Billions In Cannabis Debt Loom, But One Lender Sees Plenty Of Green Ahead

For cannabis companies looking for financing in 2025, debt is increasingly their drug of choice. 

A cannabis real estate sector formerly loaded with equity capital has made an about-face toward debt as legal uncertainty and tighter margins sent equity investors heading for the hills.

Debt financing eclipsed equity as the industry’s favored source of capital in 2022. The moves have led to upcoming loan maturities that could see up to $6B come due by the end of 2026, mirroring the impending maturity wave in the broader CRE market.

How that plays out has some bracing for a bust in an industry that has so far failed to make weed a reliable income stream. But one lender is confident in the bets it has made to date even in this uncertain environment.

Chicago Atlantic, which represents roughly 20% of the U.S. cannabis debt market share, counted $2.3B of closed cannabis loans as of the end of 2024, nearly all of them secured by retail or industrial properties.

The commercial real estate finance company and publicly traded REIT made its bets knowing that many borrowers in the space have little access to credit, whether from bank financing or the private credit industry, and that it is one of the few big players in a market facing a dearth of options.

“As the market's evolved, it's become a lot clearer where some of the ways of capital deployments have proven to be more resilient and more conservative,”  Chicago Atlantic Real Estate Finance co-CEO Peter Sack said. “Our debt strategies certainly show that.” 

The U.S. cannabis industry has experienced rapid growth, with retail sales in 2024 exceeding $32B, according to Business of Cannabis. As more states implement legal cannabis frameworks, the market is poised to grow to $55B by 2030.

Yet federal laws still limit banking services for the industry, and cannabis companies don’t have access to bankruptcy courts. This reduces protections for borrowers compared to more traditional asset classes while increasing risk for lenders.

Private debt has swooped in as its savior in the same way it has for asset classes like multifamily, increasingly filling the financing gap. 

Enter Chicago Atlantic. The lender, which manages a diversified portfolio of real estate credit investments primarily in the cannabis space, is one of only a few in the country consistently making loans greater than $10M to such companies, Sack said. 

The lender’s borrowers are cannabis companies that are either vertically integrated, meaning they own their cultivation facilities and retail, or they are diversified retail operators with numerous sites, Sack said. Borrowers already own the properties or have them under purchase agreements, and they are looking for Chicago Atlantic’s support to acquire them.

“We focus only in those states where there are a limited number of licenses to cultivate or sell cannabis,” Sack said. “That creates an environment where there's a regulatory barrier to entry and where the states aren't issuing new licenses. That means higher margins for our operators, higher predictability of revenues and much better credit quality for us as lenders.”

In jurisdictions with limited licenses, the company has a strong understanding of the competitive dynamics for the upcoming three years, Sack said. That’s because that’s the length of time it would take for a state to issue new licenses and award them and for companies to find real estate, build out cultivation facilities and deliver their first harvest. 

As a result, Chicago Atlantic Real Estate Finance structures its loans to be two to four years in duration. The loans are closer to two years for an operator who only has operations in one state and closer to four years for an operator who is diversified across multiple states because the regulatory risk is more diversified across a broader footprint.

Rates on the company's loans are in the mid- to high teens, or about an 800-to 1000-basis-point premium above similar mortgage indebtedness in the broader CRE market, Sack said. They’re also able to include protections, shorter loan durations and higher amortization than exists in the larger CRE market. 

“In this environment, we found that we could deploy capital at particularly low leverage and risk levels and a relatively high return profile when compared to the broader private credit markets, whether that's in real estate or non-real estate,” Sack said. 

Yet the company's practices landed it in the crosshairs as the sole lender for New York’s Cannabis Social Equity Investment Fund, which has faced multiple issues in its rollout. The fund has lagged well behind its goal of providing 150 businesses with storefronts, low-interest loans and support, opening just 22 shops as of the start of this year.

New York Gov. Kathy Hochul established the lofty goal in 2023 with the expectation more investors would be willing to take on investment risk even as the industry struggled elsewhere. Some legislators accused Hochul of entering into a “sweetheart deal” with Chicago Atlantic and panned the loans as “predatory,” a charge the lender refutes.

“We're very proud of the investment, it's performing well,” Sack said. “New York, like many jurisdictions, is still adapting its regulatory model, and there have been and will continue to be many bumps along the road. But we continue to be supportive of the social equity program in New York and dispensary operators in New York.”

On the federal legislative front, it’s still uncertain where the Trump administration stands on a process called descheduling, under which the Drug Enforcement Agency and the Department of Health would move cannabis from a Schedule I substance to a less restrictive Schedule III substance. That’s important because it changes the tax treatment of cannabis companies significantly, Sack said.

Currently, cannabis companies operate under a tax rule that doesn’t allow them to deduct most of their overhead operating expenses. This means cannabis companies effectively pay tax on gross profit rather than pre-tax net income, Sack said. If cannabis were to be rescheduled to a Schedule III substance, then cannabis companies would pay tax on their pre-tax net income just like any other corporation, increasing cash flows significantly. 

On a more positive note, cannabis companies are uniquely positioned and insulated from the impacts of tariffs. All of Chicago Atlantic's cannabis borrowers’ sales are domestic. The costs that are exposed to tariff threats are relatively minimal and limited to vaping devices, packaging and some consumables, Sack said. 

“All of the cannabis produced in our borrowers and sold by our borrowers is not only grown within the U.S., it's grown within the state of its operations,” he said. “It's hard to find an industry that's more localized and U.S. job-centric than the cannabis industry.”

Yet the wave of debt maturities remains a worry. 

In 2022, more than 42% of operators reported making a profit, according to a new report on cannabis delinquency by Whitney Economics. By 2023, that number had dropped to about 24%.

Report authors called delinquencies “an existential threat for the U.S. cannabis industry.” Delinquencies from large corporations and multistate operators are a particular worry, accounting for $1.4B or 36.4% of total delinquencies in 2023, according to Whitney.

Despite challenging market conditions, Sack said Chicago Atlantic’s portfolio remains strong, with one position on nonaccrual in its portfolio, a number that has been consistent over the last year.

That goes back to its strategy to focus on states with limited licenses for operation, Sack said. 

“The cannabis market as a whole is seeing some challenges,” he said. “It varies by market … You see some markets that don't have a particularly limited license structure, those markets become more competitive. You see wholesale prices declining in a product which eats into earnings profiles, which eats into companies’ ability to service indebtedness.”