Most cannabis real estate transactions in California involve a dual escrow. When a licensed cannabis operation sells, the real estate and the business are frequently two separate assets governed by two separate legal frameworks, requiring two separate escrows running concurrently. Coordinating both to close simultaneously, without one collapsing the other, is where most cannabis deals succeed or fail.
Discovery: What Has to Be Understood Before Anything Goes to Market
Every engagement begins with the same set of questions. Who owns the real estate? Who owns the business? Are they the same entity, or are they different parties with different interests? If different, are they aligned on selling, or is one party reluctant?
These are not formalities. In cannabis, it is common for the real estate to be held by one entity while the licensed business is held by another with its own cap table of investors. The relationship between those parties, whether aligned or adversarial, determines how the transaction gets structured, how value gets allocated, and whether the deal closes at all.
Before anything is priced or marketed, Zaki Properties needs to understand the full picture. That means getting on the ground to assess both the real estate and the operation. Is the business operational or is it a non-operating license holder? If operational, is the staff willing to transition to a new owner? Staff continuity provides meaningful optionality for a buyer who does not want to recruit and train an entire team from scratch, and it is a selling point worth knowing before the first conversation with a potential acquirer.
On the real estate side, Zaki Properties produces a Broker Opinion of Value to establish the property’s market position.
On the business side, the work is more granular. Three years of financials. EBITDA analysis if the operation generates revenue. Tax liabilities that would need to be satisfied to close escrow. Depreciation schedules, balance sheet items, equipment lists, and a complete inventory of what the acquirer will actually be buying. The objective is to build a clear, defensible picture of the business so that nothing hidden surfaces mid-escrow and stalls or kills the transaction.
If the seller does not have legal counsel retained for the business sale, Zaki Properties introduces them to cannabis attorneys who specialize in asset purchase agreements or stock purchase agreements. This is not optional. A business sale without experienced legal counsel is a business sale that does not close.
Value Allocation and the Financing Question
Before going to market, two structural decisions need to be made.
First, value allocation. If the real estate and the business have different ownership, the cap tables are different, and the interests are different, the price may need to be pre-allocated between real property and business before the asset is marketed. This gives both parties clarity on what they are receiving and avoids a negotiation between seller-side parties happening in front of a buyer. If ownership is unified and the sellers are open to flexible allocation, the asset goes to market at a combined price. The buyer and their tax and legal advisors determine how value is allocated between real property and business assets based on their own tax and financing considerations.
Second, seller financing. In cannabis, traditional bank financing is largely unavailable for business acquisitions. A handful of community banks are willing to lend on cannabis assets. Private lenders will lend at rates significantly above commercial banking. The practical result is that many cannabis transactions are facilitated by seller carry. Understanding whether the seller is willing to carry a note, and on what terms, is a conversation that happens before the asset goes to market, not after an offer comes in.
Zaki Properties maintains relationships with both private lenders and community banks that are active in the cannabis space. Connecting a qualified buyer to capital that can actually close is part of the advisory engagement, not a separate process.
Two Escrows: How the Transaction Splits
Once an offer is accepted, two escrows open.
The real estate escrow is a standard California real estate transaction. Title, inspections, lender requirements if applicable, and an AIR form or equivalent purchase agreement.
The business escrow is a bulk sale escrow governed by the California Uniform Commercial Code. The definitive document is an Asset Purchase Agreement or a Stock Purchase Agreement, preceded by a non-binding Letter of Intent. The APA or SPA covers the transfer of the license, equipment, inventory, contracts, intellectual property, and any other operational assets.
These two escrows are handled by different escrow officers, sometimes at the same company, sometimes not. They run on different timelines with different contingencies. The real property close is typically conditional on milestones being met on the business side, including execution of definitive documents and, critically, the Management Services Agreement.
The MSA: Bridging the Gap
The DCC license does not transfer automatically with the sale of real estate or a business. The buyer either applies for a new license or acquires the existing business entity and retains the seller as an owner during the transition period. Either path takes time.
