Legal Issues Archives - Page 3 of 4 - Arizona Medical Marijuana Law

Prospective Dispensary’s Single Most Important Task Before April 30, 2012

Nonprofit entities that want to obtain a dispensary registration certificate (aka license) to sell medical marijuana in Arizona have a lot of tasks to accomplish before they can open for business. At this time, however, the single most important task for all would-be dispensaries is to locate a properly zoned place within the desired CHAA to operate the dispensary and tie it up with a lease or an option to lease.

Arizona’s medical marijuana law and the Arizona Department of Health Services rules provide that the application for a dispensary registration certificate must show the location where the dispensary will operate. In addition, Arizona Department of Health Services Rule R9-17-304 states:

To apply for a dispensary registration certificate, an entity shall submit to the Department the following

6.Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions;

7. Documentation of:

a. Ownership of the physical address of the proposed dispensary, or

b. Permission from the owner of the physical address of the proposed dispensary for the entity applying for a dispensary registration certificate to operate a dispensary at the physical address;

Translation: The dispensary applicant must obtain and submit with the application for a dispensary registration certificate a written statement from the applicable zoning authority that the proposed dispensary premises is “groovy” and a written statement from the landlord that the applicant can operate a dispensary at the location designated in the application (or proof the applicant owns the land).

Actions Prospective Dispensaries Must Take Yesterday

Here are the actions every would be dispensary must take as soon as possible:

1. Hire a zoning attorney who can tell you which locations in your desired CHAA are properly zoned and meet the requirements of the ADHS rules. This step is very important because it is a total waste of time to search for a location and get it leased and find out the location is not properly zoned or too close to a school. The zoning attorney will also apply for the Rule R9-17-304.D.6 zoning comfort letter from the applicable zoning authority.

2. Visit only properly zoned sites that are not too close to a prohibited structure and identify where you want to operate the dispensary.

3. Sign a lease or an option to lease for your desired location (or enter into a contract to purchase it). Make sure the lease has language in it that requires the landlord to give you a written Rule R9-17-304.D.7 comfort letter not later than April 1, 2012.

Cities are severely limiting the areas where a dispensary can be located. When you add the complexity of understanding the applicable zoning ordinance with the further limiting CHAAs, the result is a very difficult problem simply to determine where dispensaries can be located within a CHAA. In many CHAAs, the number of usable sites is limited, which is causing a modern day equivalent to the Oklahoma land rush of the 1800s.

If you cannot find a location and legally tie it up with a lease or a lease option, it’s game over. If your dispensary has not yet found and tied up a site, you should immediately contact an experienced zoning lawyer to explain the zoning rules for your desired area and show you how the CHAAs interact with the zoning. You want the zoning attorney to give you a map that shows exactly where within a city and a CHAA the zoning is right for a dispensary. Use that map to find a site. Enter into a lease or an option to lease with the landlord. Have your zoning lawyer assist in completing the necessary city paperwork to get your site approved by the city.

Nothing else matters as much now as finding a site that is properly zoned and getting it under lease or an option to lease.

I recommend Maricopa County zoning attorney Michael Curley. Call him at 602-903-3077. You need a zoning lawyer to explain where you can lease your site and what locations are available in your desired CHAA.

See “Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?,” “How Does My Dispensary Tie Up Land for its Retail & Cultivation Sites?” and “CHAA on This!“

By Richard Keyt|2012-01-27T07:41:42-07:00January 27th, 2012|Dispensary Leases, Legal Issues, Real Estate Issues|Comments Off

Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement

My name is Richard Keyt. I am an Arizona business lawyer who has practiced law in Arizona since 1980 and who has formed thousands of companies. I have seen far too many situations where owners of a company suffered dearly because they failed to adopt a Buy Sell Agreement. When people join together (other than a husband and wife) to go into business they do not realize that business divorces are more common than husband and wife divorces (50%+). A U.S. Bureau of Labor Statistics study found that 66% of new businesses did not last four years. A special tabulation by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration found that 71% of start up businesses failed within ten years.

Companies fail for many reasons, but a common reason for failure is one owner or one group of owners cannot get along with another owner or another group of owners. When this happens I say the owners need a “company divorce.” Unfortunately for most people who need a company divorce there is no easy way to consummate the divorce because the owners never signed a Buy Sell Agreement. Arizona law does not provide for a company divorce other than an involuntary judicial dissolution. When the owners of an Arizona company cannot agree on how to divorce and they do not have a Buy Sell Agreement, they only have two options: (1) continue on indefinitely, or (2) one owner can file a lawsuit in Arizona Superior Court and ask the court to dissolve the company.

The involuntary judicial dissolution is always an expensive nightmare for all concerned. Each side has to burn money (i.e. attorneys’ fees) while waiting for the court to decide how to divide the pie and kill the company. Judicial dissolution should be the last resort because it ultimately ends with the termination of the company unless the parties tire of burning money and agree to a settlement.

The Buy Sell Agreement is the Exit Strategy

Without exception I always recommend that when people go into business together the first thing they should do after forming their new company is adopt a Buy Sell Agreement because it contains the owners’ exit strategy. A good Buy Sell Agreement provides for how the owners will deal with and buy out the interests of one or more owners when they cannot agree or on the happening of a triggering event such as death or termination of employment. The purpose of the Buy Sell Agreement is to make a company divorce less expensive and painful for all owners.

For more about the importance of the Buy Sell Agreement see my article called “A Multi-Member LLC’s Most Important Document.”

Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement

The Buy Sell Agreement is a must have document for every Arizona medical marijuana dispensary company because if ANY PRINCIPAL OFFICER OR BOARD MEMBER OF THE COMPANY CEASES TO MEET ANY ONE OF THE REQUIREMENTS CONTAINED IN THE ARIZONA DEPARTMENT OF HEALTH SERVICES’ RULES THE COMPANY WILL BE PREVENTED FROM APPLYING FOR A DISPENSARY LICENSE OR IF IT HAS A LICENSE THE ADHS WILL REVOKE THE COMPANY’S DISPENSARY LICENSE. Consider this example:

Example 1: World Wide Widgets, LLC, an Arizona nonprofit LLC, has three members, Homer Simpson, Ned Flanders and Chief Wiggins. They invest a ton of money, time and effort to obtain a license to operate an Arizona medical marijuana dispensary. Two years after the LLC opened its doors for business, Ned Flanders is convicted of an excluded felony. The Arizona Department of Health Services will revoke the company’s dispensary license.

The Arizona Department of Health Services medical marijuana dispensary rules contain grounds to revoke or deny an original and a renewal dispensary license if any principal officer or board member of the company violates any of the prohibitions contained in the rules. Here are the conditions that principal officer or board members must satisfy at all times:

R-17-322.A.2: “The Department shall deny an application for a dispensary registration certificate or a renewal if: . . . A principal officer or board member . . .

b. Has been convicted of an excluded felony offense.

c. Has served as a principal officer or board member for a dispensary that:

i. Had the dispensary registration certificate revoked, or

ii. Did not obtain an approval to operate the dispensary within the first year after the dispensary registration certificate was issued.

e. Is a physician currently providing written certifications for medical marijuana for qualifying patients;

f. Is a law enforcement officer; or

g. Is an employee or contractor of the Department”

R-17-322.B states: “The Department may deny an application for a dispensary registration certificate if a principal officer or board member of the dispensary provides false or misleading information to the Department.”

R-17-322.C.2 states: “The Department shall revoke a dispensary’s registration certificate if . . . . A principal officer or board member has been convicted of an excluded felony offense.”

If any principal officer or board member is convicted of an excluded felony the conviction will prevent the company from obtaining OR RENEWING a dispensary license. If the company has a dispensary license, ADHS will revoke its license.

The term “excluded felony” is defined in Arizona Revised Statutes Section 36-2801.7 , which states:

“Excluded felony offense” means:

(a) A violent crime as defined in section 13-901.03, subsection B, that was classified as a felony in the jurisdiction where the person was convicted.

(b) A violation of a state or federal controlled substance law that was classified as a felony in the jurisdiction where the person was convicted but does not include:

(i) An offense for which the sentence, including any term of probation, incarceration or supervised release, was completed ten or more years earlier.

(ii) An offense involving conduct that would be immune from arrest, prosecution or penalty under section 36-2811 except that the conduct occurred before the effective date of this chapter or was prosecuted by an authority other than the state of Arizona.

How a Good Buy Sell Agreement Can Solve the Ineligible Owner Problem

My Buy Sell Agreement for a company that intends to acquire and operate an Arizona medical marijuana dispensary solves the owner ineligibility problem because it provides that if an owner ever ceases to meet all the ADHS eligibility requirements, then at that moment in time the company purchases the ownership interest of that owner for an amount calculated by the method selected by the owners and set forth in the Buy Sell Agreement. The end result is that an ineligible owner is never a problem that would prevent the company from obtaining or renewing its dispensary license. My Buy Sell Agreement also provides that if any eligibility requirement ceases to be an ADHS requirement to renew the dispensary license, that requirement will no longer trigger a buy out.

Example 2: Same facts as in Example 1 except all the members of World Wide Widgets, LLC, signed my Buy Sell Agreement. Effective simultaneously with Ned’s conviction of an excluded felony his membership interest in the company was purchased by the company and Ned ceased to be a member. The Buy Sell Agreement contains a valuation method that determines the purchase price and it provides for the terms of the payment of the purchase price according to what the members agreed to. For example the value of the company might be determined by an appraisal method with the purchase price to be paid with a 20% down payment within thirty days of the date of Ned’s felony conviction and equal payments of principal and interest at four percent over 5 years.

Because I believe this is such an important issue, every one of the nonprofit LLCs that I form must have my Buy Sell Agreement.

If you need a Buy Sell Agreement for a prospective Arizona medical marijuana dispensary, call me, Richard Keyt, at 602-906-4953, ext. 1.

By On the Net|2017-10-07T09:54:54-07:00January 16th, 2012|Legal Issues|1 Comment

Eleven Critical Tasks Every Prospective Arizona Medical Marijuana Dispensary Must Accomplish to Be Able to Submit an Application to DHS for a Medical Marijuana Dispensary License

Updated on January 14, 2012, from my task list first published on April 24, 2011.

I am reposting and updating this article in light of the fact that Arizona Governor Jan Brewer ordered the Arizona Department of Health Services to implement medical marijuana dispensaries in Arizona. Check back because I will update this task list when ADHS issues the new time lines and changes to its regulations.

