How 280E Affects Tenants and Landlords—and What May Change with Rescheduling

Cannabis real estate economics look very different under 280E. For tenants, rent, payroll, and most operating costs are non-deductible at the federal level—pushing effective tax rates up and squeezing cash flow. For landlords, tenant coverage ratios, lease structures, and lender attitudes are all shaped by 280E-driven margins. If federal rescheduling proceeds, the math changes—potentially fast. This article explains how 280E works in practice, why it matters to leases and valuations, and what a move to Schedule III could mean for both sides of the table. If you’re preparing to expand or relocate, explore current cannabis real estate for lease on 420 Property.

Executive Summary

• What 280E does: Disallows federal deductions and credits for businesses trafficking in Schedule I or II substances—leaving only cost of goods sold (COGS) to reduce gross receipts.
• Tenant impact: Base rent, NNN, payroll, marketing, utilities, insurance, and many TIs (tenant improvements) are generally non-deductible; EBITDA and DSCR are depressed versus non-cannabis peers.
• Landlord impact: 280E does not apply to landlords, but it indirectly drives underwriting: tighter coverage covenants, higher security packages, and bespoke clauses (use, compliance, cash handling).
• If rescheduling to Schedule III becomes effective: 280E would no longer apply to cannabis operators for federal income tax in the effective period, improving after-tax cash flow, rent coverage, and financing options—though federal CSA, banking, and insurance frictions do not vanish overnight.
• Practical moves now: Structure leases to reflect current 280E realities but keep “step-up” options for a post-280E world; align TI and C1D1 capital plans; add protective covenants; prioritize CUP/zoning certainty.

280E—A Practical Primer for Real Estate Decisions

What 280E says (and why it matters): Section 280E of the Internal Revenue Code denies all federal income tax deductions and credits for any trade or business that consists of trafficking in Schedule I or II controlled substances. Operators may still reduce gross receipts by COGS, but typical operating expenses (rent, payroll, marketing, interest, depreciation, and most TIs) are not deductible at the federal level. State treatment varies—some states have “decoupled” from 280E for state income-tax purposes—but federal rules dominate underwriting.

Implications by business model

• Retail/dispensary: Limited COGS relief; most occupancy costs (base + NNN) are non-deductible, so every $1 of rent behaves like ~$1+ of pre-tax expense.
• Cultivation/processing: More inputs can be capitalized into inventory and flow through COGS, but many overheads remain non-deductible; C1D1 build-outs are capital-intensive and often financed with equity or high-cost debt.
• Ancillary services (non-plant-touching): Not subject to 280E; conventional tax rules apply.

Key takeaway: Under 280E, the same lease rate consumes more after-tax cash than in non-cannabis sectors. That reality should drive rent structure, TI amortization, and covenant design.

How 280E Distorts Lease Economics for Tenants

1) Occupancy cost is “heavier” after tax

Because rent and most NNN items are non-deductible, effective occupancy cost is higher on a net basis. That depresses EBITDA, weakens DSCR, and can push lenders to require larger cash reserves or personal guarantees.

Illustrative dynamics (conceptual):

• $30/sf NNN rent under 280E behaves like ~$30+ pre-tax (no deduction).
• After rescheduling (if effective), the same $30/sf becomes deductible, lowering taxable income and freeing cash—often the difference between borderline and healthy coverage.

2) TI and build-out planning

• Tenant Improvements (TIs): Where tenants fund TIs, they typically capitalize and depreciate under normal rules—but 280E generally blocks depreciation deductions for plant-touching operators. Structuring landlord-delivered TIs with rent amortization can smooth cash, but tenants still face non-deductible rent under 280E.
• C1D1 rooms, hazardous exhaust, power upgrades: Treat these as mission-critical scope items. Secure permits early; align delivery timelines to licensing milestones to avoid stranded capital.

3) Lease structure and covenants

• Base vs. percentage rent: Percentage rent can align interests, but some regulators and lenders disfavor revenue-sharing. Confirm local rules and lender policy.
• NNN detail: Explicitly allocate utilities, security, waste, and environmental compliance.
• Licensing contingencies: Use phased rent commencement tied to permit issuance, with outside dates and termination rights.
• Compliance & reporting: Require ongoing license good standing, insurance certificates, site security protocols, and financial reporting (to monitor 280E-pressured coverage).

4) Zoning, CUP, and timing risk

A tenant’s ability to open—and the length of the rent-free period—turns on zoning, buffers, and CUP approvals. Map setbacks (schools/parks/churches), sensitive-use buffers, and local density caps before signing. Lock in long-lead utilities (power, water) early.

What 280E Means for Landlords and Underwriting

1) 280E does not tax the landlord—but it changes risk

Landlords are not “trafficking” and thus are not directly subject to 280E. Standard deductions (interest, depreciation, repairs) remain available. The indirect effect is real: tenants have thinner after-tax margins, so landlords model lower rent-coverage, require larger deposits, and tailor remedies for licensing failures.

2) Lender and title dynamics

• Lender consent: Many mortgage covenants restrict illegal federal uses; obtain written approvals before lease execution to avoid recourse risk.
• Banking & cash handling: Even with improving access, banks impose enhanced diligence; cash management requirements (e.g., armored pickup, audited cash logs) often appear in leases.
• Insurance & title: Some carriers exclude cannabis risks; title companies vary in comfort levels. Start diligence early.

