As thousands of entrepreneurs join the rush to capitalize on an emerging market, they are learning that the two most significant hurdles they face are banking and insurance. Whether a cannabis business owns the property or leases, a lack of availability of title insurance can cause uncertainty for both the business owner and investors.
In the early days of state legalization, many title insurance companies operating in the cannabis space by issuing policies that were subject to certain exclusions. Exclusions for civil or criminal forfeiture and limitations on handling escrows were typical at the time. Although policies were issued differently based on state laws, it was generally relatively easy to obtain insurance for cannabis-related properties.
In early 2017, just as more states were considering legalizing marijuana, title insurance companies started to have second thoughts about issuing policies that involved an escrow, because of the reluctance of the banking industry to handle cannabis cash. This predicament pushed title companies into refusing to either take on insuring cannabis properties or at least rebuffing the escrow portion of the contract. Some law firms stepped in to fill the void in handling the escrow transaction, as long as title companies would agree to insure the property.
Why there is Trouble Obtaining Insurance
In April 2017, Fidelity National Financial, sent underwriting bulletins to its affiliated title underwriters specifically prohibiting the handling of escrow or issuing title insurance for land that was planned for use in the cultivation, manufacture, sale, or distribution of marijuana or marijuana-related products.
Once Fidelity, the world’s largest title insurer, rejected cannabis properties, many other title insurers began to follow suit. Whether or not Fidelity caved to government pressure to back away from the cannabis market is unknown, but with Trump’s Attorney General, Jeff Sessions, being vehemently opposed to marijuana, it was clear to Fidelity that insuring marijuana businesses was not in their short-term plans.
So, with both the banking industry rejecting marijuana monies, which made it extremely difficult to process escrow transactions, and the administration’s apparent open hostility to marijuana markets even in states where it was legal, it essentially doomed business owner’s prospects of obtaining title insurance for their properties.
Fidelity now requires that the seller and buyer of real estate sign an affidavit attesting that the property is not, and will not be used for any purpose related to marijuana production or distribution. This stipulation clears the way for the title insurer to issue a policy without being surprised at closing with an undisclosed cannabis-related hiccup.
The issue complicates traditional transactions where banks that are involved require the issuance of title insurance. Although cash purchases don’t require a title policy, buyers proceeding without title insurance places themselves in a precarious position.
A Growing Market Leads to New Optimism
The news is not all bleak, however, as new developments bode well for cannabis businesses. A new attorney general has been sworn in, and the cannabis market continues to grow, with several more states expected to legalize cannabis over the next year. Hemp, a strain of cannabis that has no high-inducing THC, has been sanctioned at the federal level, and several bills are floating around Congress that could remove marijuana from the Federal Schedule 1 drug designation.
As legislators take up debate on whether cannabis should become legal federally, some significant developments are already occurring.
- The 2018 federal Farm Bill legalizes hemp as an agricultural commodity, allowing for legal cultivation, production, and sale. President Trump signed it into law on December 20, 2018.
- On February 28, 2019, Sen. Cory Booker (D-NJ) reintroduced the Marijuana Justice Act in the U.S. Senate. The law would remove cannabis from the Drug Enforcement Administration’s (DEA) Schedule I, the same regulatory class as heroin and cocaine.
- In August 2018, 13 state bank regulators formally requested that Congress develop legislation that creates safe harbors for financial institutions servicing the cannabis industry, joining numerous governors and state attorneys general who had previously requested such legislation. The Trump administration has voiced its openness to negotiate in a bipartisan fashion.
- In September of this year, the FDA approved the first drug to utilize the marijuana plant-derived ingredient cannabidiol (CBD) – but it can’t be sold in the U.S. until the DEA removes cannabis from Schedule I.
For the most part, federal law enforcement has been concentrating on pursuing black market growers and distributors of marijuana. State-licensed entities, as long as they are operating with the appropriate state and local permits and following the municipal code, are generally left alone without interference.
Both state and federal agencies agree that the elimination of the black market is critical to regulating an ever-growing legal framework.
Some insurers are beginning to come back online and develop policies that will provide insurance to cannabis properties, and though there are only a handful of carriers, more are indicating they are ready to jump back into the marketplace.
Banking for cannabis businesses is starting to emerge as well. With over 400 community and state banks now offering at least some financial services to the cannabis industry.
For investors or businesses entering the cannabis space, it is critical to evaluate each property you are considering with an attorney that understands the nuances of federal cannabis law, title policy, and who is up to date on state and local statutes that may affect the purchase and use of the property.