Leasing to Cannabis Retailers Using MSO Structures: What Landlords Need to Know Before Signing
Categories: Cannabis leasing , landlord protections , legal insights , MSO structures
By: Sandeep S. Chandi, Esq. (Pasricha & Patel, LLC)
As retail cannabis continues to gain regulatory traction across the U.S., commercial landlords are fielding increasing interest from dispensary operators seeking to lease space. Many of these tenants rely on a Management Services Organization (MSO) to fund, operate, and manage their business, with services governed under a Management Services Agreement (MSA).
This MSO model has become a staple in the cannabis industry, especially in states like New York and New Jersey where cannabis licenses are restricted to individuals meeting specific ownership, residency, or social equity criteria. But while this structure may help cannabis businesses get off the ground, it presents distinct legal and operational risks for landlords, whether the licensee is the tenant or the MSO proposes to sign the lease directly.
This article outlines the risks, recommended protections, and business considerations landlords should assess when engaging with MSO-backed cannabis tenants.
Understanding the Structure: Who Is the Real Tenant?
In an MSO model, the license-holding entity (the “licensee”) is typically a newly formed LLC or closely held corporation created to meet the regulatory qualifications for licensure. However, that licensee is often undercapitalized, lacks operational expertise, and does not possess the funds or infrastructure to build out or operate a cannabis retail facility on its own.
To fill this gap, the licensee enters into a Management Services Agreement (MSA) with a separate entity, the MSO, that provides capital, staffing, equipment, supply chain coordination, compliance oversight, and branding. The MSO is frequently the true party in control, but is not the licensee and therefore cannot legally operate the cannabis business under state law.
Scenario 1: The Licensee is the Tenant (But Not Funded)
When the licensee signs the lease, landlords must be especially cautious. These entities are often thinly capitalized and heavily reliant on the MSO for capital infusions. This can expose landlords to multiple risks:
- If the MSO fails to fund the build-out, the space may sit dormant or half-completed.
- If a dispute arises between the MSO and the licensee, business operations may be interrupted, and the lease may default.
- If the licensee loses its license, the landlord is left with a tenant that cannot legally operate, and the lease may be worthless.
In these situations, the landlord’s only contractual relationship is with a tenant that has limited financial strength, no real operational history, and little control over its own fate.
Scenario 2: The MSO Wants to Sign the Lease Directly
Alternatively, some MSOs will propose to sign the lease directly, offering the landlord a stronger guarantor and a party with actual capital and infrastructure. While this may seem advantageous at first glance, it introduces a different set of legal risks:
- Most states prohibit non-license holders from exercising operational control of a cannabis business. If the MSO is the direct tenant but does not hold the license, this may trigger regulatory scrutiny and jeopardize the license altogether.
- Regulators may view the MSO’s leasehold interest as an unauthorized financial interest in the licensed business.
- If the MSO operates the site directly, the landlord could be seen as leasing to an unlicensed operator, potentially violating local zoning, land use, or cannabis-specific ordinances.
Additionally, the state may later determine that the MSO’s involvement constitutes a de facto ownership interest, resulting in fines or license revocation. This, in turn, could render the entire lease unlawful.
Key Protections and Negotiating Strategies for Landlords
To mitigate risk, landlords should require, without limitation, the following when negotiating with cannabis operators using an MSO model, regardless of whether the licensee or MSO is proposed as the tenant:
The lease should prohibit material changes to the MSA or ownership structure without landlord consent.
This ensures the landlord is not left with incomplete work or subcontractor liens.
- Guaranty by the MSO and/or Capital Partner. If the licensee is the tenant, require the MSO (or another financially viable affiliate) to guarantee the lease. This ensures that the party actually funding and operating the business has direct liability for rent and performance.
- Disclosure of Organizational Structure and MSA Terms. Landlords should request full disclosure of:
- The MSA;
- Organizational charts for both entities;
- The capital stack (who is funding buildout and operations); and.
- Any shared officers, managers, or overlapping control.
- Regulatory Compliance Representations. Include a robust representation and warranty clause that:
- Requires compliance with all applicable cannabis laws and licensing regulations;
- Prohibits illegal conduct on site;
- Allows the landlord to terminate the lease if the license is suspended, revoked, or the tenant is found to be non-compliant or conducting illegal activities.
- Build-Out and Funding Clarity. If the MSO is funding the improvements, the lease should:
- Identify who holds the contracts for construction and design;
- Require payment and performance bonds or lien waivers;
- State that tenant improvements revert to the landlord upon termination.
- Federal Law Disclaimer and Risk Allocation. Include a clause acknowledging that cannabis remains federally illegal, and that the tenant bears the full risk of any federal enforcement action. The lease should expressly disclaim landlord liability for changes in law or enforcement priorities.
- Expanded Termination Rights. The landlord should be able to terminate the lease or declare default in the event of:
- License revocation or regulatory ineligibility;
- Change in control of tenant or MSO;
- Breach of any MSA-related disclosure obligations.
- Lease Assignment and Subletting Restrictions. Prohibit subletting or assignment of the lease without prior written approval, and reserve the right to vet any proposed successor licensee or MSO.
- Increased Security Deposits and Personal Guarantees. Given the heightened risk associated with undercapitalized licensees and complex MSO arrangements, landlords should require enhanced financial security beyond standard lease terms. This may include a larger security deposit (e.g., 6–12 months’ rent), particularly if the tenant is not yet operational or the MSO is not directly liable under the lease. Additionally, the landlord should strongly consider obtaining personal guarantees from principals of the MSO or related entities with financial backing.
Conclusion: It’s Not Just About Who Signs the Lease - It’s Who’s Really in Control
MSO-backed cannabis tenants are not inherently problematic, but they do require a higher level of legal scrutiny, due diligence, and structural protection. Whether the licensee is the tenant and relies entirely on MSO funding, or the MSO proposes to sign the lease directly, landlords must understand how capital, control, and compliance intersect in this highly regulated industry.
The right decision ultimately depends on the landlord’s risk tolerance, leverage, and business goals, but no matter the arrangement, clear contractual protections are non-negotiable. With the proper lease structure, guarantees, disclosures, and termination rights, landlords can participate in the growth of this emerging sector while minimizing exposure to unnecessary risk.
If you’re evaluating a lease proposal involving a cannabis tenant or MSO-backed operator, the Commercial Real Estate team at Pasricha & Patel, LLC can help you structure terms that protect your investment and align with industry best practices. Contact Sandeep S. Chandi, Esq. for a confidential consultation.