Recreational Marijuana in New Jersey

Given New Jersey Governor Phil Murphy's campaign pledge to legalize marijuana for recreational use in his first 100 days, the State of New Jersey is on the cusp of a major new revenue stream-recreational marijuana.

Last May, Democratic State Senator Nicholas Scutari introduced a bill to legalize recreational marijuana in New Jersey, patterned after Colorado's successful legalization initiative. There is no way to fully understand the limitations that the New Jersey Senate will place on the recreational marijuana bill until the bill passes. However, Scutari's proposed bill would impose a 7% sales tax on marijuana and marijuana products, escalating to 25% after five years. The senator estimates New Jersey would realize $300 million to $500 million a year in new tax revenue after the tax is fully phased in. Proponents say New Jersey could see $2-$3 billion in annual marijuana sales, based on the experiences of other states (like Colorado) that have legalized the drug.

Based on that $2-$3 billion annual sale projection, there is no doubt that aspiring entrepreneurs will flock to the Garden State for their piece of the pie. As mentioned above, the real analysis of the bill would come after the bill passes; however, below are just a few of the legal challenges that an aspiring entrepreneur may face in opening up shop in local municipalities.

Zoning Issues

One of the biggest challenges will be finding a commercial/retail space that fits within an allowable zone in accordance with a local municipality's zoning map. As other states, like Colorado, have seen, marijuana businesses are likely to be narrowly zoned, primarily with the intent to ensure such businesses are unable to open. States have implemented certain zoning restrictions, such as requiring that marijuana businesses remain a certain distance from schools, hospitals, substance abuse treatment centers, daycare facilities and other sensitive-use entities. Additionally, some jurisdictions impose the restriction that marijuana business be separated from one another (some jurisdictions require a 500-foot limit). In a densely populated state, like New Jersey, this could dramatically limit the number of recreational marijuana business storefronts across the state.

Leasing Issues

Once an aspiring business owner finds a location within an allowable zone to set up shop, the owner must now be mindful that the sale of recreational marijuana may in fact be prohibited by private contracts between landlords and existing tenants. Many commercial leases include varying provisions that detail prohibited uses of the subject spaces by tenants. While a commerical landlord may try to distance himself from leasing space to a recreational marijuana storefront, such prohibitions are also negotiated strongly by tenants. Historically, larger retail tenants aggressively negotiate such prohibited uses in an attempt to ensure their neighboring tenants do not attract “unwanted consumers.” Most notably (and quite common) is a prohibition against so-called “head shops,” which sell drug paraphernalia but not drugs themselves. Such prohibitions could create an even more limited market for marijuana businesses to open.

Banking

Because marijuana is a Schedule I controlled substance under the Controlled Substances Act (21 U.S.C. §812 sched. 1(c)(10)(2012)), it is still a federal crime to use, possess or distribute marijuana. As such, marijuana businesses often cannot obtain bank accounts of any kind, unless the bank is willing to undergo strict compliance with federal guidelines passed down in a memorandum initiated during the Obama administration.

The Bank Secrecy Act, enforced by the Financial Crimes Enforcement Network (FinCEN), mandates that banks monitor customer accounts for suspicious activity associated with crime or terrorism. The act requires banks to investigate their customers and to neither negligently nor knowingly do business with bad actors. FinCEN requires financial institutions to file Suspicious Activity Reports (SARs) with the federal government when they know or suspect an account holder engages in illegal activity. While the legality is not entirely clear around banks' acceptance of funds from marijuana businesses, the risk for the banks simply isn't worth the cost of business at this stage. Banks are required to ensure businesses are compliant under state law to ensure they are not aiding or assisting in any money laundering schemes. To put it simply, banks do not have the time, resources or clarity to ensure this type of compliance. In jurisdictions that permit the sale of recreational marijuana, there has been a slight push by local savings banks and credit unions that have been willing to permit marijuana businesses to open accounts. As such, it's safe to say that if and when recreational marijuana becomes legal in New Jersey, the vast majority of the resulting businesses will likely operate primarily on a cash basis, unless local banks and credit unions are receptive to banking with a marijuana business.

Conclusion

While many aspiring entrepreneurs will be looking to get a piece of the projected $2-$3 billion in revenue, it is clear, based on the experiences of recreational marijuana vendors in other jurisdictions, that it will not be as easy as opening a storefront and watching the cash flow in. In addition to the above points, if the bill passes in New Jersey, we will likely see dramatic limitations to the “who, what, where and when” of the legal recreational marijuana business.

*****
Richard G. Lyons is an associate at Bertone Piccini in Hasbrouck Heights, NJ. He concentrates his practice in the areas of business/corporate dealings, real estate and health care. This article also appeared in the New Jersey Law Journal, an ALM sibling publication of this newsletter.