Nearly 300 people have been prosecuted for violating a Los Angeles city ordinance limiting the number of medical marijuana dispensaries. City officials issued warnings to landlords and real estate professionals of fines and possible jail time if they are complicit in violating the ordinance.

The appearance and disappearance of medical marijuana dispensaries (MMDs) is a recurring theme in the California real estate market. Currently, the only state-wide zoning restriction on MMDs is a law prohibiting them from being located within 600 feet of a K-12 school. [Calif. Health & Safety Code §11362.768(b)]

Local governments are the main source of the prohibitions in place. The L.A. ordinance restricts MMD operations to those registered prior to 2007, and bans more MMDs from opening. The result? An increase of limitations on real estate professionals and their clients.

Landlords, tenants, sellers and buyers rely on brokers and agents for their professional expertise. Advising clients on the risks of operating a particular business in a restricted zone is a duty. In nonresidential dealings, it’s integral to the transaction.

Even if your neighborhood doesn’t restrict MMDs, there are other economic considerations when representing a client in a real estate transaction involving MMDs.

A broker hired to find a tenant for a property owner has a fiduciary duty to ensure the prospective tenant’s activities do not violate state or local laws, including zoning laws. Even if the tenant is not violating any laws, the broker still has a duty to mitigate the landlord’s risk in renting to a tenant in an inherently volatile business. To hedge against high turnover and loss of rent, the landlord may ask for additional financial statements or a lease guarantor.

A broker representing an MMD tenant has a similar duty to investigate state and local laws when finding suitable properties. Part of their duties includes a discussion with prospective landlords about lease terms available and any additional documentation the tenant is to provide.

In addition to investigation of local laws, brokers representing sellers of nonresidential property need to disclose material facts. Material facts are any information that may negatively affect the client or interfere with their intended use of a property, which is grounds for disclosure. Seller’s brokers are to disclose any known impediment to the buyer’s intended future use of the property, if that use is known.

Extra diligence and awareness when dealing with a high-risk business ensures the broker both fulfills their fiduciary duty to their client and protects themselves against violations of existing laws.

Have you dealt with MMDs in your real estate practice? Tell our readers about it in the comments below.

Re: “City, Police Announce New Campaign to Crack Down on Illegal Medical Pot Dispensaries from Patch and “More than 100 marijuana shops shut down, L.A. city attorney says” from the Los Angeles Times