Cannabis Banking and the Potential Impact on the Real Estate Market

Cannabis Banking and the Potential Impact on the Real Estate Market

The cannabis market is thriving in the United States. This substance is now legal in 33 states plus the District of Columbia for medical use. Another 11 states have legalized it for recreational use, with Illinois being the latest to pass this legislation. This legal change has opened up potentially lucrative business opportunities, including those in the real estate market. Those in the cannabis business need land for growing, processing and selling their product, so the real estate market should benefit from the current cannabis-friendly landscape.

Unfortunately, under federal law, the sale and distribution of cannabis are still illegal, and while federal law enforcement currently isn’t bucking state law on this issue, that legal status does have a chilling effect on banking and real estate transactions. Interested entrepreneurs have to be creative in order to prosper in the cannabis business. That’s why the current proposed legislation in the House and Senate is so important.

Real Estate Issues

The conflict between state laws and federal law can make standard lease language problematic. Most of these documents require that the leaseholder not pursue any illegal activity on the premises. Landlords may be hesitant to enter into a lease with a cannabis business because of this provision. Those who are seeking a lease for a cannabis operation may fear it could be terminated if the landlord decides to enforce this provision even though the state has legalized the business.

Growing, processing and selling cannabis also requires extra security. Because the industry is still largely a cash business, it is particularly tempting to robbers. Installing proper security measures is expensive. Also, the fear of crime may give landlords pause.

Getting liability and property insurance can still be difficult due to federal law. Many mainstream companies will not touch the industry, but there are businesses that cater to cannabis coverage. In particular, getting title insurance has been an issue for those buying land for cannabis purposes. Without title insurance, getting real estate loans can be early impossible. Unless buyers can swing cash-only purchases, taking care of the real estate issues is daunting.

Banking Issues

Banking issues are perhaps the biggest challenge to the cannabis industry. Most banks are insured by the federal government, so they are bound to follow federal law over state law. As a result, they cannot lend money to cannabis entrepreneurs. In fact, they don’t allow cannabis businesses to have checking or savings accounts for fear they will be accused of money laundering by the federal government. While there are other options for financing, they are less appealing than going with traditional banks. This situation means that cannabis operations are still largely cash operations, which makes them vulnerable to theft and hard to insure. For years, lawmakers were reluctant to address this issue, perhaps because cannabis still seemed nefarious in some way. But now that it has gone mainstream, legislators are trying to address the banking problems.

Secure and Fair Enforcement Banking Act

Oregon representative Jeff Merkley is sponsoring the Secure and Fair Enforcement Banking Act, or SAFE. This bill would stop federal banking regulators from punishing banks that worked with legal cannabis companies. In addition, the bill would also protect associated businesses, such as builders, equipment providers, etc., from being charged with federal crimes. The proposed law has support in both houses of Congress, and the House of Representatives should be voting on the bill later this year.

The Senate held a hearing on cannabis banking reform on July 23, 2019, where legal experts and industry representatives testified to the need for cannabis banking reform. Although the passage of the act is not certain, there appears to be significant support for it.

Federal Legalization of Pot

Of course, these banking and real estate issues would be largely solved if the federal government would simply make cannabis legal. In July, the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security debated cannabis reforms. Also, two Democrats, Jerry Nadler, the House Judiciary Committee Chair, and Senator Kamala Harris, current presidential candidate, will be introducing a bill to decriminalize marijuana on the federal level. Although decriminalization of marijuana is not the same as legalizing it, such a law should relieve the banking industry of its current cannabis lending restraints.

Rising Land Values

There is plenty of good news for the real estate market due to cannabis legalization. Property in areas with established cannabis businesses is increasing in value. Multiple studies have shown that dispensaries in the neighborhood also have this positive effect. In fact, property values jump when the state government simply legalizes cannabis.

This trend applies to warehouse demand as well. Data shows that demand for warehouse properties rose by 34% in states where medical cannabis is legal and by 27% in states where medical and recreational use is legal. These states also saw a rise in demands for cropland and storefronts. Cannabis is good business for all property owners.

The path toward cannabis legalization has been long and hard. Inevitably, the movement to legalize it at the state level has given rise to many investment opportunities, and business people are making money – often a lot of money. Sadly, the conflict between federal and state laws has left cannabis as a “sorta” legitimate business. The threat of legal action hangs over the head of everyone involved in these businesses and keeps banks and landlords from becoming part of a lucrative industry.

As more states completely legalize cannabis, the pressure for the federal government to do the same increases. Federal opposition seems contradictory and even hypocritical to many advocates. Even previously anti-cannabis people, like former Speaker of the House John Boehner, have jumped on the weed wagon, largely because they see the profit potential. Land values in cannabis-legal states are rising. The cultural climate is changing. Cannabis entrepreneurs still face obstacles, but the way to a successful business is becoming clearer and property values are also likely to continue to rise if cannabis companies have access to banking and loans.

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August 1, 2019No comments

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