Marijuana board still grappling with landlord arrangements

  • Erika McConnell, the executive director of the Alaska Alcohol and Marijuana Control Office, raised several issues with pending license applications for marijuana businesses that may run afoul of rules regarding residency for business owners based on lease agreements that take a piece of the profits in lieu of rent. (Photo/Naomi Klouda/AJOC)

When the Marijuana Control Board combed through licenses applications for new cannabis operations at its Anchorage meeting Nov. 14-15, residency and landlord issues continued to trip up applicants.

Only Alaskans can buy into a marijuana operation, per state law. The board has long expressed concerns about hidden ownership interests that could bring non-residents or a black market element into the legal industry.

“We want a well-regulated industry and one that we know who the owners are,” said board member Loren Jones of Juneau, who holds a seat reserved for a member from public health. “And that we know they have the requisite residency and fingerprints on file, and they can’t be an owner if convicted of a felony.”

A new regulation drafted in July but not yet approved seeks to revise the definition of “direct or indirect financial interest” in order to have a more transparent industry. Currently, landlords can take a percent of profit in exchange in lieu of rent. But they don’t have to be listed on the license, and therefore, there’s no fingerprint record or background check on them.

The board scheduled an extra meeting Nov. 28-29 to finish going through about 30 more applications on the agenda that weren’t reviewed at the Nov. 14-15 meeting. They meet at 9 a.m. at the Crime Lab, at 4805 Dr Martin Luther King Jr Ave., in Anchorage.

The landlord issue is up for a vote: the board is looking at eliminating percentage lease or rent agreements from the exemption of direct or indirect financial interest. Under this scenario, any percentage lease or rent agreement could be created but the landlord would have to be a licensee meeting the same standards as the operator of the business.

The board has already approved many businesses on a percent-of-profit in lieu of rent arrangement. If the new regulation passes, the board also needs to decide how and when the existing licenses with these leases should come into compliance, or if they should be grandfathered in, said Alcohol and Marijuana Control Office Director Erika McConnell.

A couple of new license applications illustrated the problem.

X-Tracted Laboratories Royal Mountain Extracts LLC of Talkeetna proposed 80 percent of its net income go to the owners of the property in lieu of rent. The landlords, who only recently moved to Alaska and purchased the property on Commercial Drive in Talkeetna in March, are not yet Alaska residents.

Residency, as defined by the board, is the same standard as eligibility for the Alaska Permanent Fund Dividend that requires a full calendar year living in the state.

Therefore, the landlords can’t be on the application because they aren’t Alaska residents under the PFD standard. McConnell brought this application to the board’s attention.

“When landlords have a percentage interest in a business, it places them in a position to exert influence in the business in a manner that is intended to be limited to licensees,” she wrote.

Dan Nelson and Joe McAneney would be the licensee.

The board asked questions about the plans at its Nov. 14-15 meeting, and recommended the landlords, Samuel Benson and Christina Tersine, wait until they achieve residency before the application is complete.

Nelson, appearing with his attorney, agreed to wait until January and withdrew his application.

But if the board passes its new regulation at its special meeting Nov. 28-29 in Anchorage next week, its new definition would require the landlords go through the same application process as the owner once they are officially Alaska residents.

A landlord in Houston accepting income instead of rent on a limited cultivation facility was allowed to move forward after the board approved the applicant Arctic Farm LLC. But McConnell also brought this application to the board’s notice.

“The lease shows that the landlord would initially receive 100 percent of the facility’s revenue less taxes and expenses, i.e. all of the profit,” she wrote. “Once the marijuana facility pays $175,000 in rent, the rent would be reduced to 50 percent of the facility’s profit,” she wrote of the plan.

In this case, the landlord is Northern Lights Land LLC, owned by six people with shares ranging from 2.8 percent to 60 percent.

“It appears that the high percentage on the percentage-based leases is a means to funnel profits from the marijuana business to people who are not licensees,” McConnell wrote to the board. “Despite the exemption, the landlords clearly have a financial interest in the business and should be licensees.”

But the license applicant, Jonathan Cortez, explained that the land had been developed by the landowners (including family members). They have no decision-making interest in the business.

The board approved the application after a long question-answer session that looked at the ownership issues.

Board member Nick Miller, an industry representative from Anchorage who owns Alaska Buds, said it’s a common practice throughout Alaska to help startups through these lease-for-profit arrangements. Even malls do it to attract retail businesses, he said.

“I’ve been told by realtors that this seems to be a common tactic used for startups in other industries when they don’t have a lot of capital upfront,” Miller said. “If someone owns a building, it’s standard practice. That’s okay but we still need to know who is making the decisions.”

The board requires applicants also to show that a provision exists in the lease that if they default on rent, the owner can’t come in and take away marijuana products. Applicants were repeatedly quizzed by the board on whether their lease agreements contain that provision.

Another applicant, Hempco LLC of Nikiski, has a prominent landlord. Mike Navarre, the former Kenai Peninsula Borough mayor, owns the property that Hempco licensee Jenny Foster is leasing. Navarre is now the commissioner of the Department of Commerce, Community and Economic Development after a recent appointment by Gov. Bill Walker. His office oversees the Alcohol and Marijuana Control Office.

The public comments on the regulation are available on the Alaska Alcohol and Marijuana Control Office webpage.

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Naomi Klouda can be reached at naomi.klouda@alaskajournal.com.

Updated: 
11/22/2017 - 1:17pm

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