Financing A Crime: Marijuana Businesses Struggle To Borrow While The Drug Is Still Illegal At The Federal Level
Marijuana is still considered an illegal drug under federal law, a fact that has proved challenging for pot companies working to expand their commercial footprint.
As the medical cannabis industry grows in 26 states and Washington, DC (recreational use is only legal in eight states and DC), only a handful of specialty lenders are willing to finance this federal crime.
“Under the Controlled Substances Act, cannabis businesses are illegal, and most banks are federally insured,” D|R Welch Attorneys at Law lawyer Andy Kaver said. “So many banks cannot lend or choose not to lend to marijuana businesses because those funds wouldn’t be insured.”
The pot industry is still incredibly difficult to finance nationally, said Dominic Sergi, president and CEO of real estate investment firm Clear Height Properties and co-founder of medical marijuana cultivator Cresco Labs. Many marijuana businesses have to skirt the law and trick the federal government into thinking they are a normal business, Sergi said.
Perks For Private Investors
More recently, wealthy private investors have been buying up real estate zoned or licensed specifically for weed cultivation, manufacturing or distribution, and then leasing that space to pot businesses looking to expand. But this model often comes with a catch. Private investors get to name their price because funding options are so few, sometimes charging high premiums or boosting interest rates.
“If you want to buy a property to conduct your business, you can’t just go to any bank,” said Brian Yauger, president of cannabis tracking and reporting website Lemonhaze Inc. “There are many private groups and specialty firms that will happily fund these businesses, but they charge extreme rates.”
That is not to say that public recognition of this industry is not growing. Just this past December one of the first cannabis REITs to trade on a major exchange went public, raising $67M during its initial public offering at $20.52/share. The San Diego-based REIT, called Innovative Industrial Properties, acquires industrial properties approved for cannabis facilities and rents them out in sale-leaseback transactions.
Landlords Remain Wary
There are many reasons why most traditional landlords refuse to lease to cannabis businesses, Yauger said, most of which have to do with a number of real or perceived risks.
Retail landlords may not want to deal with the negative perceptions of the industry or the smells of the cannabis product; and some simply prefer not to lease to controlled substance retailers. As for industrial, heightened challenges for cannabis sites often include increased security requirements and tenant improvements for indoor agriculture.
On the flip side, not all cannabis businesses are at the mercy of landlords; some own their own real estate. Attorneys like Kaver assist pot businesses that own their own real estate in mitigating risks by establishing two separate entities: a cannabis business and a landlord. Businesses can then lease a building to themselves and use the rental contract to allow for possible lease termination if federal laws prevent the cannabis business from operating as planned.
The 'Secret Sauce' Behind Banking Systems
Sergi said the taboo surrounding marijuana is waning, if not already gone, but the lack of affordable financing options in the industry remains.
“We still see many cannabis businesses operating in 100% cash and trying to figure out how to get that cash into the banking system,” he said.
That is where Sergi's Cresco Labs, a medical cannabis manufacturing company, has benefited. The lineage of Sergi’s two companies come from the banking world. When Cresco Labs leaned on Clear Height Properties, a real estate investment firm, for industrial space, Clear Height procured traditional financing for the cannabis company.
“We have the advantage of talking to bankers as other bankers. We can get traditional financing for cannabis businesses, that’s our secret sauce,” Sergi said.
If federal laws change to recognize marijuana as a legal substance, traditional lenders will likely enter the space in high volumes. Sergi thinks medical cannabis businesses will have an easier time getting financing than recreational businesses.
"Over time, the industry is only getting stronger and better, but it’s still extremely difficult to navigate,” he said.