Observations and Thoughts on Lending to the Legal Cannabis Industry

As a business owner who has been assisting legal cannabis businesses in obtaining financing, I have a few observations and thoughts on the matter. While the potential profits are certainly enticing, there are also considerable risks involved. For one, cannabis is still illegal at the federal level, which can complicate matters when it comes to banking and financing. To date, 40 states and the District of Columbia have deemed it legal in some form; medical and/or adult use Where marijuana is legal in the United States (mjbizdaily.com).?Regarding lending to this space, I don’t believe the Federal Laws pertaining to the sector will have any real impact when it comes to underwriting the creditworthiness of any such business entity operating in the U.S. today. ???Additionally, the regulatory landscape is constantly shifting, which can make it difficult to stay on top of compliance requirements. Despite these challenges, however, I believe that there is a lot of potential in the cannabis industry, especially as more and more states move toward legalization.?Ultimately, I think that lending to the cannabis industry can be a smart business move, but it's important to approach it with caution and a thorough understanding of the risks involved.

Financial institutions (Fis), including both banks and credit unions that are willing to lend to the space, are taking a very conservative approach.?FIs remain at the top of the hierarchy system with respect to lending to the legal cannabis industry, and, commercial real estate (CRE) loans are the easiest and most common type of loans offered to the industry.?With respect to the terms and structures of the legal cannabis CRE loans I’ve come across, the terms are shorter in nature and the rates and fees are priced at a premium when compared to other CRE loans that are NOT associated with the legal cannabis industry.?

The most common hurdle or challenge when discussing CRE financing solutions to the legal cannabis industry is the vast appraisal difference between “as is” versus “cannabis use” values.?In California (as an example) some counties and/or cities have designated areas as “green zones” specific to legal cannabis operations.??Where lenders and appraisers get hung up is trying to determine a fair market “as is” value on a CRB in a green zone.??Will federal legalization (or SAFE Banking Act) change the appraised “cannabis use” value or provide better financing terms and structures to the legal cannabis industry…???I’m not sure! ??In my opinion, competition between lenders for strong proven business entities with strong historical financials should start to make the terms, rates, and loan fees more favorable for the borrowers.?

Federal legalization laws haven’t changed yet, and, there’s no reason to believe the SAFE Banking Act will pass anytime soon Schumer's marijuana legislation plan hits bipartisan resistance - POLITICO.?If/when it does, the industry may start to see the number of financial institutions banking the sector become more prevalent, not only for deposits but also on the lending side.?To date, most industry experts (myself included) believe there are roughly 150+/- (or 1.5%) of the nearly 10,000 FIs in the U.S. willing to provide banking services to the sector.?Of those 150(+-) FIs, only 15% to 25% (20 to 35) are or have made loans to the industry.?When discussing FIs lending to the space, it is important to distinguish between a cannabis-related business (CRB) Tier 1 or Tier 2 CRE loan.???

Industry experts and regulators alike define a Tier 1 CRB client from a FI compliance perspective as having direct contact with the plant while a Tier 2 CRB is considered non-plant-touching.??The industry also looks into the beneficial owners of CRBs to help determine the FI compliance classification as well.?An example of a Tier 2 CRB CRE owner (or beneficial owners of the borrowing entity) that doesn’t touch the plant but, has tenants that are plant-touching.??To add further context, the CRE owner(s) (or beneficial owner/s) have nothing to do with any state-licensed cannabis license(s).?When talking about FIs lending to the legal cannabis space to date, it is worth pointing out that most loans are classified as a Tier 2 CRB.??Another example of a Tier 2 CRB is a business that makes and sells specific equipment that Tier 1 CRBs need to operate their business.?Again, the difference is often whether the underlying CRB and its beneficial owners are plant-touching versus non-plant-touching.

As stated above, FIs across the U.S. have been willing to lend on commercial real estate (CRE) property in accordance with their underwriting policies, procedures, and credit standards.?This sounds like great news on the surface, but, unfortunately, given the economic environment coupled with the FOMC’s historical rate hiking campaign over the past 18 months, most FIs have turned the lending spigot off to the sector.??Obviously, FIs don’t come out and say they have stopped lending…but, tightening their credit criteria to the point that nobody qualifies is in essence turning the spigot off and by definition creating a credit crunch environment.??As a result, this leaves the legal cannabis business entities in dire need of additional sources of debt/capital.?

