Are you considering entering the (legal) drug trade? What if you were merely the financier of an operation – like cannabis – in CA? When your borrower defaults, do you have to lose, too? No! Here are some great ways to make the skunk weed stop smelling so bad.
If your borrower is involved in an illegal drug operation, much of your collateral is subject to seizure. When that happens, various state and federal government agencies will send notices of intent to consider your collateral surrendered, and seek to auction it. You’ll want to carefully review those notices, and appropriately (and timely) object to them. In an ordinary case, as long as you were not aware of, or participating in, the unlawful conduct, the government will return your collateral to you. Note: do not then return that collateral to your borrower. If it was the instrumentality of a crime once, it likely will be again. Should the government seize it a second time, it will not be returned to you. Among the conditions of its release to you the first time will be your promise not to provide it to the borrower, or allow it to be used in the conduct of a crime again. Sell your collateral and reduce the balance owed to you by the net proceeds.
That sounds dangerous. Does the news get worse than surrendered collateral? Is there any criminal exposure/RICO liability to a lender in these circumstances? Almost never. The only way you’d be held criminally culpable is if you knew that your borrower intended to use your money to commit crimes, or you participated in the commission of those crimes yourself.
Whew! Well, lets focus on the (un)ordinary financing parts of these relationships and the transaction.
Collateral:
Insist your borrower pledge his ‘grow license’ as collateral at the onset. It costs him nothing to do this, and it is likely no other creditor thought to get a security interest in it. The license is (odds on) the most valuable item held by the borrower (the permitting process is expensive and time consuming), but it is useless to him without his farm. Therefore, no reason exists that he shouldn’t pledge it to you. Still, you will need to contend with the California state licensing agency for a transfer (you can’t just start farming pot yourself), but you’ll have accelerated some of the application formalities, and placed yourself at the front of the line for consideration. It can’t hurt, and as mentioned, this is the borrower’s most valuable holding. If nothing else, it may inspire him to keep his loan performing.
Obviously, you’ll have a Deed of Trust related to the real estate which encompasses the farm. Also, obtain and file a personal property financing statement (UCC-1) for the equipment. Itemize and attach an inventory list – much of the equipment related to the agriculture of the plants are quite expensive, and valuable. To the extent his memory (and focus) fails him, and he can’t describe each piece of equipment, use a “all inventory” and “all equipment” collateral description. Remember: the fertilizer used in cultivation of this crop (bat guano) is among the most expensive substances on earth; by ounce, more expensive even than caviar.
Abandoned Personal Property:
Tenants frequently leave personal property behind when they vacate. It may be as simple as a box of trash or as complex as a farm loaded with belongings. The first step for a residential landlord is to determine if the property is worth less or more than $700. If you are unsure about the value, consider asking a second-hand dealer to give you an estimate. Recall that some of the property is tremendously valuable (in this context: the grow lights, fertilizer, and left over ‘inventory’). This assumes you did not get and file a UCC-1 related to the property.
If There Was a Lockout Conducted by a Sheriff following an unlawful detainer lawsuit, you’ll want to follow these five steps.
Step One: Part of the documentation from the Sheriff provides notification of the abandoned property. Keep the property in a reasonably safe place for fifteen calendar days starting the day after the Sheriff’s lockout. If you move the personal property, you must do so carefully and keep it secure.
Step Two: The owner of the personal property (usually the former resident) has a right to collect the property during the fifteen days following the lockout. You must allow reasonable access, but you can require that the personal property owner pay reasonable storage costs as a condition of returning the property to them, unless the owner claims the items within two days after vacating. If the owner claims the personal property within two days, you cannot charge reasonable storage costs. You also cannot insist that any past due rent be paid in order for the former resident to get the property back.
Step Three: If you are not contacted about the personal property and its total is less than $700, you may dispose of the property any way you see fit. This includes keeping the property for yourself.
Step Four: If the value of the property is worth at least $700, a public auction is necessary. Before the auction, you must publish a notice of the sale, describing the abandoned property once per week for two consecutive weeks in a newspaper of general circulation. The sale must be held at least five days after the last notice was published in the newspaper. If you conducted a non-judicial foreclosure sale related to the real estate, this will be your second auction related to this loan. At the auction, you may bid on any items you like and keep any items you successfully bid on, as well as those which have no bids. [Author’s suggestion – make the opening bid for each item at least $700].
Step Five: You may want to employ the services of a professional auctioneer. The sale proceeds are used to reimburse you for the storage and auction costs. The balance must be given to the former resident, or if the resident cannot be located, to the county treasurer’s office within thirty days from the date of the sale. If your borrower still owes you money, place a constructive trust on the proceeds.
If there was no lockout by the sheriff, you must mail a “Notice of Right to Reclaim Abandoned Personal Property,” in a statutorily prescribed form, to the personal property owner’s last known address. The notice must contain language notices letting residents/former residents know they have rights to reclaim abandoned personal property under certain conditions, that they may be able to reclaim the property without incurring additional costs, and the sooner they act to reclaim the property, the less costs are likely to be. Keep the property reasonably safe for 18 days after the date of the mailing. Follow Step 2 from the section above if someone comes to retrieve the property. If you do not hear from owner of the personal property during the notice period, you may dispose of the property as described in Steps 3-5 above.
Conclusion:
The “players” in these transactions are oftentimes quite colorful. The promises of huge revenue grow tall. Keeping a sober outlook on the pledge of collateral, its auction value, and the moving parts of the transaction are essential at the underwriting stage. Upon default, you have all the ordinary real estate collection remedies, plus a few which are uncommon in your remaining portfolio. Keep them in mind.
Geraci Law Firm is well-versed in the creation of loan documents that pertain to Cannabis properties to protect your interests. Contact us today with all of your Cannabis-lending questions.
