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Money Doesn’t Grow on Trees: Financing Your Cannabis Real Estate

The cannabis industry is heavily dependent on real estate: cannabis needs to be grown, processed, and sold, and you can’t do any of that without physical space.  Marijuana remains a federally-controlled substance in the United States, creating a conflict with the laws of many U.S. states where medical and/or adult recreational marijuana is legal.  One of the initial hurdles for any cultivator, processor, or retailer of cannabis products is the ability to expand the cannabis-zoned real estate housing their operations.  Owning or leasing real property is a crucial milestone in the expansion of any business operation, and the cannabis industry is no exception.  Because regulated banks face the possibility of criminal prosecution for aiding and abetting a federal crime (not only possessing marijuana but also money laundering), owners of cannabis real estate may have difficulty obtaining institutional financing or even opening a bank account.  In this post, we de-mystify the process of obtaining financing for your cannabis real estate by addressing where to get it, how to get it, and who you need on your team to get the best possible result.

Where to Get It

Even though many states have legalized the use of cannabis, institutional capital from banks that are subject to Financial Crimes Enforcement Network (“FinCen”) regulations is not readily available to finance cannabis real estate.  The absence of institutional capital in this market has paved the way for a booming and ever-expanding industry of private lenders, state licensed banks, and local credit unions that are not subject to FinCen regulations and thus are ready, willing, and able to provide lending platforms specifically to meet the needs of cannabis real estate proprietors.  These lenders provide an alternative to institutional sources of capital for cannabis businesses that are purchasing real estate in order to expand their business.  However, because demand in this area vastly outweighs the supply of capital, cannabis real estate borrowers should beware of predatory lenders and negotiate as best they can to obtain competitive terms and rates for their loan.  While passage of the Agricultural Improvement Act of 2018 (the “Farm Bill”) has moved the cannabis industry even closer to general societal acceptance, due to the as-yet-uncertain nature of the burgeoning cannabis landscape, reputable lenders will address the risk of cannabis real estate financing by having stringent requirements borrowers must meet in order to qualify. Borrowers should expect to pay hefty upfront origination and exit fees and underwriting fees to compensate lenders for the perceived institutional risk and additional reporting requirements imposed upon banks working with cannabis owners.

How to Get It

Cannabis real estate lending presents a distinct set of issues that must be overcome during the underwriting process.  The main risk that a lender considers when determining whether to lend on cannabis real estate is whether the property can be purposed for a profitable non-cannabis use in the event future regulation renders the collateral real property prohibited for the cannabis-related use that supported the loan origination.  Moreover, in order to lend on cannabis real estate, lenders will require property due diligence (title, zoning, survey) and extensive financial disclosure from the borrower. A few of the key factors that determine whether a borrower is successful in obtaining a real estate loan for a cannabis business are:

  • The value of the real property that will serve as collateral for the loan
  • Whether there is business income to justify the loan amount, which will include a review of borrower’s cannabis license, information about the business and its related parties and the expected activity of the borrower (types of products to be sold and types of customers)
  • Organizational status of borrower, including a review of the borrower’s business documents and operational information

Who to Call to Get It

In the current regulatory and lending market, until marijuana is removed from the federally controlled substance list, obtaining financing from a regulated bank will remain a difficult hurdle.  Financing for industrial hemp real estate is expected to become more available (and Congress may take a step in that direction with its pending consideration of the “Secure and Fair Enforcement Banking Act of 2019” a/k/a the “SAFE Banking Act of 2019”), but only as these financial institutions become comfortable with financing the cannabis industry as a whole.  For borrowers operating in states that have a robust cannabis regulatory system already in place (Colorado and Oregon), the burden is somewhat easier.  For loans backed by real estate, most cannabis borrowers will find success with a “hard money” loan,–that is, a loan made by an individual or groups of individuals who will charge a higher interest rate, but because they are not affiliated with a bank, will not face the FinCen regulatory scrutiny that deters most banks from making cannabis loans.

Being properly prepared can be the difference between growing your cannabis business sky-high, or seeing it crumble to the ground.  Preparation means surrounding yourself with a trusted team that can help you locate the lenders willing to make cannabis loans, and work with you to secure and negotiate your loan on the most favorable terms possible.  You’ve got the vision and the know-how to turn your cannabis dreams into reality; make sure your team on the ground is prepared to propel your plan forward and mitigate your risk from A to Z.

Watch this space for future updates on how Congress is attempting to address the restrictive access to financing through the SAFE Banking Act of 2019.  If you have any questions about this post or any other matters related to financing cannabis real estate, please contact me at