Development Agreements: A Valuable Tool For Commercial Cannabis Land Development

We’ve seen this movie before: a City gets excited about commercial cannabis opportunities, and passes an ordinance allowing indoor medical cannabis cultivation. After the law goes into effect, neighbors start to complain, sometimes based on odor or aesthetic issues, but more often just based on personal politics. Sooner or later, the right neighbor complains to the right city council member and cannabis gets a major setback, perhaps through a more restrictive ordinance or even a moratorium. The city declares the cannabis tenant or recent purchaser’s use to be nonconforming, and issues a notice and order to abate. The cannabis tenant/purchaser now finds itself several hundred thousand dollars in debt on a construction or build-out project without a path forward for being able to operate, and if they even had a local commercial cannabis permit they usually can’t take it elsewhere because it runs with the land.

So how does a would-be tenant or purchaser avoid this risk, or at least try to mitigate it before jumping headfirst into a huge investment for improving the land? One solution that would-be tenants, purchasers, and developers should become familiar with is what’s called a development agreement.

A development agreement is in essence a contract between a municipality and a property owner or developer specifying how a given parcel will be improved and used for a certain finite period of time, and specifying how the planning and zoning laws for that parcel will change or not change during that time. The benefit to the government is private investment into developing the land, improving infrastructure on private land without having to do a regulatory taking, increasing value of the real estate, and broadening the tax revenue base. The benefit to the owner or developer is that the government guarantees that the state of planning and zoning laws will freeze or remain substantially unchanged for whatever period of time the parties agree to.

With the added certainty of stable zoning laws, developers and their investors and lenders will be more willing to provide their time, effort, and financial resources into improving the land. Without a development agreement in place, developers typically have to risk substantial investment in architects, engineers, and contractors before they can obtain a building permit from the municipality, and, under California’s vested rights doctrine, only at that point will they have any certainty that their parcel will remain unaffected by future zoning law changes—though even this much is not always certain, as courts have found exceptions to that general rule in some cases. Often, both parties will expend significant resources on lengthy litigation and administrative hearings regarding vested rights and the permitting process.

Given its current state of unpredictability and immense growth, California’s commercial cannabis industry would seem a prime candidate for development agreements, yet it’s somewhat rare to see local governments use them for cannabis business land development. Perhaps this is due to a reluctance to tie land within city limits to uses that the federal government still deems unlawful, or perhaps cities just prefer a wait-and-see approach with their cannabis ordinances that keeps the door open to shutting things down if the community drifts towards disapproval. Whatever the reason, less certainty in already uncertain times is bad for all parties involved.

Cities want to attract responsible, experienced developers to improve land and public infrastructure, as well as increase property value and the tax revenue base. Getting private investors to fund public infrastructure improvements on private land without having to conduct a regulatory taking is itself a huge savings. Developers and their associates need certainty that their improvements will be a relatively safe investment for all parties involved in the project, and that the proposed use will be able to lawfully occur on the land being developed.

Development agreements add a measure of certainty to an uncertain proposition, and if cities are willing to pass ordinances that allow cannabis business activities they might also consider utilizing development agreements to facilitate land development that fosters those activities while also improving public infrastructure and real estate value, at little to no cost to the government. By the same token, would-be purchasers and developers may want to consider exploring development agreements as part of their commercial cannabis development plans as tools for mitigating uncertainty in construction and build-out projects, since reliability of zoning laws in a relatively volatile industry can be an extremely valuable addition to a business proposition.

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