Here is my list of critical tasks that each prospective Arizona medical marijuana dispensary must accomplish before it can file an application for a dispensary registration certificate beginning [new date to come from ADHS]. If any one of the following is not satisfied on or before [new date to come from ADHS], the last day to file the application for a dispensary registration certificate, the application will be rejected.

1. Find a Properly Zoned Site Where the Dispensary Will Operate. Find a site where the nonprofit entity could operate its dispensary. You must show the “physical address of the proposed dispensary” on the application. R9-17-304.D.1.b. The site must be properly zoned. See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012,” “How Does My Dispensary Tie Up Land for its Retail & Cultivation Sites?” and “CHAA on This!“

2. Landlord Comfort Letter. R9-17-304.D.7 requires that the dispensary applicant get written “Permission from the owner of the physical address of the proposed dispensary for the entity applying for a dispensary registration certificate to operate a dispensary at the physical address.”

3. Zoning Comfort Letter. Obtain a comfort letter from the appropriate zoning authority that says the the proposed location of the dispensary is “groovy.” Rule R9-17-304.D.6 states that the comfort letter must be “from the local jurisdiction where the dispensary’s proposed physical address is located” and it must say that “There are no local zoning restrictions for the dispensary’s location, or . . . The dispensary’s location is in compliance with any local zoning restrictions.” See “Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?,” the DHS FAQ DI12 & DI13 about certificates of occupancy and special use permits,

4. Medical Director. Enter into a contract with a medical director who has obtained a license from Arizona Department of Health Services to act as the medical director. The application must include the medical director’s DHS license number. R9-17-304.D.1.e. This means the medical director must apply for his or her DHS license asap. See “Clauses to Include in a Contract between a Medical Director & a Dispensary.”

5. Policies & Procedures. Prepare the following written policies and procedures per R9-17-304.D.4 that comply with the requirements in the DHS rules for:

a. Inventory control (task 5),
b. Qualifying patient record-keeping (task 6),
c. Security (task 7), and
d. Patient education and support (task eight)

You should be working on these documents now so they will be ready when you submit the application.

9. By-laws. Prepare the dispensary’s by-laws containing provisions for the disposition of revenues and receipts. R9-17-304.D.8 See “What the Final DHS Rules Require to Be In Dispensary Bylaws,” “Bylaws for Arizona Medical Marijuana Dispensaries,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”

10. Business Plan. Prepare a business plan demonstrating the on-going viability of the dispensary on a not-for-profit basis. R9-17-304.D.9. See “What Must be In an Arizona Medical Marijuana Dispensary Applicant’s Business Plan.”

11. Bank Comfort Letter. Last minute rules R9-17-302A.5 and R9-17-304.D.1.f.ii. require that every application for an Arizona medical marijuana dispensary license contain a financial institution comfort letter that:

(1) Is from an in-state financial institution or an out-of-state financial institution;

(2) Is dated within 30 days before the date the dispensary registration certificate application was submitted; and

(3) Demonstrates that the entity applying for the dispensary registration certificate or a principal officer of the entity has at least $150,000 under the control of the entity or principal officer to begin operating the dispensary and has had control of the $150,000 for at least 30 days before the date the dispensary registration certificate application was submitted“

By Richard Keyt|2012-05-13T16:18:49-07:00January 14th, 2012|Legal Issues, Stories & Articles|Comments Off

Checklist for Opening an Arizona Medical Marijuana Dispensary

Updated on January 13, 2012, from my checklist first published on January 16, 2011.

Here’s my checklist for the legal issues that every prospective Arizona medical marijuana dispensary business must complete, sooner rather than later than the yet to be announced date when the Arizona Department of Health Services will stop accepting applications for dispensary registration certificates. Check back in the future because I will update the checklist as I find more legal issues to add to the list.

See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012” and “Ten Critical Tasks Every Every Prospective Arizona Medical Marijuana Dispensary Must Accomplish to Be Able to Submit an Application to DHS for a Medical Marijuana Dispensary License.”

1. Create an Arizona LLC to own and operate the dispensary business and hold the medical marijuana dispensary license.

A. Make sure that all members satisfy all of the requirements for ownership set forth in the DHS rules.

B. Members adopt Bylaws that comply with the DHS rules. R 9-17-304.D.8 states that the Bylaws must contain “provisions for the disposition of revenues and receipts.” See “What the Final DHS Rules Require to Be In Dispensary Bylaws,” “Bylaws for Arizona Medical Marijuana Dispensaries,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”

C. Members sign a resolution approving the Bylaws.

D. Members adopt a buy-sell agreement that contains their exit strategy and deals with issues such as having the LLC purchase the interest of a deceased owner to make sure that no person becomes an owner who does not satisfy all of the requirements of the DHS rules. to be an owner.

E. Members sign a resolution approving the buy-sell agreement.

F. Members sign a resolution giving the designated officers managers the power and discretion to sign any and all contracts they deem necessary and appropriate to carry out the purposes of the business.

G. The LLC enters into written Nondisclosure / Confidentiality Agreements with all members.

2. Obtain a federal employer identification number for the LLC.

3. Open a bank account in the name of the LLC. See “Will Some Banks Refuse to Give My Dispensary a Bank Account?” and Banking Issues.

4. Hire a Certified Public Accountant to determine if the LLC should be taxed as a sole proprietorship (if it has one owner or husband and wife owners who own their interest in the LLC as community property), a partnership (if there are two or more members), a C corporation under subchapter C of the Internal Revenue Code of 1986, or an S corporation under subchapter S of the Internal Revenue Code (if the LLC meets the requirements to be an S corporation for federal income tax purposes. (more…)

By Richard Keyt|2017-10-07T09:54:53-07:00January 13th, 2012|Legal Issues, Medical Directors|Comments Off

New Arizona Law can Shield Employers in Marijuana Lawsuits

Arizona Republic: “A new state law, signed by Gov. Jan Brewer on Friday, could shield some employers from lawsuits if they wish to fire workers who are under the influence of medical marijuana or prescription drugs on the job. Another provision in the law allows employers with a qualifying drug-testing policy to reassign or lay off workers who take such medications if they have a job with possible safety risks. The law, House Bill 2541, takes effect immediately.”

By On the Net|2011-05-04T06:38:06-07:00May 4th, 2011|Legal Issues, Stories & Articles|Comments Off

Arizona’s U.S. Attorney Notifies Will Humble & Arizona Department of Health Services that Compliance with Arizona’s Medical Marijuana Law Does not Offer Protection from Federal Criminal Laws

Today, May 2, 2011, the United States Attorney for Arizona, Dennis Burke, sent a letter to Arizona Department of Health Services Director Will Humble that notified him and the would-be Arizona medical marijuana industry that compliance with Arizona’s recently enacted medical marijuana laws and the DHS rules implementing the laws is not a defense to prosecution for violating U.S. criminal laws involving marijuana. Here are the main points contained in the letter:

May 2, 2011

Will Humble
Director
Arizona Department of Health Services
150 N. 18th Avenue
Phoenix, Arizona 85007

Re: Arizona Medical Marijuana Program

Dear Mr. Humble:

I understand that on April 13, 2011, the Arizona Department of Health Services filed rules implementing the Arizona Medical Marijuana Act (AMMA), passed by Arizona voters on November 2, 2010. The Department of Health Services rules create a regulatory scheme for the distribution of marijuana for medical use, including a system for approving, renewing, and revoking registration for qualifying patients, care givers, nonprofit dispensaries, and dispensary agents. I am writing this letter in response to numerous inquiries and to ensure there is no confusion regarding the Department of Justice’s view of such a regulatory scheme.

The Department has advised consistently that Congress has determined that marijuana is a controlled substance, placing it in Schedule I of the Controlled Substances Act (CSA). That means growing, distributing, and possessing marijuana in any capacity, other than as part of a federally authorized research program, is a violation of federal law regardless of state laws that purport to pennit such activities. As has been the case for decades, the prosecution of individuals and organizations involved in the trade of illegal drugs and the disruption of illegal drug manufacturing and trafficking networks, is a core priority of the Department of Justice. The United States Attomey’s Office for the District of Arizona (“the USAO”) will continue to vigorously prosecute individuals and organizations that participate in unlawful manufacturing, distribution and marketing activity involving marijuana, even if such activities are permitted under state law.

An October, 2009, memorandum from then-Deputy Attomey General Ogden provided guidance that, in districts where a state had enacted medical marijuana programs, USAOs ought not focus their limited resources on those seriously ill individuals who use marijuana as part of a medically recommended treatment regimen and are in clear and unambiguous compliance with such state laws. And, as has been our policy, this USAO will continue to follow that guidance. The public should understand, however, that even clear and unambiguous compliance with AMMA does not render possession or distribution of marijuana lawful under federal statute.

Moreover, the CSA may be vigorously enforced against those individuals and entities who operate large marijuana production facilities. Individuals and organizations- including property owners, landlords, and financiers -that knowingly facilitate the actions of traffickers also should know that compliance with AMMA will not protect them from federal criminal prosecution, asset forfeiture and other civil penalties. This compliance with Arizona laws and regulations does not provide a safe harbor, nor immunity fromfederal prosecution.

The USAO also has received inquiries about our approach to AMMA in Indian Country, which comprises nearly one third of the land and five percent of the population of Arizona, and in which state law -including AMMA- is largely inapplicable. The USAO currently has exclusive felony jurisdiction over drug trafficking offenses in Indian Country. Individuals or organizations that grow, distribute or possess marijuana on federal or tribal lands will do so in violation of federal law, and may be subject to federal prosecution, no matter what the quantity of marijuana. The USAO will continue to evaluate marijuana prosecutions in Indian Country and on federal lands on a case-by-case basis. Individuals possessing or trafficking marijuana in Indian Country also may be subject to tribal penalties. I hope that this letter assists the Department of Health Services and potential registrants in making informed choices regarding the possession, cultivation, manufacturing, and distribution of medical marijuana.

Sincerely,

DENNIS K. BURKE
United States Attorney
District of Arizona

Will Humble’s first public response to Mr. Burke’s warning shot across the bow of prospective Arizona medical marijuana dispensaries was to recite portions of Dennis Burke’s letter and to warn:

“The bottom line take-home message in today’s letter is that federal enforcement priorities in Arizona will continue to focus on folks that manufacture, distribute, possess and market marijuana despite the passage of the AZ Medical Marijuana Act- and that folks that operate large cultivation facilities or dispensaries (including property owners, landlords, and financiers) will be at risk for federal prosecution and asset forfeiture even if they’re in compliance with Arizona law and the rules that we published a couple of weeks ago.”

