Choosing the right cannabis real estate lease structure affects monthly cash flow, lender confidence, and exit value. This guide explains how NNN, Full Service Gross, Modified Gross, ROFR/ROFO, assignments, and related clauses actually work in cannabis, and how to negotiate a lender-friendly LOI without overpaying for risk. If you’re ready to transact now, start by comparing cannabis properties for lease on 420 Property and use the framework below to shortlist spaces.
Why lease structure matters more in cannabis
Landlords price risk, and regulated-use assets carry unique variables: zoning constraints, CUP conditions, odor and security requirements, and specialized TI (tenant improvements) such as cultivation HVACD or C1D1 extraction rooms next door. Those factors shape net effective rent, concessions, deposits/LCs, and who carries which operating costs. On the capital side, your lease terms drive DSCR and valuation; on the operational side, they determine how resilient you are when wholesale pricing compresses.
In other words: the right cannabis real estate lease is a financial instrument as much as a space agreement.
Common cannabis real estate lease structures explained
Below are the most-used structures you’ll encounter on 420 Property and in institutional deals, with cannabis-specific nuances.
1) NNN (Triple Net)
What it is: Base rent plus pass-throughs for Net real estate taxes, Net insurance, and Net common area maintenance (CAM). The tenant bears operating costs and variability, while the landlord focuses on the shell and capital stack.
Why cannabis operators use it:
- Aligns with landlord expectations for specialized uses and heavier wear on building systems.
- Clear delineation of who pays for what; useful for underwriting and resale.
Watchouts & tips:
- CAM transparency: Require an annual CAM budget, line-item detail, and a true-up with audit rights.
- Capital vs. maintenance: Define which items are capital (owner) vs. routine maintenance (tenant).
- Roof/HVAC responsibilities: Clarify repair vs. replacement; consider a service contract and capital reserve language.
- Security/odor systems: If required by the CUP, decide whether they’re landlord base-building or tenant systems embedded in TIs.
2) Full Service Gross (FSG)
What it is: One all-in rent; landlord covers most operating expenses (taxes/insurance/CAM), often with an expense stop.
Pros:
- Budget predictability for tenants in ramp-up.
- Landlord bears inflation risk up to the stop.
Cons for cannabis:
- Landlords may inflate the all-in rate to price perceived risk.
- Expense stops that reset annually can recreate variability.
Tip: If you prefer FSG for simplicity, use a clearly defined base year and auditing rights, and validate inclusions/exclusions.
3) Modified Gross
What it is: Hybrid—some expenses included in base rent; others are pass-throughs. Common for legacy industrial transitioning to cannabis.
Pros: Flexible; can mirror operational reality (e.g., tenant covers unusually high utilities for cultivation while taxes/insurance remain with owner).
Tip: List included vs. excluded costs explicitly. Avoid “as customary” language.
4) Absolute NNN (often in sale-leasebacks)
What it is: Tenant bears all expenses, including structure/roof. Common when an operator monetizes real estate to fuel growth.
Pros: Maximizes landlord certainty; can unlock higher valuations for stabilized credits.
Cons: Only pencil when NOI and EBITDA comfortably support rent; stress-test DSCR under downside pricing.
Tip: Ensure SNDA and estoppel forms are bank-standard; sale-leaseback buyers will diligence QoE and lease enforceability.
5) Percentage Rent / Participation
What it is: Base rent plus a percent of gross sales after a breakpoint. Less common for production, sometimes used in retail dispensary leases.
Tip: If used, agree on audit standards and exclusions (e.g., taxes, returns). For cultivation/manufacturing, percentage rent can misalign incentives and complicate financing.
6) Ground Lease
What it is: Tenant leases land and constructs improvements; rent is typically lower, term is long, and reversion applies.
Use case: Greenhouse campuses where the tenant wants long-duration control and build-to-suit economics without upfront land purchase.
Who pays for what: CAM, utilities, and specialized systems
CAM (common area maintenance): Define landscape, snow/lot, lighting, private roads, private utilities, security patrols, and admin fees. Require an annual CAM budget and cap admin/management fees where possible.
Utilities: Heavy electric loads (grow), gas for heating, water for fertigation/evap cooling, and sewer/trucked wastewater. In NNN, tenant pays directly; in gross leases, meter or submeter to avoid disputes.
Specialized systems: If the CUP mandates odor control or monitoring, decide whether the infrastructure is landlord work (base building) or TI. Clarify end-of-term removal and repair obligations.
Critical clauses for cannabis tenants (and landlords)
ROFR / ROFO (rights of first refusal/offer)
- ROFR lets you match a third-party offer; ROFO lets you negotiate before the landlord shops the space.
- Use for adjacent bays or expansions; it prevents getting landlocked by a competitor.
Assignment, subletting, and change of control
- Expect restrictions and landlord consent, plus background checks and regulatory approvals.
- For M&A or holding-company reorganizations, carve out permitted transfers so a routine equity event doesn’t trigger default.
- If licensing requires agency approval to assign, build that timeline into the clause.
Use clause and out-clauses
- Define permitted cannabis uses precisely (cultivation, manufacturing, distribution, retail) to avoid later disputes.