3) Protective clauses that matter

• Use & compliance: Define permitted uses with precision; require adherence to all laws and security standards.
• Federal illegality acknowledgment & waiver language: Clarify that federal illegality does not excuse performance.
• Indemnities: Robust landlord indemnity for regulatory actions, nuisance claims, and RICO-style suits.
• Remedies & step-in rights: Faster cure periods for loss of license; rights to secure the premises and protect improvements.

Rescheduling: What Changes if Cannabis Moves to Schedule III?

280E and Rescheduling—What to Expect

Current status (as of August 2025): The Department of Justice/DEA has proposed moving marijuana to Schedule III and conducted hearings, but no final rule is in effect. The IRS has explicitly reminded taxpayers that 280E still applies unless and until rescheduling becomes final.

If Schedule III becomes effective:

• Federal tax relief: 280E would no longer apply to operators from the effective date forward for federal income tax. Ordinary and necessary expenses (rent, payroll, marketing, depreciation, interest) would be deductible again, changing underwriting overnight.
• Cash-flow lift: Expect higher reported EBITDA, better DSCR, and improved ability to service fixed rent. Some tenants may prefer higher base rent in exchange for larger landlord-funded TIs once deductibility returns.
• Financing perception: Banks and insurers may re-rate risk as documented cash flows rise post-280E; however, broader CSA, banking policy, and federal–state conflicts will still shape compliance (this is not full federal legalization).
• State taxes: Many states already “decouple” from 280E; federal relief would harmonize treatment and simplify compliance, but state-specific rules will continue to matter.
• Timing & retroactivity: Market consensus expects relief to apply prospectively from the rule’s effective date—not retroactively to prior tax years.

What will not change on day one:
Zoning setbacks, local CUP processes, building and fire codes (including C1D1), and licensing limits remain municipal/state-driven. Operators will still need robust compliance, security, and environmental controls.

Action Plan: Lease & Tax Strategy Under Uncertain Timing

For Tenants (operators)

1. Model two scenarios now
   • Status quo (280E in place): Validate rent coverage with conservative after-tax cash flow.
   • Post-rescheduling: Re-forecast EBITDA/DSCR with deductibility restored to evaluate capacity for additional TIs or expansion.
2. Structure rent to bridge both worlds
   • Consider graduated base rent or TI amortization that steps up post-rescheduling.
   • Keep percentage-rent options narrow and compliant with local rules/lender expectations.
3. TIs and capex discipline
   • Prioritize life-safety, C1D1, and power upgrades.
   • Where possible, shift non-critical scope to landlord-delivered work to mitigate 280E’s depreciation limits.
4. Licensing & zoning certainty
   • Front-load CUP/zoning diligence; align possession and rent commencement with license milestones.
5. Documentation & E-E-A-T
   • Maintain detailed cost accounting (COGS vs. G&A) to avoid aggressive positions under 280E; strengthen your lender file with process controls and third-party certifications.

For Landlords (owners and developers)

1. Underwrite with 280E today; include a rescheduling “step”
   • Size security deposits and guarantees to today’s coverage.
   • Add rent step-ups or re-tiered TI amortization that activate post-280E.
2. Tighten protective covenants
   • Maintain compliance, reporting, and inspection rights; define remedies for license lapses.
   • Require robust insurance (consider surplus lines where necessary); verify exclusions.
3. Lender and title alignment
   • Secure lender consent early; document cash-handling controls.
   • Confirm title/escrow provider willingness for cannabis transactions.
4. Portfolio positioning
   • In markets with durable demand, evaluate build-to-suit and power-dense shells that can command premium rents when deductibility returns.
   • For raw sites, advance entitlements and infrastructure to accelerate time-to-tenant; browse cannabis land for sale to identify supply gaps.

Valuation, Lending, and Exit Considerations

• NOI & cap rates: Post-280E deductibility tends to stabilize tenant performance, which can compress cap rates for stabilized assets. Expect greater lender comfort, larger proceeds, and lower spreads where tenant cash flow demonstrably improves.
• SDE/EBITDA & QoE: Buyers and lenders will scrutinize quality of earnings (QoE) adjustments that bridge pre- and post-280E periods. Keep audit-ready schedules that separate COGS from non-deductible OPEX.
• LOI & APA terms: In M&A or sale-leaseback LOIs, include tax-treatment representations and working-capital mechanics that reflect 280E versus post-rescheduling realities.
• DSCR/coverage: Re-underwrite with both cases. Many lenders will require a minimum pro-forma DSCR (e.g., 1.35x) before crediting any rescheduling upside.

Checklist to Use Before You Sign

Tenant

• Confirm zoning, buffers, and CUP timeline.
• Map build-out scope (power, C1D1, security), TI funding, and delivery sequencing.
• Validate DSCR with 280E-era cash flow; run a rescheduling case.
• Align rent commencement with license milestones; include outside dates.
• Lock insurance, waste, and cash-handling vendors.

Landlord

• Obtain lender consent; review mortgage covenants.
• Specify permitted uses; include federal illegality acknowledgment and waiver.
• Set reporting cadence (financials, licenses, incident logs).
• Size deposits/guarantees to 280E risk; add post-rescheduling rent/TI adjustments.
• Verify insurance coverages and exclusions.

Where 420 Property Fits

Whether 280E stays in place or rescheduling accelerates, the fundamentals don’t change: superior sites with clean entitlements, power availability, and disciplined leases win. Use 420 Property to identify opportunities and comp sets:

Disclaimer

This article is for educational purposes only and does not constitute legal, engineering, financial, or tax advice. Always consult qualified professionals and your local Authority Having Jurisdiction before making decisions.

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