More to Clean Up? NJ Adult Use Law Prohibition on Incentives May Make It Even Harder to Plant Your Garden

New Jersey’s landmark adult use statute, signed by Governor Phillip D. Murphy on February 22, 2021, has already set off a land grab. Prospective applicants searching for viable properties are discovering that viable real estate is hard to come by. New Jersey’s warehouse/industrial market remains red hot notwithstanding the pandemic thanks to ecommerce, making it hard to find attractive properties suitable for cultivation facilities. Institutional ownership and financing of these properties prevail in the market, making it harder still to find landlords or lenders willing to deal with cannabis tenants.

New Jersey’s famously difficult and time consuming land use process makes siting almost any business in its 560+ towns a considerable challenge. A dispensary will almost assuredly attract even more than the usual number of objectors. Though 2/3ds of New Jersey voters approved legalizing cannabis, there remains a distinct view that dispensaries should be located in some other town, not in my backyard. It remains to be seen whether the up to 2% municipal tax on retail sales will soften these views.

Add another challenge to this list: Section 37 of the adult use law prohibits any entity issued any cannabis license from receiving any state or local economic incentive. In addition, the issuance of any cannabis license to a “person or entity that has been awarded” a state or local economic incentive “shall invalidate the right of the person or entity to benefit from the economic incentive as of the date of issuance of the license.”

What is a state or local incentive? For these purposes, any “financial incentive”  awarded  by the state, county or local government or any of their authorities “for the purpose of stimulating economic development or redevelopment in New Jersey, including, but not limited to, a bond, grant, loan, loan guarantee, matching fund, tax credit, or other tax expenditure.”

That appears to mean a cannabis company cannot take advantage of any incentive or financing from the Economic Development Authority, for example to rehabilitate a closed or contaminated property or to develop innovative technologies. Cannabis companies may not be eligible for a clean energy grant or loan for sustainable energy, or, it seems, even a routine local tax abatement.

This provision has its genesis in the desire to ensure that those granted the privilege of a valuable cannabis franchise not take advantage of New Jersey’s  Farmland Tax Assessment program, by which property owners who operate farms receive generous allowances from New Jersey’s typically sky high local property taxes. The Farmland Credit is intended to encourage the preservation of farms and open space, especially in the face of suburban development.

But recent well-publicized concerns that state economic incentives had been improperly issued by state agencies or abused by recipients appears to have expanded this notion. The intent seems to be to prevent incentives, which are intended to spur economic development that wouldn’t otherwise occur “but for” the state or local incentive, from being directed toward cannabis licensees, who arguably are highly incented to build without the need for public largesse.

While this proposition is plausible enough on its face, we question whether cannabis companies should be treated differently from any other business operating in a high cost state like New Jersey. If New Jersey wants to leverage its pharma strength and attract the capital investment in cannabis technology and cannabis therapies it needs to be a national leader in cannabis, this provision will most assuredly inhibit the establishment of these high value businesses in the state.

But the biggest problem for cannabis companies hunting for property arises from Section 37’s draconian consequences for property owners who rent to cannabis companies:

    • “a property owner, developer, or operator of a project to be used, in whole or in part, by or to benefit” a cannabis license “shall not be eligible for  a  State or local  economic incentive during the period of time that the economic incentive is in effect.”
    • the issuance of a cannabis license “at a location that is the subject of a State or local economic incentive shall invalidate the right of a property owner, developer, or operator to benefit from the economic incentive as of the date of issuance of the license.”

If siting a cannabis business will invalidate any economic incentive on which a developer relied, property hounds will find those properties to be off the table.

It seems likely this well-intentioned portion of the legislation will:

    • raise the retail price of cannabis,
    • discourage cannabis cultivators from adopting sustainable, low carbon energy solutions, and
    • worst of all, inhibit siting facilities in urban and urban-adjacent towns, where redevelopment zones and tax abatements are prolific.

The provision effectively prohibits landlords who have received any form of state or local incentive from leasing any portion of their property to cannabis businesses, at the risk of losing the entire incentive on which their project was financed. This will limit the number of available properties for growing and selling cannabis. In turn, this will drive up the rents and selling prices of the few remaining properties. Inevitably, increased property costs will  be reflected in higher cannabis pricing that will be borne by patients and adult use consumers alike. If incentives remained intact despite a cannabis tenant, input costs and retail prices will be lower.

On its face, it seems that clean energy and angel investor incentives all other businesses enjoy may also be off the table for cannabis businesses. This would fly in the face of the need and desire of the power-hungry cultivation segment of the cannabis industry to adopt sustainable and low-carbon energy practices. We remain hopeful a favorable interpretation or creative lawyering can solve this problem.

But worst of all, this provision will make it especially difficult to locate cannabis businesses in urban redevelopment areas like Jersey City, Newark, Camden and elsewhere, where local payments in lieu of tax arrangements are typically required to spur small and large projects, whether mixed use, retail, office, or industrial. In most cases, the most profitable urban retail locations will be in redeveloped areas benefitted by incentives. The most available urban cultivation sites will be contaminated properties requiring significant investment to rehabilitate and bring back on the tax rolls.

Given the need to ensure that communities ravished by the war on drugs share in the upside of a legal cannabis market, we are hopeful that legislators will revisit this provision. We need to reconsider and recalibrate this language to ensure we do not discourage cannabis businesses in urban areas or inhibit the adoption of clean energy strategies that will reduce carbon emissions that disproportionately affect urban areas.

New Jersey’s lawmakers have historically been open to clean up measures to fix the unintended consequences of well intentioned legislation. Here’s hoping they do.

In the meanwhile, if you are hunting for New Jersey property, be sure to inquire early on about the existence of incentives that may take that shiny new warehouse off your list.