I expected Dennis Burke’s letter to say what it said. He merely reiterated the position of the United States Attorney General as set forth in recent letters from the U.S. Attorneys for the Northern District of California, the Eastern District of Washington and the Western District of Washington. See

“Burke: No safe harbor in Arizona on federal pot laws“

“U.S. Attorney Will Prosecute Dispensary Owners, Landlords who Rent to Dispensaries & State Employees Involved in State Medical Marijuana Laws”

“Washington Legislature Passes New Medical-marijuana Law, Governor Threatens Veto“

“WA US Attorney Says Marijuana Dispensaries / Stores Violate Federal Law”

“Director of Arizona Department of Health Services Not Worried About Being Charged with Violating Federal Marijuana Criminal Laws“

By On the Net|2015-04-06T18:51:47-07:00May 2nd, 2011|Federal Dispensary Attacks, Legal Issues, Marijuana Crimes, Stories & Articles, Will Humble Speaks|Comments Off

Arizona Medical Pot Law no Shield for Users, Growers, Prosecutor Says

Arizona Republic: “Arizona’s top federal prosecutor launched a pre-emptive strike against the state’s medical-marijuana industry Monday, warning prospective pot growers and sellers that they could be prosecuted under federal drug-trafficking laws. U.S. Attorney Dennis Burke, joining a growing chorus of federal law officers across the country, said his office will abide by a 2009 Justice Department memo that discourages prosecution of medical-marijuana users. But he said anyone who possesses or distributes marijuana is still violating federal law. And he singled out large operations.”

The story said that Arizona Governor Jan Brewer does not intend to stop the implementation of Arizona’s medical marijuana laws. Maricopa County Attorney William Montgomery said this about Dennis Burke’s letter:

“I think this is the end of the medical-marijuana movement. You can’t do a wink and a nod toward unlawful conduct and not have a consequence.”

Read the story. It contains more stupid statements made by Arizona medical marijuana law pundits about the significance of Dennis Burke’s letter. The story also says:

“Rep. John Kavanagh, R-Fountain Hills, said Burke’s letter is reason enough for Humble to stop issuing marijuana cards and halt plans for granting dispensary permits. ‘I hope he doesn’t think the Legislature is going to bail him out if he facilitates the distribution of marijuana,’ Kavanagh said. ‘The federal government has told him that this is an illegal operation. I don’t think they have to do the math for him’.”

By On the Net|2012-05-12T15:23:25-07:00May 2nd, 2011|Federal Dispensary Attacks, Legal Issues, Marijuana Crimes, Stories & Articles|Comments Off

What Must be In an Arizona Medical Marijuana Dispensary Applicant’s Business Plan

Arizona Department of Health Services rule R9-17-304.D.9 requires that every application for a license to operate an Arizona medical marijuana dispensary contain a business plan. The rule gives some but not much guidance, as to what the business plan must contain. The rule states that to apply for a dispensary registration certificate, an entity shall submit to DHS a:

“business plan demonstrating the on-going viability of the dispensary on a not-for-profit basis that includes:

a. A description of and total dollar amount of expenditures already incurred to establish the dispensary or to secure a dispensary registration certificate by the individual or business organization applying for the dispensary registration certificate,

b. A description and total dollar amount of monies or tangible assets received for operating the dispensary from entities other than the individual applying for the dispensary registration certificate or a principal officer or board member associated with the dispensary including the entity’s name and the interest in the dispensary or the benefit the entity obtained,

c. Projected expenditures expected before the dispensary is operational,

d. Projected expenditures after the dispensary is operational, and

e. Projected revenue”

If you need a business plan for your medical marijuana dispensary (Arizona or any other state), I recommend that you hire Robert Kane to prepare it. He has prepared business plans for hundreds of prospective medical marijuana dispensaries. Call him at 561-234-6929 or send him an email at [email protected]. Tell him Richard Keyt referred you to get a substantial price discount.

By Richard Keyt|2011-04-30T11:53:14-07:00April 24th, 2011|Legal Issues, Stories & Articles|Comments Off

Liability of Medical Directors of an Arizona Medical Marijuana Dispensary

Arizona Medical Marijuana Medical Director:
What will you get sued for?
Can You Protect Yourself and Your Family from Financial Ruin?

Disclaimer: I am not an attorney. I am the business manager for Arizona Medical Marijuana Medical Directors: AZMMMD.com. This article is strictly my opinion. It is not, nor should it be construed as offering: Advice, Instructions, Solutions, or anything other than my opinion on a subject: a subject that is changing everyday!

When I first examined the issue of the potential liability of the Medical Director of an Arizona medical marijuana dispensary I thought the answer was simple. I mean since the start of legalized medical marijuana in California, not one dispensary has been sued by a patient! In fact the only lawsuits I could find were municipalities suing dispensaries.

Unfortunately, after reviewing the final rules and having conversations with the Arizona Department of Health Services (ADHS) I now know the issue of Medical Director liability is complicated and may contain insurmountable problems for medical directors!

When you first read the job of the Medical Director it appears to be similar to a vendor providing a system for dispensary application and subsequent operation; similar to inventory control or security. However, on closer inspection of the rules and discussions with the ADHS it is MUCH, MUCH more then that!

First ask yourself: Why did Arizona require a Medical Director’s involvement in the dispensary application and operation process, but California and Colorado DID NOT?

We know the reason from discussions with the ADHS. It is control. ADHS wants someone with a license at stake (the Medical Director) to be responsible for certain elements of the dispensary application and operation process. How is this accomplished? What follows is the text of the ADHS rules that specify the duties of the Medical Director or that have an affect the Medical Director.

R9-17-310.A,2.e: Patient education and support, including:

i. Availability of different strains of marijuana and the purported effects of the different strains;

ii. Information about the purported effectiveness of various methods, forms, and routes of medical marijuana administration;

iii. Methods of tracking the effects on a qualifying patient of different strains and forms of marijuana; and

iv. Prohibition on the smoking of medical marijuana in public places;

R9-17-310.A.3: Maintain copies of the policies and procedures at the dispensary and provide copies to the Department for review upon request;

R9-17-312.E: A medical director shall not establish a physician-patient relationship with or write medical marijuana recommendations provide a written certification for medical marijuana for a qualifying patient.

R9-17-312.D: A medical director shall provide oversight for the development and dissemination of:

R9-17-314.A.5: A qualifying patient record is provided to the Department for review upon request;

R9-17-322.C. The Department shall deny an application for a dispensary registration certificate or a renewal if . . . The Department determines that the dispensary did not implement the policies and procedures or comply with the statements provided to the Department with the dispensary’s application.

These sections of the ADHS rules make a Medical Director responsible for activities that if not performed properly could result in the closure of the Dispensary. The Medical Director is responsible not only for development of educational materials and training, but also the “oversight” of the specific sections of the Qualifying Patient Records. The Qualifying Patient Records may be examined for compliance at anytime by ADHS. If the records are found non-compliant:

The dispensary could lose its license to operate. The Medical Director could be held responsible.

The ADHS will probably refer this to the appropriate medical board for disciplinary action. It will probably be a minor sanction, but who knows?

The dispensary owner will probably sue the Medical Director for lost revenue and/or business disruption. Easy to protect yourself from, but costly.

What is the biggest problem? A dispensary agent may knowingly or unknowingly dispenses medical marijuana to an unqualified person. If that were to happen, the dispensary agent will lose his/her dispensary agent license. R9-17-323.C.2. The Most Important Question: Is this activity Criminal? If it is who will the Attorney General of Arizona or County Attorneys prosecute? Will it be the dispensary agent, owners of the dispensary entity and/or the Medical Director???

I see this as the Medical Director’s biggest liability! Unless there is a law passed to specifically address this question. It is still illegal to sell marijuana in Arizona except when a licensed medical marijuana dispensary sells to a qualified patient who has a valid registry identification card. This is Arizona not California. It is not unreasonable to expect everyone involved with the dispensary to get arrested for selling medical marijuana to an unqualified person.

Jim Mc Cready
602 578-4385
[email protected]

By On the Net|2015-04-06T18:51:47-07:00April 22nd, 2011|Legal Issues, Medical Directors|1 Comment

What the Final DHS Rules Require to Be In Dispensary Bylaws

As I have written before, all not-for-profit Arizona medical marijuana dispensaries must have Bylaws and submit the Bylaws to the Arizona Department of Health Services with its application for a dispensary registration certificate. Both Arizona law (Arizona Revised Statutes Section 36-2806) and the Arizona Department of Health Services rules (R9-17-304(D).8) require the dispensary entity to have Bylaws. Here is what the DHS rules say must be in the prospective dispensary’s Bylaws:

a. The names and titles of individuals designated as principal officers and board members of the dispensary;

b. Whether the dispensary plans to:

i. Cultivate marijuana;

ii. Acquire marijuana from qualifying patients, designated caregivers, or other dispensaries;

iii. Sell or provide marijuana to other dispensaries;

iv. Transport marijuana;

v. Prepare, sell, or dispense marijuana-infused edible food products;

vi. Prepare, sell, or dispense marijuana-infused non-edible products;

vii. Sell or provide marijuana paraphernalia or other supplies related to the administration of marijuana to qualifying patients and designated caregivers;

viii. Deliver medical marijuana to qualifying patients; or

ix. Provide patient support and related services to qualifying patients;

c. Provisions for the disposition of revenues and receipts to ensure that the dispensary operates on a not-for-profit basis; and

d. Provisions for amending the dispensary’s by-laws

See “Bylaws for Arizona Medical Marijuana Dispensaries,” “Bylaws – We Don’t Need No Stinking Bylaws or Do We?”

By Richard Keyt|2012-05-13T16:21:29-07:00April 21st, 2011|Legal Issues|Comments Off

Arizona Senate Passes House Bill 2541 a Drug Testing Bill Related to Medical Marijuana

Phoenix Business Journal: “The Arizona Senate passed House Bill 2541 Tuesday afternoon, giving employers more protection in their drug testing policies when it comes to dealing with employees using medical marijuana. If signed by Gov. Jan Brewer, this bill will go a long way in protecting employers and avoiding a lot of potential problems.”

See “Bill lets employers act against medical marijuana patients.” Read the text of HB 2541.

By On the Net|2011-04-20T06:39:37-07:00April 20th, 2011|AZ Legislation, Legal Issues|Comments Off

Three IEDs in DHS’ Actual Final Rules Detonate & Blow Many Would-Be Arizona Medical Marijuana Dispensaries Away

Let the litigation begin. The Arizona Department of Health Services had 120 days to create the rules to implement Arizona’s medical marijuana law. During that time DHS produced FOUR versions of its rules, but it saved its three improvised explosive devices until the 120th day. When the smoke clears from the DHS final rule bombs and allows would-be dispensaries to check their damage, many will find that they are too crippled to continue the race to the dispensary license finish line.

