New York City Landlords Divided Over New Law Fining Them For Unlicensed Dispensaries

The law has support from the Real Estate Board of New York but plenty of opposition in the real estate community.

This story was republished with permission from Crain’s New York and written by Eddie Small

The smoke shop leasing a small amount of space in one of New York landlord Jim Wacht’s buildings had been there for years. Though he had never been thrilled about renting to a store selling tobacco, describing it as “not a great look,” he only recently became suspicious that the business was breaking the law.

“They didn’t advertise that they were selling cannabis products, but I was concerned,” said Wacht, president of brokerage and management firm Lee & Associates. “So we had somebody go in there covertly and ask if they could buy any cannabis. The answer was yes.”

Wacht, who said the property is in Midtown but declined to provide its specific address, warned the business that it could not keep selling marijuana without a license from the state, but it continued to do so anyway. His firm is now pursuing legal action against its tenant.

“It’s a violation of every lease that’s written because it’s illegal,” he said. “If they’re operating illegally, it’s a lease default, so a landlord could take action to shut them down.”

Wacht’s firm is acting how the city would presumably like all landlords of smoke shops found to be operating illegally to act, especially given how rapidly they have spread throughout the city since the state legalized recreational marijuana sales in 2021. But officials are no longer just hoping that property owners will choose to take action. Under a law that the City Council passed 48-0 in late June, landlords who continue to lease space to unlicensed pot shops after being warned by law enforcement that the stores are operating illegally could now face fines of up to $10,000.

Wacht views the explosive growth of unlicensed pot shops as a blight on the city and is a supporter of the new law, but support is not universal. Some landlords see it as the city pawning off on them a problem it has been unable to solve through its own law enforcement agencies. And given that the overall retail market is still struggling to recover from the pandemic and evicting and replacing a tenant can be difficult, many could still be inclined to quietly look the other way.

This is the fork in the road that landlords are now facing. That the sale of marijuana is legal only in very specific circumstances makes this decision more complicated, says Harris Davidson, an attorney at the law firm Rosenberg & Estis.

“If the illegal activity is prostitution or selling hard drugs, a landlord will very quickly try to evict. We’ve helped many landlord clients do that,” he said. “But it’s a little different here because cannabis has been decriminalized, and the stores are on the thin gray line between legal and illegal.”

Illegal opportunities

State officials have faced plenty of criticism over how long it has taken to launch New York’s recreational weed retail program. The law legalizing cannabis sales passed in March 2021, but the first dispensary did not open until December 2022, and even now there are just 23 licensed stores throughout the state. This has created an opportunity for unlicensed stores to open, and estimates for their total number in the city have ranged from about 1,500 to 8,000.

Government agencies have taken steps to crack down. In July, for instance, the Manhattan district attorney’s office fined the owner of 11 unlicensed shops $400,000 and ordered him to stop selling weed.

But such efforts have yet to make much of a dent in the number of illegal shops, many of which can simply change locations even if they get shut down.

“The city knows that going after these tenants is like playing a game of Whack-a-Mole,” Davidson said. “They can shut down one, and Exotic Vape Clouds Three will show up the next day somewhere else as Exotic Vape Clouds Four.”

This is the main reason the City Council’s law was necessary, says Councilwoman Lynn Schulman, who sponsored the bill and represents Queens neighborhoods including Rego Park and Forest Hills.

“All the other efforts that were being conducted by the city and state focused solely on those businesses,” she said, “and those businesses haven’t been going away.”

Under the new law, which took effect Aug. 14, if a raid on a store uncovers illegal activity, city officials will first tell the landlord it is renting to an illegal business. If later inspections show that the business is still operating, the landlord could be fined $5,000, followed by a $10,000 fine for each subsequent failed inspection.

Evicting a tenant in New York is a long and difficult process, and many landlords have expressed concerns that a second or third raid could reveal the unlicensed store is still selling weed even though the landlord is actively trying to get rid of the tenant. However, the legislation specifies that the landlord will not face fines if this is the case.

