Crackdown On Unlicensed Cannabis Shops Triggers Alarm For Landlords

D.C.’s new era of cannabis regulation is here, and that means the days are numbered for a retail market that has operated in a gray area for the past decade.

After opening up the regulated cannabis market last year — lifting the cap on medical licenses and allowing anyone over 21 to self-certify for a medical card — city officials are moving ahead to deal with the nearly 100 unlicensed cannabis retailers that remain open.

And if their landlords don’t take action to remove the illegal shops, they may be held accountable.

Following legislation the D.C. Council passed in January, the Alcoholic Beverage and Cannabis Administration can now issue fines of more than $10K to property owners with unlicensed cannabis tenants. 

The agency has ramped up its enforcement of cannabis retailers and their landlords after the council passed emergency legislation in July clarifying ABCA’s authority to conduct inspections and gave the agency “clear statutory authority” to close businesses and seize contraband cannabis.

On Tuesday, the council unanimously voted to make both those pieces of legislation permanent.

“To be able to look at what is going to motivate people to follow the law and get into compliance and get into licensure, you’ve got to understand that the landlords have skin in this game too,” Ward 6 Councilmember Charles Allen, who introduced the January bill, told Bisnow.

Allen said the city’s crackdown is part of an effort to support the growing number of cannabis businesses that are playing by the rules and paying taxes. Legal operators told Bisnow they are anxious for swift enforcement of the unlicensed shops, which they say pose unfair competition.

“Their sales continue to grow and ours continue to shrink,” said Grace Hyde, director of commercial and production operations at District Cannabis, a licensed medical dispensary in Union Market.

The crackdown is also a matter of safety. With the unregulated market, there is no oversight determining where the product comes from or what is in it. 

“We've had cannabis seized laced with fentanyl. Like, this is dangerous stuff,” Allen said. “And so for people who do want to consume, we've got a tested and a trusted marketplace in the legal cannabis businesses, and that's where people should be going.”

But the practice of putting liability on landlords is a departure — ABCA doesn't fine landlords in its enforcement of the city’s liquor license laws.

“I don't think they’ve ever done this before,” said ArentFox Schiff partner David Grosso, a former D.C. councilmember who led previous cannabis legislative efforts and now represents a medical dispensary in Takoma. “Usually they go after the alcohol license operator. Whoever owns that alcohol license is the one that gets in trouble.” 

Over the last six months, a joint task force of D.C. agency employees has launched a series of enforcement efforts: earmarking unlicensed shops and going door to door — in some cases undercover — gathering evidence, issuing warnings and padlocking storefronts. In one case, an owner was arrested.

Five establishments selling cannabis illegally were shut down last month, ABCA announced, in an initial round of enforcement. Officials seized pounds of illegal weed, including products laced with amphetamines from at least two locations, psychedelic mushrooms at four and a substance that tested a preliminary positive for opium at one. The five were openly selling cannabis for cash.

But they are just the tip of the iceberg. Nearly 100 more illegal locations remain, ABCA Director Fred Moosally told Bisnow. The joint task force has conducted 124 inspections of unlicensed shops since March, and ABCA has issued 84 warning letters and 23 cease and desist orders. Moosally said he expects closures to average one to two a week over the next few months.

Under ABCA’s enforcement process, which kicked off in March, landlords are issued notices of actions it takes against tenants — first a warning, then a cease and desist, and then notice of a summary closure. Moosally said most of the landlords have been cooperative and are engaging with their tenants. Some have taken tenants to court, he said. And no fines have been issued thus far.

But the city’s top landlord lobbying group, the Apartment and Office Building Association, is expressing concern after some of its members received cease and desist letters in July and began asking for guidance. AOBA sent out a bulletin to its members at the beginning of September titled “DC Government Begins Unlicensed Cannabis Shop Crackdown,” warning that ABCA is empowered to hold landlords liable. 

“There is some confusion amongst property owners about this,” AOBA Director of Policy Communications Alex Rossello said. 

It is a radical change for property owners after a decade of no enforcement on either operators or landlords. D.C. voted to legalize recreational cannabis in 2014, but shortly after, Congress halted the change in its tracks, preventing the District from developing a regulated market and taxing recreational sales.

That push-and-pull allowed a gray market to develop, in which some shops opened under the guise of gifting cannabis — you buy a shirt or beverage for an inflated price and receive a cannabis “gift.”

But many have also taken to just selling weed for cash, Moosally said. 

There has been a legal market for medical cannabis since 2010, but just eight retail shops have been permitted in the city. 

A law that went into effect in March 2023 lifted a cap on the number of locations and allowed individuals to self-certify, unlocking the potential for a widespread industry in the regulated — and taxable — realm.

It opened a phased licensing process, allowing new and existing cannabis operators, including gifting shops, the chance to obtain retail, cultivation, manufacturing and courier licenses through ABCA. The final application period closed at the end of August.