Today, the DHS submitted its final rules to the Arizona Secretary of State, but not without making three new rules that will prevent many would-be dispensaries from actually filing an application for a dispensary license. Here’s what DHS did:

The Zoning Comfort Letter Bomb

The first bomb is contained in new rule R9-17-304(D)(6), which reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions

DHS issued the following FAQ on this issue:

“Do I need a certificate of occupancy from my city in order to apply? No, applicants do not need to submit a certificate of occupancy in the initial application. They must attest to meeting zoning requirements and provide documentation from the local government saying either there are no local zoning requirements or the location meets the requirements. However, if chosen as the dispensary for a specific CHAA, a copy of a certificate of occupancy or other documentation issued by the local jurisdiction will be necessary when requesting approval to operate the dispensary.”

The legal significance of this new rule is that the decision on which entity will get a dispensary license will be determined at the city or local zoning level. The rule does not give any guidance on what it means to be “in compliance with any local zoning restrictions.” Each local zoning authority will decide the conditions on which it will give its zoning comfort letter. The zoning authorities are able to give one comfort letter per CHAA if they so desire. Any would-be dispensary that fails to get a zoning comfort letter by June 30, 2011, is precluded from filing an application to get a dispensary license. Each local zoning authority is now free to determine who will get its zoning comfort letter. This new rule is an abrogation of DHS’ duty to select the qualified dispensaries and a shameful dereliction of its duty.

For a an actual example of how the cities are now able to select who will own a medical marijuana dispensary within their jurisdictions, see “Fountain Hills Faces Medical-marijuana Challenge.” Fountain Hills has only accepted one zoning application so no other would-be dispensaries will be able to operate in Fountain Hills. Result: Fountain Hills will determine who owns the dispensary in Fountain Hills, not DHS.

The Landlord Comfort Letter Bomb

New rule R9-17-304(D)(7 ) reads: “To apply for a dispensary registration certificate, an entity shall submit to the Department the following . . . . Documentation of:

a. Ownership of the physical address of the proposed dispensary, or

b. Permission from the owner of the physical address of the proposed dispensary for the entity applying for a dispensary registration certificate to operate a dispensary at the physical address;

DHS went backwards. The second draft of the rules created a nightmarish situation for prospective dispensaries because a large number of prospective tenants were all trying to enter into leases for a very small number of possible sites. The law of supply and demand made it impossible for most prospective dispensaries to find a properly zoned site and tie it up with a lease. This caused rents to soar way above market because the laws of economics applies to medical marijuana dispensaries and available rental space like it does to every other commodity. It was because of this hellish situation that I wrote an article on February 8, 2011, called “Prospective Dispensary’s Single Most Important Task Before May 30, 2011.”

Once again would be dispensaries will be engaged in a mad scramble to get a comfort letter from a landlord. Many will not be successful or will be successful only at great expense in time and money. Most landlords will demand real money to get a letter. Few will give away comfort letters. A commercial real estate broker who has been successful in getting leases for would-be dispensaries told me today that some landlords are demanding $5,000 to give a tenant a comfort letter for the purpose of getting local zoning approval. He also said that he has seen rents for dispensaries as high as $27 a foot, which is more than the going rate for class A office space in the Camelback corridor.

I predict that no prudent landlord will simply issue a comfort letter that satisfies the vague language in the new rule. I am a real estate lawyer and if I were advising a landlord and asked to draft a comfort letter that said the landlord will give the dispensary permission to lease the premises for a medical marijuana dispensary, I would put in language the makes it clear that the letter does not create a legal obligation on the part of the landlord to lease the premises to the dispensary. Without actually having a signed lease with the dispensary, every landlord should be concerned that a comfort letter does not obligate the landlord to lease the premises. I would also advise my landlord client to charge a substantial fee to get a comfort letter.

Query: If the landlords issue comfort letters that clearly state they are not binding on the landlord, then what is the purpose of requiring the prospective dispensaries to get the comfort letter? Maybe I’ve missed something, but the only reason I can see for this new requirement is to reduce the number of applicants for dispensary licenses and increase the applicants’ costs of doing business. Landlords once again have the upper hand which means the dispensaries will pay higher rents and the patients will pay more for their medicine.

See “Arizona Medical-marijuana Dispensaries Face Property Hurdles.”

The Bank Comfort Letter Bomb

Last, but not least, are new rules R9-17-302.A.5 and R9-17-304.D.1.f.ii. This last minute bomb was triggered by a question that should never have been asked of Will Humble last week at the April 5, 2011, forum in Phoenix. The first final rules issued by DHS on March 28, 2011, added a new requirement that said the dispensary application had to include:

“Documentation, from an in-state financial institution or an out-of-state financial institution, demonstrating that the dispensary has at least $150,000 available to begin operating was submitted with the dispensary registration certificate application.”

Unfortunately for many would-be dispensaries, a man asked Will Humble if it would be ok to deposit money in the bank, get the letter from the bank and immediately take the money out of the bank. Mr. Humble was visibly stunned by the question as he visualized a hole a mile wide in his capital requirement plan. Because of that question, RR9-17-304.D.1.f.ii requires the applicant for a dispensary license to submit “documentation that:

(1) Is from an in-state financial institution or an out-of-state financial institution;

(2) Is dated within 30 days before the date the dispensary registration certificate application was submitted; and

(3) Demonstrates that the entity applying for the dispensary registration certificate or a principal officer of the entity has at least $150,000 under the control of the entity or principal officer to begin operating the dispensary and has had control of the $150,000 for at least 30 days before the date the dispensary registration certificate application was submitted“

In-state financial institution” means the same as in A.R.S. § 6-101. Out-of-state financial institution” means the same as in A.R.S. § 6-101.

A client asked me the if Charles Schwab or Merrill Lynch are “out-of-state financial institutions? A.R.S. § 6-101 states that “Out-of-state financial institution means a state or federal bank, savings bank, savings and loan association or holding company with its home office in a state other than this state.” I don’t believe these types of institutions are banks or S & Ls, but could they be “holding companies?” I have no clue what the term “holding company” means. It appears, however, that a person who has sufficient assets in Merrill Lynch or a similar financial institution could not use that type of entity as an out of state financial institution for the purposes of this new rule.

This rule is outrageous, unreasonable, unfair and just plain wrong. Whether or not the reasoning behind the rule is good is something we could debate, but that is not my problem with the rule. I despise this rule because it is much too late in the process to issue the rule and simply not enough time for many prospective dispensaries to be able to comply with this new rule issued on the last day of the 120 days DHS had to finalize its rules.

The last day applicants may submit applications for dispensary registration certificates is June 30, 2011.

Note carefully requirement number 3. It could be a nuclear bomb! Either the entity applicant or A PRINCIPAL OFFICER OF THE ENTITY (whichever one actually has the funds) must show that it/he/she has had control of the $150,000 for at least 30 days before the dispensary application is submitted to DHS.

Bottom line: DHS may have just opened the litigation flood gates and may have cost the State of Arizona mega-millions in damages for promulgating unreasonable rules that have no basis in Proposition 203.

What do you think? What am I missing? Am I wrong. Add your comments below.

By Richard Keyt|2017-02-11T17:21:23-07:00April 14th, 2011|Banking Issues, Legal Issues|1 Comment

Arizona State Workers Involved in Implementing & Overseeing Arizona’s Medical Marijuana Laws May Violate Federal Criminal Laws

Arizona Republic: “Those who choose to use, grow or sell marijuana under Arizona’s ‘medical’ marijuana law might not care that they are violating federal law. On the other hand, Arizona Department of Health Services employees who implement these laws very well might care that they are violating federal law, but they are faced with a dilemma.” This story was written by Carolyn Short, chairwoman of an anti-Proposition 203 campaign and Ed Gogek, a Prescott psychiatrist who specializes in addictions.

The story links to a “legal memorandum” that states:

“Based on our review of Arizona and federal statutes and case law, (1) Arizona citizens who use, possess, cultivate or distribute marijuana, or facilitate such use, possession, cultivation or distribution, including Department of Health Services (“Department”) and other State employees or agents, acting in accordance with the provisions of the Act, could be subject to federal prosecution under the CSA [Controlled Substances Act]; and (2) the Act [Arizona’s medical marijuana laws] is preempted by the CSA and thus is null and void.”

By On the Net|2011-04-12T10:02:22-07:00April 12th, 2011|Legal Issues, Marijuana Crimes|Comments Off

Update on the Bylaws Update

Before the “final” Arizona Department of Health Services rules issued on March 28, 2011, I prepared Bylaws for Arizona limited liability companies, for profit corporations and nonprofit corporations that intend to apply for a license to own and operate an Arizona medical marijuana dispensary. I have not been able to “finalized” my Bylaws because I have been waiting for the “final” version of the DHS rules to be set in concrete. I want to modify my Bylaws only one more time so I am waiting patently for DHS to “finalize” the rules.

You will notice that I have put “final” and “finalize” in quotes. I did that because despite DHS’ statements that the March 28, 2011, version of the rules was the final version, the rules have not yet been “finalized.” I attended a forum last Tuesday at which DHS Director Will Humble announced two important facts about the March 28, 2011, version of the rules.

The rules will not be final until DHS delivers them to the Arizona Secretary of State on or before April 14, 2011.

DHS intends to make changes to the March 28, 2011, version of the rules before submitting the rules to the Arizona Secretary of State.

Note to KEYTLaw Dispensary Clients & People Who Purchased Dispensary Bylaws Online in Our Store

My goal is to review the final final version of the rules delivered to the Arizona Secretary of State this coming weekend and modify the Bylaws as necessary to comply with the final rules. You should anticipate that my “final” version of the Bylaws will be available beginning on April 18, 2011.

If you are an owner of a not for profit LLC or corporation that I formed to own and operate an Arizona medical marijuana dispensary, you should have gotten an email message from me that I sent to you three days ago. In that message, I asked that the contact for your company send the following information to me so I can prepare the Bylaws for your company:

Names of all members of the board of directors of the company
Name of the President (must be one of the managers if the company is an LLC – can only have one President)
Name of the Secretary (can be the same as the President)
Name(s) of any Vice Presidents (optional officers)
Name of the Treasurer (optional officer)

If I formed your company, make sure that your contact person sends an email message to me asap with the above information.

See “All Arizona Medical Marijuana Dispensaries Must Have Bylaws.”