The Management Services Agreement bridges that gap. When the real property closes and the buyer takes ownership of the physical asset, the MSA allows the buyer’s entity to operate the facility under the seller’s active license with legal indemnification to the seller. The seller’s business stays alive on paper while the buyer runs the operation. This is how concurrent closings work in practice. The real property and the business close at or near the same time, and the MSA governs the operational transition until the license is fully transferred.
Where Deals Die: The Reps and Warranties Negotiation
The price is typically negotiated before definitive documents are drafted. By the time the APA or SPA goes to legal counsel, both sides have agreed on the economics. What has not been agreed on is liability.
Representations and warranties are the terms that define who is liable for what and for how long after close. The seller is representing that the business is what they say it is, that the financials are accurate, that there are no undisclosed liabilities, that the licenses are in good standing. The buyer is relying on those representations to justify the purchase price.
This is where deals die.
Attorneys negotiate worst-case scenarios. Their job is to protect their client from the maximum possible exposure. The language they draft reflects that mandate. It is protectionist by design. In cannabis, where regulatory risk is elevated and operational history may include periods of ambiguity, the reps and warranties negotiation can become adversarial quickly.
Zaki Properties stays in the room during this phase. Not as legal counsel, but as a second sounding board for the client. When an attorney presents a worst-case scenario and recommends austere protective language, the advisor’s role is to assess the probability of that scenario actually occurring and help the client distinguish between genuine risk and theoretical risk. There are places to give that are in the seller’s best interest if their objective is to close. Identifying those concessions, while holding firm on the terms that actually matter, is where advisory value is created.
In practice, if the advisor is hands-off during definitive documents, the transaction often stalls. Both sides retreat into their attorney’s risk framework and the deal loses momentum. Staying involved, managing communication between the parties, and providing practical perspective on what is reasonable keeps the transaction moving toward close.
Managing the Process
From LOI through close, Zaki Properties functions as the conduit between the escrow company, legal counsel, and the clients on both sides. The advisor manages the timeline, the conditional sequencing between the two escrows, and the communication flow that keeps all parties aligned.
This is not a passive role. It is active, daily management of a process involving multiple attorneys, multiple escrow officers, and frequently multiple parties on the seller side who need to agree before any document is signed.
Frequently Asked Questions
What is a dual escrow in cannabis real estate?
A dual escrow occurs when a cannabis operation sale requires two simultaneous escrow processes. The real estate transfers through a standard real estate escrow. The business, including the license, equipment, and operational assets, transfers through a bulk sale escrow governed by the Uniform Commercial Code. Both must close concurrently.
Can a cannabis license transfer with the sale of real estate in California?
The state DCC license does not transfer automatically with the real estate. The buyer either applies for a new DCC license or acquires the existing business entity and retains the seller as an owner on the license during the transition period. Separately, the local municipal permit, whether a Land Use Permit, Conditional Use Permit, or business license accompanying the LUP or CUP, must also be transitioned prior to close. The Management Services Agreement governs the state license during the transition period but does not cover the municipal permitting process, which is handled directly with the local jurisdiction.
What is a Management Services Agreement in a cannabis transaction?
An MSA is a legal agreement that allows the buyer’s entity to operate a cannabis facility under the seller’s active license after the real property has closed but before the license transfer is complete. The seller maintains their license while the buyer operates the facility with legal indemnification to the seller.
What happens if the real estate closes before the business sale is complete?
A Management Services Agreement is executed between the buyer’s entity and the seller’s entity. The seller keeps their business and license active while the buyer operates the facility under that license with legal indemnification. This bridges the gap until the license transfer or new license application is finalized.
Jamie Warm is a Cannabis Advisor at Zaki Properties, a cannabis real estate and business advisory firm operating across California.
805.722.7095 | Jamie@WarmstoneAdvisors.com | zakiproperties.com
