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For Prospective Adult-Use Cannabis Businesses in New Jersey, Site Selection is Paramount

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In November of 2020, the voters of New Jersey passed a referendum on the legalization of recreational or adult-use cannabis by a majority of 67%.  The referendum followed efforts by Governor Murphy and the State Legislature to expand the state’s medical cannabis operations, including the signing of Executive Order 6 and the passing of the Jake Honig Compassionate Use Medical Cannabis Act.

Patient demand in the medical market has continually increased since its inception.  The state’s adult-use market will make New Jersey one of the country’s largest cannabis markets, expected to generate about $126 million a year in tax revenue.  The state is trying to move quickly to draft and pass both legislation and a regulatory framework for the adult-use cannabis market; it is hopeful that the market is up and running before the end of 2021.

In light of the anticipated boom for the New Jersey cannabis industry, cannabis entities have begun to search for and find ways to establish themselves in the communities in which they seek to operate, and to position themselves to be ahead of the curve when the state issues the initial Request for Applications (“RFA”) for licenses. This rush to market includes entrepreneurs, investors, cultivators, retailers, property owners, vertically integrated operations and those looking to become involved in the industry.

Location, Location, Location

As in any business, location is paramount. When the New Jersey Department of Health issued its most recent RFA for medical cannabis licenses in 2019, evidence of site control and support of the local community were mandatory elements of the application. It is likely that these requirements will be included in any RFAs for adult-use licenses as well.

The different types of cannabis businesses will of course require different types and locations of properties. For example, an outdoor cultivation operation may need suitable farmland, while an indoor cultivation operation or processor may call for a warehouse or industrial property.  A retailer will likely seek out a desirable storefront location. At the same time, a vertically integrated cannabis business may benefit from a mixed-use location.

Land Use, Zoning Laws & New Cannabis Businesses

Land use and zoning laws restrict the locations of properties that are available to cannabis businesses. Prior to the referendum’s passing, certain municipalities had passed ordinances either zoning for, or completely prohibiting the siting of cannabis businesses in their bounds. However, the proposed legislation for the adult-use market, which would be accomplished through amendment to the medical market legislation and apply universally to the cannabis industry in the state, would require municipalities to rewrite any existing rules or ordinances relating to the siting of cannabis businesses.   Additionally, federal and state laws, such as the federal Drug Free Zones Act and the N.J. Drug Free Zone Law, further restrict the location of property available to cannabis businesses.

The Importance of Environmental Due Diligence

These restrictions on available properties may cause many cannabis businesses to select locations that are in historic manufacturing, industrial, or heavy commercial areas. These locations often come with significant pre-existing or underlying environmental liabilities.  Understanding the legal landscape associated with such locations is critical.  For example, the New Jersey Spill Compensation and Control Act extends broad liability for the cleanup of discharges of hazardous substances against both “dischargers” and “persons in any way responsible.”

The federal Comprehensive Environmental Response, Compensation and Liability Act (a/k/a, “CERCLA”) similarly provides broad liability for the cleanup and removal of hazardous substances.  Under both statutes, liability can and has been applied against property owners and operators of contaminated property, regardless of whether or not that party had conducted any bad acts or had even known about a discharge or the conditions that created a discharge.

To avoid these potential environmental liabilities that can run into the hundreds of thousands or millions of dollars or more, businesses must be aware of and conduct the appropriate due diligence inquiries. Although environmental due diligence obligations generally apply to property owners, site operators should also make appropriate inquiry into the conditions and risks associated with a chosen site.

The Future of New Jersey’s Adult-Use Cannabis Market

In sum, as the adult-use market opens up in New Jersey and promises to be one of the largest cannabis markets in the country, cannabis businesses are quickly setting themselves up for success in the license application process, which is likely to include requirements that applicants are able to demonstrate site control and community support.

Cannabis businesses may find that they are restricted to sites in historic industrial areas that may be subject to environmental liabilities, and thus a business must be aware of and conduct the appropriate due diligence inquiries.