Due to the conflicting state and federal laws pertaining to the legal cannabis industry, any federal small business administration (SBA) loan programs are not made available.?Furthermore, the U.S. Department of Agriculture (USDA) should be a financing source for legal Hemp businesses Hemp Production and the 2018 Farm Bill - 07/25/2019 | FDA, but, due to a very slow and cumbersome approval process, most borrowers don’t have the time or resources required to wait and see if the USDA approves the loan application.?FIs that I am aware that will lend to the Hemp industry only do so once they receive confirmation from the USDA that the underlying borrowing entity qualifies for their guarantee program (similar to the SBA guarantee program).?Case in point, Hemp Production | Agricultural Marketing Service (usda.gov) has delayed the Hemp Testing Enforcement Discretion until December 31, 2023.?The biggest and most critical difference between cannabis and Hemp is the level of THC (0.3%) found in the plant.??The 2023 Farm Bill could have a significate impact that could reshape the Hemp industry How the 2023 Farm Bill could reshape the Hemp Industry (covercannabis.com).?Regardless of future law changes/revisions, Hemp business owners today are being hamstrung and hindered due to their close association with cannabis.?And, as a reminder, the 2018 Farm Bill made it legal for Hemp businesses to exist, and, allows them to conduct business regardless of state lines.?This isn’t the case for legal cannabis businesses, which are restricted to the state in which they were granted a license in which to operate.?If any CRB has expansion aspirations to other states, they must apply for a license in that state(s), and if granted, must operate that business 100% separated from their businesses in other states.??

For those unaware, states, counties, and cities where cannabis is legal in some manner require any individual or business to apply for a license to conduct or operate some form of cannabis business.??In many cases, the beneficial owners (individual(s)) or CRBs that received a provisional license or permit must then demonstrate they have the financial means to lease, buy, and build out tenant improvements (Tis) on any CRE property where the proposed business and provisional license will be conducted.?Furthermore, most of these provisional licenses have an expiration date (six months for example) attached to them.?The challenge I often see with the provisional license is the beneficial owners/CRBs don’t have the financial wherewithal required to actually get the license and start executing their business plan.?

To help overcome this issue, I recommend (where appropriate) that business owners consider expanding their team with “bankable” individuals.?Doing so may allow the beneficial owners to stack unsecured business lines of credit (LOC)/term loans available to the industry, who qualify.??These unsecured LOCs/term loans can be approved and funded within 7 to 10 days.?These unsecured LOCs/term loans are pretty straightforward/cookie-cutter in that they require; a minimum FICO score, 2 years of tax returns, a verifiable income stream (pay stubs), and must demonstrate that they can sufficiently handle the increased debt load.???To put into perspective, if a CRB has five bankable individuals, they (the group) could easily and quickly borrow $1MM to get their business up and running.???

The cannabis industry (as a sector) has a number of ways in which to apply and receive financing to either start, acquire, or expand/grow their business today. While there are only 20 to 35 FIs actually lending to the sector, there are hundreds of other non-traditional lenders that provide financing solutions ranging from unsecured lines of credit, term loans, equipment loans, asset-backed loans, and CRE loans, to name a few.?

It is important to note that the legal cannabis industry in the U.S. today is in the consolidation phase, in large part due to the unfortunate market environment caused by a number of factors; 1). lack of movement on the passage of the SAFE Banking Act, 2). the Fed’s historical rate hiking campaign to curb inflation, 3). credit crunch from financial institutions across the board, 4). the brutal crash of cannabis equities/stocks, 5). over taxation, and 6). Oversupply and low demand have propelled the black/illicit market.?When you add all of this up, you get an extremely challenging environment in which to try and go to the market for debt financing today.

For the over 100,000 beneficial owners of CRBs in the U.S. today who don’t have the luxury of time and are faced with either shuttering their doors or taking what the debt market offers so they can live to fight another day…I do have great news!??We have been actively expanding the Eight Eleven Exchange Cannabis Financing (eighteleven-consulting.com) which includes hundreds of lending firms within our network as of this article date.??I welcome any and all communications at [email protected].

Best regards,

Michael A. Johnson, Founder & CEO

Eight Eleven Consulting

DISCLAIMER: Eight Eleven Consulting is NOT a lender, does NOT make offers for loans, and does NOT broker online loans to lenders or lending partners. We provide a consulting/advisory service and attempt to pair clients/borrowers with lenders or lending partners who offer business loan products.

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