likely be unable to execute our business plan if the federal government were to strictly enforce federal law regarding cannabis.”30

1 David Reid, Corona beer owner set to buy into world’s largest cannabis grower, CNBC (Oct. 30, 2017), https://www.cnbc.com/2017/10/30/cannabis-drinks-planned-as-constellation-brands-invests-in-canopy-growth-corporation.html.

2 Michael Sheetz, Corona beer maker Constellation ups bet with $4 billion investment in Canopy Growth, CNBC (Aug. 15, 2018), https://www.cnbc.com/2018/08/15/corona-maker-constellation-ups-bet-on-cannabis-with-4-billion-investment.html.

3 Jen Skerritt and Craig Giammona, Coca-Cola is eyeing the cannabis market, Bloomberg (Sept. 24, 2018), https://www.bloomberg.com/news/articles/2018-09-17/coca-cola-eyes-cannabis-market-in-push-beyond-sluggish-sodas.

4 Innovative Indus. Properties Inc., Our Business-Medical Cannabis Industry, http://Innovativeindustrialproperties.com/our-business/. (last visited Sept. 24, 2018).

5 21 U.S.C. § 812 (2018).

6 Id.

7 U.S. v. Oakland Buyers’ Coop., 532 U.S. 483, 493 (2001).

8 U.S. v. Oakland Cannabis Buyers’ Coop., 532 U.S. 483, 493 (2001).

9 21. U.S.C. § 841 (2018).

10 U.S. v. Gilbert, 496 F. Supp 2.d 1001, 1008 (N.D. Iowa 2007) (quoting U.S. v. Tamez, 941 F.2d 770, 774 (9th Cir. 1991).

11 U.S. v. Tebeau, 713 F.3d 955, 958 (8th Cir. 2013).

12 Id.

13 Id.

14 Id. at 963.

15 Id. at 960 (citing U.S. v. Harrison, 133 F.3d 1084 (8th Cir. 1998).

16 Id.

17 Id. (citing U.S. v. Harrison, 133 F.3d at 1086).

18 Harrison, 133 F.3d at 1086.

19 In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. CO 2012).

20 Id. at 803.

21 Id. at 804.

22 Id. at 805.

23 Id.

24 Innovative Indus. Properties Inc., Annual Report (Form 10-K) p.6-8, (March 29, 2018).

25 Id. at 14.

26 21 U.S.C. § 802(15) (2018).

27 Id. at (22).

28 In re Rent-Rite Super Kegs W. Ltd., 484 B.R. at 804.

29 Innovative Indus. Properties Inc., Our Business-Medical Cannabis Industry, http://innovativeindustrialproperties.com/our-business/. (last visited Sept. 24, 2018).

30 Innovative Indus. Properties Inc., Annual Report (Form 10-K) p.25, (March 29, 2018).

Steven Monahan graduated with distinction in 2018 from the McGeorge School of Law.  Steven received certificates of concentration in tax and business law while also earning two Witkin Awards for his legal writing.  During law school he took internships at the California Franchise Tax Board and Wagner Kirkman Blaine Klomparens & Youmans LLP.  During his time at the state, he wrote multiple opening briefs submitted to the Board of Equalization and then assisted Wagner Kirkman with their research needs.  Steven benefited greatly from the knowledge of all the tax counsels working in the Tax Administration and Procedure Bureau as well as working with the outstanding partners at Wagner Kirkman.

tel: (714) 266-4811 email: Smonahan16@yahoo.com