By Richard Keyt|2012-05-13T16:21:55-07:00April 10th, 2011|DHS Rules, Legal Issues, Will Humble Speaks|Comments Off

Would Be Dispensaries Struggle to Lease a Dispensary Site

My DHS Wish

I continue to talk to many people who are having a very hard time finding a location to operate their Arizona medical marijuana dispensary. The Arizona Department of Health Services has inadvertently created a nightmarish situation for would-be dispensary owners who do not own the real property on which to operate a dispensary. The DHS rules coupled with very restrictive city zoning ordinances and many landlords who simply do not want to lease to a medical marijuana dispensary result in many more prospective dispensary tenants than available properly zoned dispensary sites. A lot of people have told me that they believe that one or more big money outfits are going around Arizona tying up potential sites with the goal of reducing the number of prospective dispensaries that apply for a dispensary license.

A large number of nonprofit entities are all fighting to tie up a small number of properly zoned and available sites throughout Arizona. This means that there will not be very many dispensary applications filed by the application deadline. It is a supply and demand problem. The demand among would-be dispensaries is high and the supply of properly zoned sites with willing landlords is low. Econ 101 teaches that when demand exceeds supply, the cost of the item (rent) goes up. Higher rents mean higher prices passed on to patients. One of DHS’ goals should be to keep the patients cost of medical marijuana down, not be the cause of patients paying higher prices to purchase their medicine.

The current rules and restrictive city zoning ordinances create a bizzaro world where nonprofits that do not have a license to operate an Arizona medical marijuana dispensary are entering into leases and applying for zoning with cities and they will never get a dispensary license. For many would be dispensaries it is a total waste of time and money, not to mention a waste of the cash-strapped cities’ time and money.

DHS should clarify in the final version of the rules that would be dispensaries need only to affirm on their applications for a dispensary license that their dispensary and grow locations comply with applicable zoning ordinances without the need to actually apply for or receive a city use permit. The rules should also allow the winners of a license to change the location of their dispensaries and grow facilities after obtaining a dispensary registration certificate, but before obtaining the final dispensary license. This would allow a dispensary to change locations after obtaining a dispensary registration certificate if the city denies the zoning use permit or any other problem arises with the site location stated in the initial dispensary application.

DHS: Please amend the rules to solve this terrible problem that will reduce the number of actual dispensaries, increase the number of patients who grow their own and cause higher rents to be passed on to patients.

See “Phoenix Medical Marijuana Locations Reflect Restrictive Zoning.”

By Richard Keyt|2011-03-23T07:43:30-07:00March 22nd, 2011|DHS Rules, Legal Issues, Real Estate Issues, Zoning|Comments Off

Medical-pot Law will be ‘Fairly Difficult’ on Bosses

Arizona Daily Star: “Even though Arizona voters have approved the use of medical marijuana, employers won’t have to tolerate workers who are stoned on the job. Nor will they have to allow them to fire up a joint at the workplace. . . . The new law raises several issues that employers will need to address and they may have to reevaluate their drug testing policies . . . . “

By On the Net|2011-03-15T07:07:54-07:00March 15th, 2011|Legal Issues, Stories & Articles|Comments Off

Alan Sobol Adds the Rose Law Group to His List that Includes DHS, MPP & AzMMA

Alan Sobol’s latest letter to Arizona Department of Health Services Director Will Humble is dated March 14, 2011, and it contains some explosive allegations. In the letter Mr. Sobol complains about the zoning nightmare created by DHS rules and the cities of Arizona. He correctly claims that it is the cities of Arizona who are effectively making the decision on who will ultimately get a dispensary license rather than DHS. Here are some choice statements from Mr. Sobol’s letter:

“Although the AZDHS rules are ambiguous and do not specifically require Zoning approval at the first stage of the application process, nevertheless, the Rose Law group has been aggressively pursuing Zoning Approval for their clients. Do they know something that nobody else does? Is Mr. Humble’s final rules going to interpret the current ambiguous rules to mean that you do indeed need ZONING APPROVAL? It is hard to imagine that a State Agency could not have done a better job promulgating their rules, if that was truly their intention.”

“We hereby demand that Mr. Humble immediately clarify his position regarding Zoning Approval with respect to the initial Application process; Is Zoning Approval a requirement or NOT? If zoning approval is a requirement we further demand that the Health Department extend the time for applicants to submit their Dispensary applications. The extended time should be sufficient for all applicants to seek and obtain local Zoning Approval, in any event no less than 60 additional days.”

“we adamantly oppose the requirement that Applicants obtain Zoning approval prior to submission of the initial application. If the Health department requires such zoning approval they are in fact deferring their authority under Title 36 to select the Dispensary licensees to local zoning boards. Under this scenario the Health Department could only consider applicants who were approved by local zoning boards, precluding all others.”

I agree with each of the three statements made above.

Rule R9-17-303.B.5 says the application for a dispensary license must be accompanied by:

“A sworn statement signed and dated by the individual or individuals in R9-17-301 certifying that the dispensary is in compliance with local zoning restrictions“

Unfortunately the zoning rules do not explain what it means for “the dispensary is in compliance with local zoning restrictions.” There are two schools of thought on the meaning:

The applicant can make the zoning affirmation if the dispensary site is properly zoned and not too close to a prohibited structure or area.
The applicant can make the zoning affirmation if the application has filed the necessary paperwork with the city and obtained whatever magical city zoning paperwork is required to ultimately operate a medical marijuana dispensary at the site such as a use permit, a variance or a note from the mayor’s mommy saying she really really likes one of the owners of the applicant (I made up the last item).

Ryan Hurley, a zoning attorney with the Rose Law Group was a speaker at a March 3, 2011, seminar sponsored by the State Bar of Arizona. Ryan said he thought Rule R9-17-303.B.5 meant choice #2. After the seminar I asked Tom Salow of the DHS if he agreed with Ryan Hurley about the zoning affirmation and he said no – he interpreted the rule to mean choice #1. Unfortunately it is no legal significance what either Ryan Hurley or Tom Salow think the rule means. What is important is WHAT DOES THIS RULE ACTUALLY MEAN? See “Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?“

DHS needs to clairfy the meaning of the rule. I hope that the third and hopefully final draft of the rules due March 28, 2011, will clarify this point and make it clear that the applicant need only affirm that its site is properly zoned and not too close to a prohibited structure or area. It is just stupid and a waste of everybody’s resources for multiple applicants for the one license within a CHAA to go through the actual zoning process and get city zoning approval before the applicant wins the lottery.

Mr. Sobol makes a valid point that the current chaos created by the DHS rules, the CHAAs and local zoning is in effect allowing the zoning authorities to determine who can apply for a license for an Arizona medical marijuana dispensary. The cities are the gate keepers who decide who gets a site and who doesn’t. If the rules mean that an applicant for a dispensary license must get city zoning approval before being able to affirm that the site zoning is groovy then the cities are, in fact, selecting which would-be dispensaries will get a dispensary license within their jurisdictions. This is contrary to Arizona’s medical marijuana laws, which require that DHS determine who gets a dispensary license.

I suggest all would-be dispensaries and their owners to send a letter to Arizona Department of Health Services Director Will Humble and ask him to change the rules to clarify that the affirmation of zoning means only that the site is properly zoned and not too close to a prohibited structure or area. Send your letter to Will Humble, Director, Arizona Department of Health Services, 150 N. 18th Avenue, Phoenix, AZ 85007.

By Richard Keyt|2014-01-05T10:02:10-07:00March 14th, 2011|Legal Issues, Stories & Articles, Zoning|Comments Off

Feds Warnings to Oakland & Its Plan to Allow Large Scale Growing of Pot May Affect All Prospective Arizona Medical Marijuana Dispensary Owners

The New York Times had a story on March 2, 2011, entitled “Oakland’s Plan to Cash in on Marijuana Farms Hits Federal Roadblock,” which everybody who is contemplating becoming an owner in an Arizona medical marijuana dispensary should read. The story said:

“an exchange of letters between the city attorney and federal law enforcement officials has made it exceedingly clear that Washington will not tolerate plans for the large-scale marijuana farms the City Council approved last July. . . . just weeks before the city was set to issue the permits, the Council voted to stall the plan after the city’s attorney, John Russo, and a county district attorney warned the Council that the marijuana cultivation ordinance thwarted state law and that city officials could be held criminally liable.

On Jan. 14, Mr. Russo wrote a letter to the United States Department of Justice seeking guidance on the city’s legal standing. In a response, Melinda Haag, United States attorney for the Northern District of California, warned that ‘individuals who elect to operate ‘industrial cannabis cultivation and manufacturing facilities’ will be doing so in violation of federal law.’ The letter went on to say that the Justice Department was ‘carefully considering civil and criminal legal remedies regarding those who seek to set up industrial marijuana growing warehouses‘.”

If you are considering becoming an owner of a medical marijuana dispensary in Arizona, you must read and consider U.S. Attorney for the Northern District of California Melinda Haag’s letter of February 1, 2011, to John A. Russo, the then Oakland, California, City Attorney. Here are some pertinent quotes that every dispensary and grower of any quantity, but especially large quantities of marijuana should read and consider carefully:

“I have consulted with the Attorney General and the Deputy Attorney General about the Oakland Ordinance.”

“growing, distributing, and possessing marijuana in any capacity, other than as part of a federally authorized research program, is a violation of federal law regardless of state laws permitting such activities.”

“The prosecution of individuals and organizations involved in the trade of any illegal drugs and the disruption of drug trafficking organizations is a core priority of the Department. This core priority includes prosecution of business enterprises that unlawfully market and sell marijuana.”

“we will enforce the CSA vigorously against individuals and organizations that participate in unlawful manufacturing and distribution activity involving marijuana, even if such activities are permitted under state law.”

“the Department is carefully considering civil and criminal legal remedies regarding those who seek to set up industrial marijuana growing warehouses in Oakland pursuant to licenses issued by the City of Oakland. Individuals who elect to operate “industrial cannabis cultivation and manufacturing facilities” will be doing so in violation of federal law. Others who knowingly facilitate the actions of the licensees, including property owners, landlords, and financiers should also know that their conduct violates federal law. Potential actions the Department is considering include injunctive actions to prevent cultivation and distribution of marijuana and other associated violations of the CSA; civil fines; criminal prosecution; and the forfeiture of any property used to facilitate a violation of the CSA.”