“They have to show in good faith that they’ve at least initiated the proceedings,” Schulman said. “That’s an affirmative defense, and they won’t be subject to fines.”

And although Wacht took it upon himself to find out whether the smoke shop in his building was selling weed, the law does not require landlords to spy on tenants, Schulman stressed. It is up to law enforcement agencies to both determine if the tenant is breaking the law and inform the landlord if that is the case.

“This is a game-changing bill,” she said, “and it’s another tool in the toolbox to hopefully shut these businesses down.”

Industry opposition

Although the law has the support of the Real Estate Board of New York and some individual landlords, it faces plenty of opposition in the real estate community. The Rent Stabilization Association and the Community Housing Improvement Program, two lobbying groups representing smaller landlords, are both against it, as are several others in the industry.

“It won’t end this business, and it only hurts property owners,” said CHIP Executive Director Jay Martin. “Those who want to sell black market weed products will still do so, and the real solution is robust enforcement and rapid licensing.”

One Lower East Side landlord said he is currently dealing with illegal cannabis stores at three of his properties. The landlord, who asked not to be named because the stores are still operating, argued that the new law traps him in a no-win situation. He doesn’t like these shops and knows that their being open puts him at risk of incurring steep fines, but he will also lose sorely needed income streams if he kicks them out.

“You’re between a rock and a hard place. It bothers you. You want to do the right thing. But at the same time, if you want to get rid of this tenant, who’s going to compensate you for the money that you spend?” he asked. “You get cheated, and then you have to be the police yourself? I can’t be the victim and the police.”

Retailers generally do not tell property owners they want to open an unlicensed weed store in their building. Many come in saying they want to run a deli, then slowly add tobacco products and then cannabis products to their inventory, according to the landlord.

This ends up being bad not only for the landlords but also for prospective tenants that actually do just want to run a deli but now face added suspicion, he said.

“I have a new building right now where a deli guy has been calling me every day to lease my store,” the landlord said. “I have a vacant store, and I’m not comfortable leasing a store to him. He wants the space. I have to lease the space, but I cannot trust that he’s not going to end up doing a business that is not allowed.”

Bill Abramson, director of sales and leasing at Buchbinder & Warren Realty Group,  said his company has also been getting a lot of interest from businesses it suspects want to sell unlicensed cannabis products. Many of the firm’s commercial spaces are on the smaller side, which is what these stores tend to like, but it has turned down every offer.

“We get a ton of calls, but we wouldn’t accept them as a tenant even though, frankly, they offer above-market rent,” said Abramson, who supports the new law. “I understand why a landlord would be attracted to that, but it’s illegal.”

Rough retail

The proliferation of unlicensed pot shops is happening against the backdrop of a retail sector that was struggling even before the pandemic hit and has yet to fully bounce back from Covid. Although the latest Manhattan retail report from CBRE found that the average asking rent had risen for the fourth quarter in a row, rents and leasing activity both remain far below their prepandemic peaks.

This makes it all the more painful for landlords to evict an unlicensed store, especially one that has no financial issues, notes Rosenberg & Estis attorney Adam Lindenbaum.

“These tenants typically pay their rent. They’re doing well, and that’s something not to cast aside,” he said. “Landlords are not going to jump to throw a tenant into default when they’re paying rent over something that’s non-monetary.”

But Wacht said he had no sympathy for landlords who opt to look the other way when they discover they are renting to an unlicensed cannabis store, no matter the financial hit they might take. He stressed that if a property owner finds out they are renting to an illegal business, it is their responsibility to shut it down.

“If your tenants are acting illegally and you’re aware of it, you have an obligation to do something about it. I feel very strongly about that,” he said. “It’s one of the risks of being a landlord, the cost of doing business. You have an illegal tenant? Get rid of them.”

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