Among the many lingering effects of the pandemic in NYC is a surfeit of empty commercial spaces - many of them on the ground floors of co-op and condominium properties. Lack of street traffic, supply chain issues, and other obstacles proved too much for many tenants to overcome - but the impact didn’t stop there. Residential buildings with commercial space often depend heavily on the rental of their ground floor as part of their overall financial planning, so when those tenants were forced to close, that income evaporated. For some buildings, waiting indefinitely for an ‘ideal’ tenant - a dental practice, say, or an accounting firm - to take over their vacant space simply isn’t feasible. As a result, some co-op and condo boards are considering renting to tenants they might not have in the past - and in the era of legal cannabis, that group includes smoke shops and so-called ‘dispensaries’.
Legality notwithstanding, the matter of cannabis sales in New York City and New York State isn’t as simple as just setting up shop and hanging out one’s shingle. The city and state’s decriminalization of recreational marijuana included mandatory licensure for cannabis retailers wishing to get into the business legally. The program prioritizes those who were formerly incarcerated for marijuana related charges, but the roll-out of licenses has been slow - and in the meantime, with demand high (no pun intended) and serious money to be made, unlicensed smoke shops have sprung up on what seems like every other block, often taking over storefronts vacated by businesses done in by the pandemic. The state and city are attempting to put a stop to that.
To protect licensed retailers and retain some level of oversight and regulation of the burgeoning brick-and-mortar cannabis industry, this past May a new amendment was added to Section 715-A of the New York Real Property Law, spelling out grounds and procedures for the eviction of unlicensed dispensaries. It also includes stiff penalties for landlords who rent space to unlicensed smoke shops - and that includes co-ops and condos.
“The new law is attempting to penalize landlords for renting to unlicensed smoke shops,” says Harris Davidson, an associate with the Manhattan-based law firm Rosenberg Estis.
“To be fair,” says Davidson, “it’s difficult for any landlord to go after these smoke shops. If they smell trouble, they leave and go elsewhere. It’s a very gray area. But if the enforcement agency can prove to a housing court judge that the landlord knowingly broke the law, the landlord could be liable to paying a penalty of three times the rent the tenant paid while there and violating the law. The reasoning behind the penalty is to take away the financial incentive to just rent the space, to get someone in there. If you’re caught, you pay triple the amount in fines.”
There’s no jail time attached to the law, Davidson continues, but “If the landlord acts too slowly [to evict an unlicensed retailer], the state can step in and assume the role of the landlord and the landlord would be flipped on the other side of the case. If the state proves a violation at that point, both the landlord and the tenant would be liable.”
Don’t Blame Your Manager
If your condo or co-op is professionally managed, and your management company leases your ground floor space to a sketchy smoke shop, is the board exempt from any resultant penalties? In a word, explains Davidson, No. The buck stops with the board; as the directors of the corporation or association, they have to approve all leases. He does recommend that if the managing agent executed a lease without the board’s full knowledge of either the lease, tenant, or law, that the board call in the agent and review their actions immediately.
So, if you’ve got some vacant space, a cannabis retailer might make for a tempting tenant - certainly some of your residents might be thrilled at the convenience - but just make sure they have all the appropriate and necessary state licenses in place, or your income stream could be gone in a puff of smoke.