Clearly the Department of Justice intends to take legal action against those it believes are involved in the “industrial growing of marijuana.” The problem for all Arizona dispensaries that intend to grow marijuana is what is the difference between nonindustrial growing of marijuana and industrial growing of marijuana? This problem and the risk of criminal prosecution is especially great for Arizona medical marijuana dispensaries that intend to grow excess amounts of marijuana to sell to other dispensaries.

If Arizona medical marijuana dispensary owners think they can take cover under the Department of Justice memo of October 19, 2009, think again. This memo said only that the U.S. has a better use of its resources than to prosecute individuals (such as patients and caregivers) who are using medical marijuana in compliance with state law. The memo does not say that the Department of Justice will not prosecute medical marijuana dispensaries and their owners who are complying with state law. It says just the opposite.

“prosecution of commercial enterprises that unlawfully market and sell marijuana for profit continues to be an enforcement priority of the Department. To be sure, claims of compliance with state or local law may mask operations inconsistent with the terms, conditions, or purposes of those laws, and federal law enforcement should not be deterred by such assertions when otherwise pursuing the Department’s core enforcement priorities.”

By Richard Keyt|2012-08-18T09:14:08-07:00March 5th, 2011|Federal Dispensary Attacks, Legal Issues, Marijuana Crimes, Stories & Articles|Comments Off

What is a Nondisturbance Agreement & Why Do Dispensary Tenants Need It?

One of the important provisions included in my Addendum to Lease between a landlord and a tenant that intends to operate an Arizona medical marijuana dispensary is a condition that requires the landlord to deliver to the tenant a Nondisturbance Agreement from every person or entity that holds a deed of trust or a mortgage on the premises. If your not-for-profit dispensary entity intends to lease premises for the dispensary or the growing facility, a Nondisturbance Agreement from every lienholder is a must have document. This document protects the tenant from being evicted if the landlord loses the real property in a foreclosure.

Under Arizona real estate law, when the landlord defaults on a lien that encumbers real estate, the lienholder can foreclose and the land is sold to the highest bidder. The legal consequences of a foreclosure is that the foreclosure terminates / extinguishes the interests in the land of every party whose interest is of a lower priority than the foreclosed lien. Translation: If a lienholder whose lien was recorded before the tenant entered into a lease forecloses, the foreclosure terminates the lease.

Solution: If the premises your nonprofit entity leased or intends to lease are encumbered by one or more Deeds of Trust or Mortgages, the entity must get a Nondisturbance Agreement from every lienholder. This is an agreement signed by the lienholder in which the lienholder promises that if the lienholder forecloses on its lien, it will honor the tenants lease as long as the tenant does not default on the lease.

Example 1. Landlord borrows $X from Lender on January 1, 2011. The loan is secured by a Deed of Trust that encumbers the land of which the leased premises is a part. The Deed of Trust is recorded on January 3, 2011. Landlord leases premises to dispensary on March 4, 2011. Landlord defaults on the payments due to Lender on January 1, 2013. Lender forecloses by selling the property at an auction held by the trustee under the Deed of Trust on May 1, 2013. The foreclosure terminates the lease as of May 1, 2013. If the tenant cannot make a deal with the new owner to stay in the premises, the tenant will be out on the street and the dispensary will die. If the tenant can work out a new lease with the new owner, the new rent will probably be a lot higher because the new owner has the tenant over a barrel.

Example 2. Same facts as above except the lease required the landlord to get a Nondisturbance Agreement from the Lender and the Lender signed and delivered the Nondisturbance Agreement to the tenant. The tenant recorded the Nondisturbance Agreement on March 4, 2011. The foreclosure does not terminate the lease and the new owner becomes the new landlord and cannot evict the tenant as long as the tenant satisfies all of the tenant’s obligations under the lease.

Warning #1: During these difficult economic times, many landlords are defaulting on their loans. Do not take a chance that you might lose your entire investment in your Arizona medical marijuana dispensary because your landlord defaults on a loan. Your dispensary must get a Nondisturbance Agreement from every lender that holds a lien that was perfected before the date of the lease because the failure to do so could cause the loss of your entire investment in the dispensary if the landlord defaults and the property is sold at a foreclosure sale.

Warning #2: You can ask the landlord to disclose the existence of liens and the name and address of the lienholder(s), but the only safe way to determine if a lien, Deed of Trust or Mortgage encumbers your leased premises is to pay a title insurance company to give you a status report that lists all liens and encumbrances on the leased premises. If the landlord tells you there are no liens and you don’t verify that fact independently, you’ll wish you had purchased a status report from a title insurance company when the property sells at a foreclosure auction and your dispensary is evicted from the premises.

Solution: Every would be dispensary that leases premises that are encumbered by a lien must protect itself from potential eviction due to the landlord’s default on a lien by obtaining a Nondisturbance Agreement signed by the lienholder.

If you have already signed a lease, it’s not too late to ask the landlord to ask the lender to give you a Nondisturbance Agreement, but the landlord and the lender are less likely to to it if it is not a condition to the effectiveness of the lease.

By Richard Keyt|2012-08-18T09:16:24-07:00March 4th, 2011|Dispensary Leases, Legal Issues|Comments Off

Alan Sobol’s Excellent March 1, 2011, Letter to Will Humble

What follows below is the text of a March 1, 2011, letter from Alan Sobol and the Arizona Association of Dispensary Professional, Inc., to Arizona Department of Health Services Director Will Humble. Alan asks that DHS immediately clarify two huge problems that almost all prospective dispensaries face:

The requirement of Proposition 203 and the Arizona Department of Health Services rules that the application for a dispensary license show the actual address of the dispensary.

Uncertainty as to whether a dispensary site must merely be properly zoned or if the dispensary must have file all necessary paperwork with the city or county and actually obtain city or county approval before it can file an application for a dispensary. See “Must My Dispensary Obtain a Conditional Use Permit from the City before it can File an Application for an Arizona Medical Marijuana Dispensary License?“

Confusion in the rules as to whether all owners of the dispensary must meet the Arizona residency requirement.

I agree with Alan on all three issues. It’s a landlord and zoning zoo out there for prospective dispensaries, but it doesn’t have to be. Rather than have 5,000 would be dispensaries scramble to tie up 5,000 sites, file 5,000 zoning applications, pay 5,000 city and county zoning fees and have cities and counties waste their scarce and valuable resources processing 5,000 zoning applications, the DHS rules should provide that prospective dispensaries be required to list on its application the actual location of the dispensary after they obtain a dispensary registration certificate, but before they apply for their final inspection necessary to obtain the license.

Under the current rules 5,000 prospective dispensaries are all competing for the limited number of sites that meet local zoning requirements. The result is landlords can charge higher rent because the demand is much bigger than the supply of properly zoned sites. Yesterday somebody told me that there are only two properly zoned sites in Surprise and one is leased and the other is in foreclosure. It makes no sense for any prospective dispensary to waste its time and resources and the time and resources of a city or county zoning department unless the dispensary has obtained a dispensary registration certificate. Require dispensary applicants to disclose the location of their sites and affirm the zoning only after they win the lottery and get a dispensary registration certificate.

Alan’s third issue is valid. In my February 18, 2011, letter to Will Humble I suggested that the rules be amended to clarify that all eligibility requirements for any principal officer and director be expanded to include apply to all owners.

Here’s Alan Sobol’s March 1, 2011, letter. DHS please listen and help.

March 1, 2011

Arizona Department of Health Services
Office of the Director:
150 North 18th Avenue
Phoenix, Arizona 85007

RE: Open letter To Director Humble. The Market Place is in Chaos, Please help!!

Dear Mr. Humble

I am writing to you at the request of the members of the Arizona Association of Dispensary Professionals, (AADP). With over 6100 members we are the largest trade association of its kind in the State of Arizona. Collectively, we represent the largest percentage of Dispensary applicants in Arizona. Upon information and belief we have at least one member/applicant in almost every AZDHS CHAA.

We are writing to you regarding our great concern for the current chaotic market conditions across the State of Arizona. We adamantly believe these conditions are a direct result of the confusion unintentionally caused your agency. (more…)

By Richard Keyt|2011-03-02T07:42:57-07:00March 2nd, 2011|Legal Issues, Stories & Articles|Comments Off

Workplace Impact of Medical Marijuana

Arizona employment law attorney Chris Mason discusses how the Arizona medical marijuana law affects employers and employees with KJZZ DJ Dennis Lambert.

By On the Net|2011-03-01T06:18:04-07:00March 1st, 2011|Legal Issues|Comments Off

Arizona State Bar Association Says Arizona Attorneys Can Represent Arizona Medical Marijuana Dispensaries

Today the State Bar of Arizona’s Committee on the Rules of Professional Conduct issued Ethics Rule 11-01 in which it said the following:

A lawyer may ethically counsel or assist a client in legal matters expressly permissible under the Arizona Medical Marijuana Act (“Act”), despite the fact that such conduct potentially may violate applicable federal law. Lawyers may do so only if: (1) at the time the advice or assistance is provided, no court decisions have held that the provisions of the Act relating to the client’s proposed course of conduct are preempted, void or otherwise invalid; (2) the lawyer reasonably concludes that the client’s activities or proposed activities comply fully with state law requirements; and (3) the lawyer advises the client regarding possible federal law implications of the proposed conduct if the lawyer is qualified to do so, or recommends that the client seek other legal counsel regarding those issues and appropriately limits the scope of the representation.

NOTE: This opinion is limited to the specific facts discussed herein. Because the opinion is based on the Act as currently in effect, subsequent legislative or court action regarding the Act could affect the conclusions expressed herein.

FACTS

In the 2010 general election, Arizona voters approved Proposition 203, titled “Arizona Medical Marijuana Act” (“Act”), which legalized medical marijuana for use by people with certain “chronic or debilitating” diseases. The proposition amended Title 36 of the Arizona Revised Statutes by adding §§ 36-2801 through -2819 and also amended A.R.S. § 43-1201. Arizona became the 16th jurisdiction (15 states and the District of Columbia) to adopt a medical-marijuana law.

Despite the adoption of Arizona’s Act, 21 U.S.C. § 841(a)(1) of the federal Controlled Substances Act (“CSA”) continues to make the manufacture, distribution or possession with intent to distribute marijuana illegal.

In an October 19, 2009, memorandum (“DOJ Memorandum”), the U.S. Department of Justice advised that it would be a better use of federal resources to not prosecute under federal law patients and their caregivers who are in “clear and unambiguous compliance” with state medical-marijuana laws. The DOJ Memorandum indicates that federal prosecutors still will look at cases involving patients and caregivers, however, if they involve factors such as unlawful possession or use of a firearm, sales to minors, evidence of money-laundering activity, ties to other criminal enterprises, violence, or amounts of marijuana inconsistent with purported compliance with state or local law.