- Consider an “approval out” if a required CUP or license isn’t issued by a date certain; pair with rent abatement and refund of unamortized TI deposits if failure isn’t tenant-caused.
SNDA, estoppel, and lender language
- A standard SNDA (subordination, non-disturbance, and attornment) protects you if the landlord’s lender forecloses.
- Estoppel certificates will be required for financings and sales—keep lease admin current to avoid closing delays.
Insurance and indemnity
- Expect higher minimums and named insureds. Clarify exclusions around cannabis operations.
- Confirm whether product liability or pollution riders are required for extraction/processing.
TI economics, rent commencement, and security
Tenant Improvements (TI) and work letters
- Scope split: Landlord shell vs. tenant TI. In cannabis, tenant typically funds specialized MEP/FP systems; negotiate landlord participation where upgrades enhance base-building value (e.g., power capacity, sprinklers).
- Delivery condition: “Warm shell,” “cold shell,” or “as-is.” Each changes schedule and cost.
- Amortization: If landlord funds TI, understand amortization term, interest rate (or implied yield), and early payoff rights.
Rent commencement and abatement
- Tie rent start to permit/CO or “substantial completion,” not a calendar date alone.
- Include free rent during commissioning; complex systems (e.g., dehumidification, controls) require tuning.
Deposits, LCs, and guaranties
- Expect larger security (cash or LC) and sometimes a corporate guaranty. Step-downs tied to on-time performance and clean inspections can free working capital.
Underwriting lens: how your lease reads to lenders and buyers
Credit committees and buyers look for durable, auditable economics:
- DSCR and headroom: Lower fixed occupancy costs and predictable pass-throughs help you ride price cycles.
- EBITDA/SDE quality: Capital vs. expense classification and CAM transparency affect QoE during diligence.
- Term & options: Sufficient term (with renewal options) to support debt tenor and depreciation schedules.
- Assignment and ROFR: Transferability and expansion rights preserve enterprise value.
- Compliance: Evidence that zoning/CUP conditions are met; clean life-safety files and maintenance logs keep lenders comfortable.
Negotiation framework: from inquiry to LOI to lease
1) Triage and shortlisting
- Filter by power, water/sewer, access, and entitlement likelihood.
- Shortlist spaces with configuration fit (clear height, loading, parking, fire lanes).
2) Data requests
- CAM history (if existing), tax bills, insurance quotes; base-building plans; utility letters if upgrades are implied.
- For conversions, ask for prior permit documents and any open corrections.
3) Offer strategy and LOI
- Structure: Pick NNN, Modified Gross, or FSG based on operating model and risk appetite.
- Economics: Base rent, TI contribution (if any), free rent, escalations, and CAM expectations.
- Protections: ROFR/ROFO, assignment/change-of-control, SNDA, estoppel, insurance levels, approval outs, and rent commencement tied to permits.
- Regulatory calendar: Reflect CUP timelines and build in AHJ inspection lead times.
4) Lease drafting
- Convert LOI terms to the lease form; tighten definitions; add exhibits for TI scope, schedule, and landlord’s work letter.
- Confirm end-of-term restoration obligations, signage, and odor/security compliance language.
5) Close and mobilize
- Execute, submit permits, order long-lead items, and schedule commissioning.
- Stand up lease administration to track options, increases, and compliance exhibits.
Buy vs. lease (and sale-leaseback) in one minute
- Lease (NNN/Modified/FSG): Faster to market, lower upfront cash, operational flexibility.
- Buy: Control, equity creation, easier to justify power/service upgrades, but ties up capital.
- Sale-leaseback: Monetizes owned real estate; works if your credit and lease terms support investor yields. Model DSCR under stress to avoid rent burdens.
Practical checklists you can paste into your diligence tracker
CAM & pass-throughs
- Annual budget + prior-year actuals and true-up
- What’s included/excluded; admin fee caps
- Audit rights and lookback period
TI & delivery
- Shell condition; landlord vs. tenant scope
- TI allowance (if any), amortization, and interest
- Rent commencement triggers and free-rent window
Protection & flexibility
- ROFR/ROFO language and timelines
- Assignment and permitted transfers; subletting rights
- SNDA and estoppel forms attached to lease
Compliance
- Zoning verification; CUP status and conditions
- Odor, security, and life-safety exhibits
- If adjacent C1D1 areas exist, separation and code narrative
When indoor vs. greenhouse changes the lease math
For indoor production, electric and HVACD loads drive utility exposure—NNN with direct metering is typical. For greenhouse campuses, ground leases or NNN with large tenant-maintained systems (curtains, dehus, controls) are common. In both cases, clarity on capital vs. maintenance responsibilities protects EBITDA and resale value.
Ready to compare real spaces and negotiate from strength? Start a focused search on 420 Property and assemble comps before you draft the LOI. Browse cannabis properties for lease to identify high-fit options, then pressure-test economics, CAM language, and TI scope against your operating model.
For help assembling your bench (brokers, counsel, architects, engineers, and code consultants), you can return to the 420 Property marketplace and explore professional listings—or bring your own team and use the platform to source the right space.
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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