Lenders Beginning to Open Up Capital for Cannabis Businesses

December 2, 2019 by Dennis R. Baranowski, Esq.

A cannabis real estate market worth tens of billions of dollars may finally be getting the recognition it deserves.

As the billion-dollar cannabis market continues to grow and evolve, the real estate sector built around the industry is expected to grow by tens of billions more.

Even as investors scramble to get in on the ground floor of an industry which, in all likelihood, will go national within a few years, banks have still been cautious about lending to cannabis businesses.

With 30 states legalizing marijuana usage in some form or another and cannabis banking bills making their way through Congress, it is only a matter of time before cannabis goes mainstream, and banks are beginning to line up.

Since marijuana is still considered a Schedule 1 narcotic at the federal level, banks have been slow to move forward until they see changes in the current regulatory issues surrounding legalized cannabis businesses.

Likewise, private lenders have limited their exposure by loaning on properties that may be removed from the industry, such as landlords who do not own a cannabis business but intend to lease space to companies manufacturing or selling marijuana products. Much of this consternation stems from the federal laws that prohibit federally-insured banks from conducting business in the cannabis space.

However, some lenders are now seeking out real estate buyers who intend to lease to the cannabis industry because lenders receive a premium when closing on cannabis properties. Interest rates are generally 25 to 100 basis points higher on cannabis-related loans to offset the added risk of lending in the space.

Although there is good money to be made by lenders by working in the cannabis marketplace, lenders must still be wary of the ramifications of changing state and federal laws that shape the industry. If local or state laws suddenly change, it could result in dispensary closures and cause tenants to break leases.

Right now, it appears banks and lenders are taking the cautious approach, even underwriting the properties as if a non-cannabis tenant were occupying the property. But as the industry continues to grow nationally, the buying of cannabis properties is a booming business. Local communities are slowly getting on board as local laws go into effect, and municipalities familiarize themselves with how to manage a burgeoning retail adult-use market.

Proposed legislation making its way through Washington looks more likely to favor lenders than hurt them. The House has already passed the Secure and Fair Enforcement Banking Act, or SAFE, which protects lenders and landlords who work in the cannabis industry from federal prosecution. It now moves on to the Senate, where industry experts hope they can get it passed before the holiday break begins.

Although the SAFE act offers some protections for the cannabis industry, banks and marijuana-related businesses still face challenges from credit card companies and third-party service providers who may not be ready to participate. Even if adult-use marijuana financial transactions are legal in California, they may not be permitted in financial hubs such as New York or Chicago, where some of these firms are headquartered.

If a reclassification of marijuana from a Schedule 1 substance to that similar to alcohol or cigarettes occurs, the financial doors swing open. Until that time arrives, banks are coming up with innovative financial solutions to provide needed capital to cannabis businesses.

As the cannabis industry evolves, financial institutions will follow. The financial sector’s interest is continuing to grow in the burgeoning cannabis market. Financial institutions will adapt more and more to cater to the cannabis industry.  Based on the current trends, it is no longer a matter of “if” cannabis businesses across the U.S. will be able to obtain all of the capital and financial services that they need to be successful long-term, but “when” will it eventually happen.  With the assistance of an experienced attorney, loans to cannabis related businesses can be structured to minimize the exposure to the lender.

If you have any questions about cannabis lending, reach out to Geraci’s Transactional team here.