Although characterizing patients and their caregivers as low priorities, the DOJ Memorandum does not characterize commercial enterprises the same way. In fact, the DOJ Memorandum says that the “prosecution of commercial enterprises that unlawfully market and sell marijuana for profit continues to be an enforcement priority” of the DOJ. [1]

The DOJ Memorandum explains that the DOJ’s position is based on “resource allocation and federal priorities” and

does not “legalize” marijuana or provide a legal defense to a violation of federal law, nor is it intended to create any privileges, benefits, or rights, substantive or procedural, enforceable by any individual, party or witness in any administrative, civil, or criminal matter. Nor does clear and unambiguous compliance with state law or the absence of one or all of the above factors create a legal defense to a violation of the Controlled Substances Act. Rather, this memorandum is intended solely as a guide to the exercise of investigative and prosecutorial discretion. (more…)

By On the Net|2017-02-11T17:32:52-07:00February 23rd, 2011|Legal Issues, Stories & Articles|1 Comment

Question: One of the members of a limited liability company that intends to obtain a license to operate a medical marijuana dispensary in Arizona is a medical doctor. Can the doctor serve as the medical director for the LLC or any other dispensaries?

Answer: Yes unless the third draft of the Arizona Department of Health Services rules provides otherwise.

By On the Net|2011-02-18T07:04:25-07:00February 18th, 2011|Legal Issues|Comments Off

Question: When my nonprofit entity files its application for a dispensary registration certificate, must it have a conditional use permit from the city in which the dispensary will be located?

Answer: Maybe. Arizona Department of Health Services Rule R9-17-304 states:

To apply for a dispensary registration certificate, an entity shall submit to the Department the following

6. Documentation from the local jurisdiction where the dispensary’s proposed physical address is located that:

a. There are no local zoning restrictions for the dispensary’s location, or

b. The dispensary’s location is in compliance with any local zoning restrictions;

The rule does not specifically state that a Certificate of Occupancy must accompany the application for a dispensary registration certificate, but the local zoning authority may require the dispensary to get a CO as a condition to getting the documentation required by Rule R9-17-304.

Bottom line: Every would-be dispensary owner needs to consult with a good zoning attorney about this issue and for advice and assistance if making sure that the dispensary’s desired location complies with local zoning requirements. See “Prospective Dispensary’s Single Most Important Task Before April 30, 2012.”

By Richard Keyt|2015-04-06T18:50:19-07:00February 16th, 2011|Legal Issues, Questions People Ask, Zoning|Comments Off

Question: Are there any special clauses my dispensary should include in its contract with its medical director?

Answer: Yes. The contract should be an independent contractor agreement, not an employment agreement. The contract should contain the standard clauses found in a good lawyer drafted independent contractor agreement plus the following clauses unique to this agreement:

The medical director will provide the specific duties of the medical director set forth in the rules.

The medical director must obtain and maintain at all times a dispensary agent registration from the Arizona Department of Health Services. See R9-17-309.A.4.b., which states:

“A dispensary shall . . . Not allow an individual who does not possess a dispensary agent registry identification card issued under the dispensary registration certificate to: . . . Serve as the medical director for the dispensary“

The medical director will comply with the applicable laws contained in Arizona Revised Statutes Section 36-2801 et.seq (Arizona’s medical marijuana statutes), and all applicable DHS rules in effect as of the date of the agreement and during the term of the agreement.

The doctor represents and warrants that he or she satisfies all of DHS’ requirements to be a medical director not later than April 1, 2012.

The doctor will obtain a license from Arizona Department of Health Services to be a medical director not later than April 1, 2012.

If at any time the medical director ceases to be eligible to be a dispensary agent or if he or she cannot perform his or her duties for any reason, the contract must terminate without prior notice to the medical director.

The contract terminates if the dispensary loses its dispensary registration certificate or ceases to operate.

The medical director must grant a license to the dispensary to copy and use the copyrighted content the medical director gives to the dispensary as required under the rules.

The medical director must represent and warrant that all content he or she gives to the dispensary does not infringe on anybody’s copyrights.

The medical director must maintain at all times the types of insurance appropriate for the position in amounts not less than $500,000 or what is recommended by the medical director’s insurance agent.

The medical director must give to the dispensary proof of insurance satisfactory to the dispensary.

The medical director’s insurance company must be instructed to notify the dispensary of any change to or cancellation of any insurance policy.

The compensation payable to the medical director will be reduced by X percent for every additional dispensary the doctor acts as the medical director, but the compensation will not ever be less than Y percent of the compensation payable if the doctor is a medical director for only the dispensary. If I’m representing a dispensary, I’ll try to put this clause in because the duties of the medical director are nonexistent once he or she does the initial set up so why should a doctor who is a medical director for multiple dispensaries get paid the same as a doctor who is the medical director for a single dispensary?

By Richard Keyt|2012-08-18T09:20:26-07:00February 15th, 2011|DHS Rules, Legal Issues, Medical Directors, Questions People Ask|Comments Off

Question: I know my Arizona medical marijuana dispensary must be operated on a not for profit basis, but does not have to be an Arizona nonprofit corporation. Why would I want to form an Arizona nonprofit corporation that is also a tax-exempt organization under the Internal Revenue Code?

Answer: Neither the Arizona medical marijuana law nor the Arizona Department of Health Services proposed rules require that an Arizona medical marijuana dispensary be a nonprofit corporation. My recommendation is that all Arizona medical marijuana dispensaries be an Arizona limited liability company. See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?“

One of the best ways to help satisfy the requirement that the dispensary be operated on a not for profit basis is for the dispensary to make substantial donations of profits to a tax-exempt charitable organization such as the American Red Cross, the Arizona Humane Society or any one or more of the many tax-exempt charities that have purposes consistent with those of the dispensary’s owners. Donations to local tax-exempt charities that give to the local community are especially good choices. The dispensary should have a regular policy of publicizing its charitable donations such as handouts given away at the dispensary or signs on the walls of the dispensary.

Dispensary owners should also consider creating an Arizona nonprofit corporation that applies for and becomes an IRS approved tax-exempt charitable organization. One or more of the owners could be on the board of directors of the charity. The charity’s purpose would not involve the growing, possession or sale of marijuana. Instead, the charity’s purpose could be picked by the founders of the nonprofit corporation. I recommend its purpose be to engage in charitable activities in which the dispensary owners have an interest and that the money donated to the charity be spent in the local community. The tax-exempt organization must not have a purpose that is related to marijuana, including medical marijuana.

Here are some potential charitable purposes for a tax-exempt organization founded by an Arizona medical marijuana dispensary:

Provide monetary assistance to people who are in a terminal condition or who cannot afford medical treatment
Pay the cost for low income people to live in a care home
Pay for nursing care for low income people
Pay for legal drugs for low income people

The tax-exempt organization cannot be a subsidiary of the dispensary entity. It must be a separate stand-alone corporation governed by its board of directors.

Caveat: The dispensary owners and insiders cannot control the tax-exempt organization. The IRS will not grant tax-exempt status to a nonprofit corporation that is controlled by a person or a group of people. The board of directors of the tax-exempt organization can have one or more owners or insiders of the dispensary on its board of directors as long as the board of directors has enough independent members who could out vote the dispensary’s owners and insiders.

I would love to form your Arizona nonprofit corporation that you intend to become a federal tax-exempt organization. To learn more about forming an Arizona nonprofit corporation read “How to Form an Arizona Nonprofit Corporation” and “Arizona Nonprofit Corporation Formation Service.”

By Richard Keyt|2011-02-14T08:23:31-07:00February 14th, 2011|Legal Issues, Questions People Ask|Comments Off

Question: My landlord wants the owners of my Arizona medical marijuana dispensary nonprofit entity to sign a Personal Guaranty. What is it and should the owners sign the guaranty?

Answer: A Personal Guaranty is a promise by the guarantor to pay the debt of a third party or to satisfy an obligation of a third party. If an entity such as a corporation or a limited liability company signs a lease for real property, the general rule of Arizona law is that the owners of the entity are not liable for the debts or obligations of the entity, including the rent. Landlords understand the law so a prudent landlord will require the owners of the entity to sign a Personal Guaranty by which the signer becomes legally obligated to pay to the landlord any amounts due under the lease that are not paid by the tenant and to satisfy any obligations of the tenant under the lease that are not satisfied. The landlord usually wants all of the owners of the tenant entity to sign a Personal Guaranty.

Personal Guarantees of leases are not required by Arizona law. Whether or not the owners give a personal guaranty is negotiable with the landlord. In economic times that favor landlords, they almost always require the owners of the tenant entity to sign a Personal Guaranty unless the entity has a satisfactory financial statement. During economic times that favor tenants, i.e., now, the owners of the entity may refuse to sign a Personal Guaranty and a desperate landlord may nevertheless enter into the lease without any Personal Guarantees because the landlord needs the rental income.

Personal Guaranty Negotiating Advice

Here are some negotiating tips for owners of an entity that may reduce their liability for the entity’s defaults under the lease when the landlord insists that the owners sign a Personal Guaranty:

Reduce the term of the Personal Guaranty. Just because the lease is for five years does not mean the Personal Guaranty must last the same period of time. Try to shorten the term of the Personal Guaranty to some period less than the full term of the lease.

Don’t guaranty extensions of the lease. If the original term of the lease expires and the entity exercises an option to extend the term of the lease, include language in the Personal Guaranty that it does not apply with respect to any extensions of the lease.

Limit the maximum dollar amount of the signer’s liability. State in the Personal Guaranty that the maximum amount for which the signer is liable is $50,000 or $100,000 or whatever is the lowest number the landlord will agree to. If the landlord spends the landlord’s money for tenant improvements or for other items required of the landlord, the landlord will almost always want the landlord’s total out-of-pocket expenses to be the signer’s minimum liability.

If the landlord will agree to limit the signer’s liability to a stated amount, provide in the Personal Guaranty that the amount of the liability goes down each month. For example, if the signer’s maximum liability is $120,000 and the term of the Personal Guaranty is two years, provide in the Personal Guaranty that the signer’s liability goes down $5,000 every month.

State in the Personal Guaranty that the signer’s obligations terminate as of the date the entity loses its license to operate an Arizona medical marijuana dispensary.

State in the Personal Guaranty that the signer’s liability terminates if the signer were to die.

State in the Personal Guaranty that the signer’s total liability is equal to the total liability thereunder divided by the number of other owners who sign a Personal Guaranty. For example, if the entity has four owners who will sign guarantees, state that the signer’s total liability under the Personal Guaranty equals 25% of the total liability.