ABCA has a live tracker of licensed and unlicensed shops and the enforcement measures it has taken. That tracker lists 14 licensed medical retailers across the city.

Of the roughly 100 unlicensed properties it lists, some aren’t directly associated with the buildings listed at their addresses, Moosally said. Some may be the locations where dispensaries are conducting curbside pickup, he said.

HighVibez DC advertises two downtown locations and one Navy Yard location for “curbside and delivery service only,” noting that they are not in-store locations, but each of the addresses is listed on ABCA’s enforcement dashboard. 

The DC Dispensary is listed at Columbia Square at 555 13th St. NW, a 601K SF property near Metro Center owned by German asset manager MEAG. The dispensary's website says it does curbside pickup and delivery.

A MEAG spokesperson said the dispensary listed there “is not, nor has ever been, a tenant of ours.” 

ABCA’s map shows three unlicensed locations at The Wharf, the city’s waterfront megaproject in Southwest.

District Wharf Properties President Andrew Son said the businesses have no affiliation with The Wharf or its retailers and are “illegally using existing business addresses.”

Son said Wharf leaders are collaborating with the Metropolitan Police Department, the Department of Licensing and Consumer Protection, its local advisory neighborhood commission and ABCA, and they “urge them to take immediate action against these unauthorized online operators that are negatively impacting businesses throughout the District.”

Some of the known unlicensed establishments flagged by ABCA are also in large apartment buildings. Brookfield’s Foundry Lofts at 301 Tingey St. SE appears on the dashboard as one such operator. 

“For non-payment of rent and breach of lease terms, we commenced an eviction proceeding in 2023 for the unit in question,” a Foundry Lofts spokesperson told Bisnow in an email.

While the fines are causing concern among landlords, proponents argue they should act as a strong motivator for property owners to jump to action. 

“They're going to see some examples being made of other landlords, and they're going to adjust their business model and not allow these illegal gifting shops the opportunity to open up shop in their buildings,” Grosso said. 

AOBA’s Rossello said the landlord association is in talks with the Department of Licensing and Consumer Protection and is asking for more clarity on the fines that could be assessed. 

“It seems like a bit of a gray area regarding our members’ liability in these situations,” he said. “So we just want to make sure that we can get clear guidelines so we can share with members, like here's the framework of the enforcement on this, and you guys can make business decisions based off of this information.”

City officials say the operators and landlords have been given ample warning. 

“We've given landlords warnings and given them copies of the actions taken against the unlicensed businesses,” Moosally said. “They know what's going on. A number of the licensees have been working with us, taking landlord action [in] landlord-tenant court against unlicensed establishments. So I think we've done what we can to work with landlords.”

A new trade association for licensed and placarded owners is taking measures into its own hands. In July, District Cannabis’ Hyde founded the Regulated Cannabis Association of the District of Columbia, which sent a letter to AOBA last month asking for cooperation in educating landlords about the illegal and legal marketplaces.

“A lot of the landlords of the unlicensed businesses don't know that their tenants are operating the business they're operating or that their business is not actually licensed through ABCA,” Hyde said.

The goal is twofold, she added: to “educate them on who they are renting to, and then hopefully show some of them that renting to a legal cannabis operator is not a bad thing.”

Hyde said landlord education is vital in an environment where the legal shops are competing with the pervasive unlicensed market.

“They don't have to pay taxes, they don't have to pay fees, they don't have to comply with regulations and laws. I mean, it's just a huge advantage,” Grosso said.

The unlicensed businesses also take away some of the scarce real estate where landlords are willing and able, due to their financing structure, to lease to cannabis operators. 

Hyde and Grosso said unlicensed businesses are typically trafficking product into D.C. illegally, a federal crime, while licensed operators are required to secure cannabis from suppliers in the District.

“The legal market is really struggling, continues to contract month-over-month,” Hyde said. “So we really need to close the unlicensed sector of the market to support the licensed businesses.”

As the enforcement ramps up, advocates say they would like to see ABCA move faster, but they understand that there are bureaucratic constraints.

There is only one ABCA investigator for the whole effort. An ABCA spokesperson told Bisnow the agency is working on expanding its cannabis enforcement team and “investing in new tools that will aid its investigations.”

“They’re putting the work in now, but I think myself and, frankly, a lot of neighbors would like to see them more quickly with a focus on the illegal, unlicensed businesses,” Allen said. 

Hyde pointed to how New York has handled its illegal operators as an example for how D.C. should go about its enforcement. The city had padlocked 779 stores and issued $65.6M in penalties as of Aug. 1. 

She said legal operators were initially worried when they didn’t see movement after the January legislation laid out how ABCA would undertake enforcement, but the last month has sparked optimism. 

“Seeing sustained efforts in the last few weeks to close these businesses feels really promising,” Hyde said.