Lenders like JPMorgan Chase and Wells Fargo and landlords like BentallGreenOak and Ashkenazy Acquisition Corp. have been pulled into the unlicensed cannabis market in New York City, potentially exposing them to legal liability, according to an analysis by PincusCo and Bloomberg.

A new law that took effect in July allows the city to fine landlords who knowingly lease space to tenants illegally selling cannabis up to $10K. While cannabis consumption is legal in the state, it is still illegal federally, and banks that are found to have been paid via cannabis sales could face regulatory penalties.

Smoke shops have proliferated across the five boroughs since New York legalized recreational marijuana in 2021, with as many as 2,000 unlicensed stores now in existence in the city. But leasing to tenants who are illegally selling cannabis is now exposing both landlords and their lenders to risk as NYC’s government agencies seek ways to clamp down on illicit sales.

More than two dozen landlords had multiple unlicensed cannabis stores as tenants, according to Bloomberg and PincusCo. It can be hard for some landlords to know if tenants plan to sell cannabis. In many cases, the retail storefronts were convenience stores or bodegas that also began to stock cannabis products alongside snacks and cigarettes.

One landlord who asked not to be named told Bloomberg that his tenants didn’t say they planned to sell cannabis when negotiating the lease and that he didn’t think he was responsible for enforcing the law.

Landlords seeking to eject tenants illegally selling cannabis have run up against a slow eviction system. After receiving notice from the Manhattan District Attorney’s Office, an Ashkenazy spokesperson told Bloomberg the company began trying to evict a Northern Manhattan tenant selling marijuana without a license, but the case won’t reach a courtroom until September.

A tenant in a building owned by BGO received a warning letter over cannabis sales, and a BGO spokesperson said the company filed a default notice against the tenant, Bloomberg reported. The Manhattan at Times Square Hotel, owned by a company controlled by Sheikh Faisal bin Qassim Al Thani of Qatar, also leases space to an unlicensed cannabis retailer, Bloomberg reported.

Banks are also potentially in line to get hit if they are found lending to owners who are taking in rent from cannabis sellers. A Bloomberg analysis of the hundreds of unlicensed cannabis stores that received a warning from the Manhattan District Attorney’s Office earlier this year found that JPMorgan Chase & Co., Signature Bank, Bank of America Corp., Wells Fargo & Co. and New York Community Bank had dozens of mortgages for properties leased to illegal smoke shops. None of the banks commented to Bloomberg for the story.

Banks have been cautious in other states where recreational weed sales are legal, ensuring that loan agreements include language that puts borrowers in default if they use the property in ways that violate federal law. If banks fail to do due diligence, they could wind up on the wrong side of federal compliance, Sullivan & Cromwell partner Sharon Cohen Levin told Bloomberg.

“If a bank has multiple customers who lease property to marijuana businesses and the bank misses that and fails to report the suspicious transactions – it would likely raise concerns about the strength of the bank’s anti-money laundering programs,” she said.