State in the Personal Guaranty that if the Arizona Cardinals with the Superbowl, the Personal Guaranty will terminate. A knowledgeable landlord should not have a problem with this because the landlord knows there is almost no chance this will ever happen.

Important Fact About Personal Guarantees & Arizona Community Property

Arizona law provides that a Personal Guaranty signed only by one spouse is not effect against the assets of the non-signer spouse. If the landlord requires that both spouses sign the Personal Guaranty, try telling the landlord that the spouse who is not active in the business refuses to sign a guaranty.

By On the Net|2012-08-18T09:03:27-07:00February 13th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off

Question: I own real property that is zoned for an Arizona medical marijuana dispensary or cultivation site. How can I increase the chances of obtaining a tenant that will actually obtain a dispensary registration certificate and become a long term paying tenant?

Answer: Easy. Lease your property to more than one prospective dispensary owner. Consider the following two scenarios:

Scenario 1: You lease to prospective dispensary owner number 1. The prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license. The tenant does not obtain a license. Long term rental income = $0.

Scenario 2: You lease the same site to 20 prospective dispensary owners. Each prospective tenant includes a clause in the lease that allows the tenant to terminate the lease if the tenant does not obtain a dispensary license. One of the 20 prospective tenants obtains a license to operate an Arizona medical marijuana dispensary. Nineteen prospective tenants leases are canceled. Long term rental income = big $$. Of course, each lease should have appropriate language in the lease that notifies each prospective tenant that its lease only becomes effective if the tenant actually obtains the dispensary registration certificate.

Update: A visitor to this website sent me the following message:

“I thought of this a couple of weeks ago and checked with the AZ Department of Health Services. The first person I spoke with was an employee of the department. She told me that multiple license applications with the same address would all be rejected. I then spoke with Laura Oxley the head of the department. She said it was a good idea, but I should speak with Tom Salow the department attorney for medical marijuana. Tom said that what I was proposing was currently acceptable under the guidelines, but he expected the guidelines to change making it unacceptable in the next revision.”

If Tom Salow’s statement about is true, why would the Arizona Department of Health Services reject multiple applications for the same location? It would not make any sense. The only purpose behind such a rule would be to make it more difficult for prospective dispensaries to find a suitably zoned location and to cause a lot of landlords to waste time entering into leases with tenants that will never get a dispensary registration certificate. If DHS changes the rules to reject applications for the same location, it would be another instance of the Arizona Department of Health Services bureaucrats/desk jockeys being the problem, not part of the solution.

By Richard Keyt|2012-08-18T09:11:36-07:00February 11th, 2011|Dispensary Leases, Legal Issues, Questions People Ask, Real Estate Issues|Comments Off

Question: My attorney put language in the Articles of Incorporation for my Arizona medical marijuana nonprofit corporation that say it will be operated as a 501(c)(3) charitable organization and that no part of the earnings of the corporation can go to insiders. Is that a problem?

Answer: Yes. Big time! If you want to operate a pure charity then the language is appropriate. Here is some common language I have seen in Articles of Incorporation of Arizona nonprofit corporations:

“This corporation is organized exclusively for charitable purposes such as religious, educational, literary and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, as amended, or the corresponding section of any future federal tax code (the “Code”).

“The Corporation is not organized and shall not be operated for pecuniary gain or profits. No part of the net earnings of the Corporation shall inure to the benefit of or be distributable to its directors, officers, members, or any other private person; provided that the Corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth herein.”

You definitely do not want the above language in the Articles of Incorporation for a corporation that intends to own and operate an Arizona medical marijuana dispensary. The first problem with the above language is that it is used in Articles of Incorporation of nonprofit corporation. You should not be using a nonprofit corporation to own your dispensary because Arizona nonprofit corporations do not have owners/shareholders. See “Is It a Mistake to Form an Arizona Nonprofit Corporation to Operate an Arizona Medical Marijuana Dispensary?“

The second problem is the above language is appropriate in the Articles of Incorporation of an Arizona nonprofit corporation only if the corporation intended to become a tax-exempt organization under the Internal Revenue Code. If you intend for your nonprofit corporation that will own a medical marijuana dispensary to file an IRS Form 1023 or 1024 and apply for tax-exempt organization status with the IRS you should know that:

Arizona Revised Statutes Section 36-2806.A states: “A registered nonprofit medical marijuana dispensary need not be recognized as tax-exempt by the internal revenue service”
The IRS will not grant an organization an exemption from federal income taxes if the activities of the organization involve the violation of federal criminal law.

The third big problem arises from the language in the second paragraph quoted above. The language is used in the Articles of Incorporation of nonprofit corporations that want to become tax-exempt organizations because it is required by the IRS. Tax-exempt organizations are prohibited by the Internal Revenue Code from paying excess benefits to insiders such as officers, directors and members. Violations of the excess benefit rules are taxed at the rate of 100% of the excess amount for every year the excess is not repaid to the organization.

If the insiders of an Arizona nonprofit corporation that intends to own an Arizona medical marijuana dispensary want to be able to be paid more than reasonable compensation and most do, then the corporation’s basic governing document, its Articles of Incorporation, should not limit the insiders compensation to reasonable amounts. Consider the insider who provides no services, but receives $5,000 a month from the corporation. The payment is a violation of the corporation’s Articles of Incorporation and makes the directors and officers who are responsible for the payment liable to the corporation for exceeding their authority.

Bottom line: Neither Proposition 203 nor the Arizona Department of Health Services rules require dispensaries to be nonprofit corporations. The rules say that the entity must be operated on a not-for-profit basis, but do not require any specific type of entity. Dispensaries may be a for profit corporation (I don’t recommend this type of entity), a nonprofit corporation (ditto), a general partnership (the worst type of entity to form), a limited partnership (ok, but now obsolete in Arizona), a sole proprietorship (bad choice) or a limited liability company (yes – this is the one!). See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?” If you formed any type of entity other than an Arizona limited liability company to own an Arizona medical marijuana dispensary, you need to dump it and switch to an Arizona limited liability company.

By On the Net|2012-01-29T11:01:57-07:00February 4th, 2011|Legal Issues, Questions People Ask|Comments Off

Question: My attorney formed an Arizona nonprofit corporation for me to own and operate an Arizona medical marijuana dispensary. Was that a mistake?

Answer: Yes because Arizona nonprofit corporations do not have owners/shareholders. Why would you invest a lot of money in an entity that you cannot own and cannot leave to your heirs if you were to die? For the reasons mentioned below, you should ask your attorney to refund the money if he or she formed your nonprofit corporation after December 17, 2010. See “Must an Arizona Medical Marijuana Dispensary be a Nonprofit Corporation?”

For profit Arizona corporations are owned by their shareholders. Arizona limited liability companies are owned by their members. Arizona partnerships are owned by their partners. Arizona nonprofit corporations do not have shareholders. If authorized in the Articles of Incorporation, an Arizona nonprofit corporation can have members and the criteria and characteristics of members can be set forth in the Articles of Incorporation or in the corporation’s bylaws. However, members are not shareholders/owners and are not treated as such by Arizona’s nonprofit corporate statutes.

Admission: Before the Arizona Department of Health Services issued its first draft of the rules on December 17, 2010, it was my opinion that Arizona medical marijuana dispensaries had to be Arizona nonprofit corporations. I formed a number of Arizona nonprofit corporations for my clients before DHS issued the first draft of the rules because the only type of nonprofit entity recognized by Arizona statutes is the nonprofit corporation.

Proposition 203 stated that a dispensary had to be a nonprofit “organization,” which I thought was a strange choice of words. Last December I asked the lawyer for the Marijuana Policy who is in charge of the model medical marijuana code on which Proposition 203 was based why Proposition 203 used the word organization instead of corporation, limited liability company and/or partnership. She said she did not know. I could tell she did not understand the significance of the fact Arizona nonprofit corporations do not have shareholders/owners.

Before December 17, 2010, I recommended to clients that they form an Arizona nonprofit corporation to own the dispensary because Proposition 203 was uncertain and because the nonprofit corporation is the only type of nonprofit entity authorized under Arizona law. I told my clients in writing of this issue.

When the first draft of the rules was issued on December 17, 2010, it clarified that a dispensary could be owned by any type of entity recognized by Arizona law. Since that date, I recommend to everybody that they form an Arizona limited liability company to own a dispensary and that the LLC be operated on a not-for-profit basis.

If you formed a nonprofit corporation to own your dispensary, it is not too late to replace it with an Arizona LLC. If your nonprofit corporation has already entered into one or more leases, get approval from your landlord to allow the tenant’s rights to be assigned by the corporation to the new LLC.

P.S. If you find a lawyer today who advises you to form a nonprofit corporation to operate your dispensary, run away as fast as you can.

By On the Net|2014-01-05T09:57:22-07:00February 3rd, 2011|Legal Issues, Questions People Ask|Comments Off

Previous 234 Next

Share this:

Like this:

The Buy Sell Agreement is the Exit Strategy

Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Question: One of the members of a limited liability company that intends to obtain a license to operate a medical marijuana dispensary in Arizona is a medical doctor. Can the doctor serve as the medical director for the LLC or any other dispensaries?

Share this:

Like this:

Question: When my nonprofit entity files its application for a dispensary registration certificate, must it have a conditional use permit from the city in which the dispensary will be located?

Share this:

Like this:

Question: Are there any special clauses my dispensary should include in its contract with its medical director?

Share this:

Like this:

Question: I know my Arizona medical marijuana dispensary must be operated on a not for profit basis, but does not have to be an Arizona nonprofit corporation. Why would I want to form an Arizona nonprofit corporation that is also a tax-exempt organization under the Internal Revenue Code?

Share this:

Like this:

Question: My landlord wants the owners of my Arizona medical marijuana dispensary nonprofit entity to sign a Personal Guaranty. What is it and should the owners sign the guaranty?

Share this:

Like this:

Question: I own real property that is zoned for an Arizona medical marijuana dispensary or cultivation site. How can I increase the chances of obtaining a tenant that will actually obtain a dispensary registration certificate and become a long term paying tenant?

Share this:

Like this:

Question: My attorney put language in the Articles of Incorporation for my Arizona medical marijuana nonprofit corporation that say it will be operated as a 501(c)(3) charitable organization and that no part of the earnings of the corporation can go to insiders. Is that a problem?

Share this:

Like this:

Question: My attorney formed an Arizona nonprofit corporation for me to own and operate an Arizona medical marijuana dispensary. Was that a mistake?

Share this:

Like this: