United States: But My Dispensary Tenant Is Cash Flow Positive, Why Can't I Get A Loan?

Marijuana is a $10 billion industry, legal in some form in 33 states plus the District of Columbia, Puerto Rico and Guam. Yet some banks and other commercial real estate lenders are sitting on the sidelines. Why? This article explains some of the why, as well as who are among those filling in the lending void and what the future holds for commercial real estate lenders and the marijuana industry.

Why Are Lenders Not Lending to the Marijuana Industry?

Despite the shift in state legalization, the possession, sale, processing and use of marijuana has remained illegal under Federal law since Congress passed the Controlled Substances Act (CSA) in 1970. The CSA classifies substances into five schedules, with Schedule I signifying the class of drugs with no potential medical value and the highest potential for abuse. Marijuana, along with heroin, LSD and certain other drugs are considered Schedule I substances.

Marijuana related businesses (MRBs) are also impacted by other federal laws relating to commercial real estate. The same year that Congress passed the CSA, it passed what is known as The Crack House Statute which makes it a felony to knowingly open, lease, rent, use or maintain any place for the purpose of manufacturing, distributing or using any controlled substance...like marijuana. The Federal Government uses this law to seize properties tied to the drug trade; however, with one exception, a failed attempt to evict a dispensary in Oakland in 2012, it has never used the law to seize a property housing an MRB that is complying with state law.

In addition to laws aimed primarily at the drug trade, there are other federal laws and rules relating to MRBs that impact financial institutions. In early 2014, in spite of marijuana being illegal under federal law, US Treasury's Financial Crimes Enforcement Network (FinCEN) issued a series of non-binding guidelines for financial institutions intending to do business with MRBs. These guidelines imposed a significant administrative burden on financial institutions dealing with MRBs, and, coupled with the potential for severe penalties, have discouraged most financial institution from dealing with MRBs. In the same year that Congress passed the CSA, it passed the Bank Secrecy Act aimed at preventing money laundering. Under the Bank Secrecy Act, a financial institution is required to file a Suspicious Activity Report (SAR) within thirty days of a suspicious transaction. This includes any transaction involving an MRB. As of early 2019, over 500 financial institutions have filed SARs dealing with marijuana transactions. Most of the financial institutions dealing with MRBs are community banks and credit unions who know their employees, know their customer base, and can therefore better monitor and keep track of marijuana related transactions. This constitutes only a small percentage of financial institutions and these SARs pertain almost exclusively to depositary relationships, rather than full-service banking relationships. Very few financial institutions are lending against commercial real estate used by MRBs.

Who is Filling the Void?

Commercial real estate is critical for growing, processing, storing, manufacturing, and selling marijuana and marijuana products. With very few financial institutions lending against commercial real estate used by MRBs, a substantial void is left to fill for this rapidly growing industry – so who will step up to the plate?

The answer, in brief, is alternative financing sources. While some commercial real estate used by MRBs is financed solely with equity, sources such as some private equity funds, family offices, private lenders, and even entrepreneurial opportunity zone lenders are lending to MRBs and their landlords. Because conventional sources of financing are unavailable, alternative financing sources are able to lend to the industry in exchange for higher returns, and therefore are willing to look past the banking challenges, and the potential for the unavailability of title insurance. (Major title insurance companies are concerned about insuring title for property used by MRBs for the same reasons that banks are reluctant to serve MRBs.)

Some of the alternative lending sources are willing to engage in sale leaseback transactions and, in lending transactions, are willing, and sometimes eager, to take equity in an MRB borrower as compensation for the risk of lending to an MRB.

A possible new and interesting player in investing in commercial real estate used by MRBs may be opportunity zone funds. While some question how a creature of federal law can provide funding to an industry that operates in violation of federal law, some opportunity zone fund promoters argue that the legislation that created opportunity zones did not expressly prohibit opportunity zone funds from investing in MRBs.

So what are market terms for MRB lending?

It is very hard to say what is market in the Wild West. Very few market standards currently exist, although higher interest returns appear to be typical. A number of alternative financing sources also charge points and/or receive equity in the MRBs.

What Is Next for Commercial Real Estate Lending to MRBs? It may be some time before the dichotomy between federal and many states' laws is resolved, despite the plethora of bills introduced or reintroduced for consideration by the House and Senate. Until then, most traditional commercial real estate lenders may refrain from lending to real estate used by an MRB and the cost of funds for such businesses will continue to remain high, all of which may leave a clear field for opportunistic alternative lenders.

Some of the most notable bills pending before Congress would, if enacted into law, either legalize marijuana or provide a safe harbor to enable banks to provide financial services to MRBs operating legally under state law, even while marijuana remains illegal under Federal law. These bills include:

The Secure and Fair Enforcement Banking Act

The Secure and Fair Enforcement Banking Act (SAFE Act) was co-sponsored by 152 lawmakers, and was approved by the House Financial Services Committee in March 2019 in a 45-15 vote. The SAFE Act, the first piece of major marijuana reform legislation to pass committee at the federal level, would allow banks and credit unions to provide financial services to state-legal marijuana companies by offering a legal safe harbor for such financial institutions if they comply with a set of reporting requirements. As the first piece of marijuana reform legislation to pass a House committee vote, it has garnered a lot of publicity. However, in testimony before the House Financial Services Committee, those opposed to the passage of the SAFE Act testified that the bill had it backwards – Congress should first decide on legalization of marijuana before tackling the question of banking the marijuana industry. This testimony foreshadows a difficult time in the Senate, if the Senate even considers the bill, assuming it passes the full House.

The Marijuana Justice Act of 2019

New Jersey Senator Cory Booker reintroduced the Marijuana Justice Act. The Marijuana Justice Act would remove marijuana from the list of controlled substances, expunge existing marijuana-related criminal records at the federal level, and withhold certain federal funding from states that disproportionately enforce marijuana criminalization laws against people of color and lowincome individuals.

The Strengthening the Tenth Amendment Through  Entrusting States Act of 2019

The Strengthening the Tenth Amendment Through Entrusting States Act of 2019 (STATES Act) was reintroduced in both the House and the Senate on April 4, 2019. The STATES Act would amend the CSA to protect people complying with state-legal marijuana laws from federal intervention. The 2019 STATES Act is largely identical to a previous version introduced in Congress with two major exceptions: a previous exemption for hemp from the definition of marijuana has been removed (hemp was legalized at the federal level by the 2018 Farm Bill), and it now requires the Government Accountability Office to conduct a study on the effects of marijuana legalization on traffic (driving while impaired).

Respect States' and Citizens' Rights Act

Similar to the STATES Act, the Respect States' and Citizens' Rights Act, reintroduced in the current session of Congress, would amend the CSA to exempt states which have legalized marijuana from federal intervention and prevent federal preemption of states' marijuana laws. The Act would prevent the Federal Government from enforcing its prohibition on marijuana in states where it is legal for residents to possess and use marijuana.


The market for financing commercial real estate used by MRBs remains very fluid. Most institutional lenders will likely refrain from lending on such commercial real estate until federal law either legalizes marijuana or provides a safe harbor to allow lenders to provide such financing. Until that time, the market will be dominated by alternative financing sources seeking yields appropriate to assuming what is usually perceived as a higher risk.

Originally published by CRE Finance World

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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