Marijuana banking ban puts real estate out of reach

Want to start a dispensary? Unless you have the cash to buy a building, good luck.

Five years after Colorado became the first state to legalize all forms of cannabis, there are now 1,029 medical and recreational dispensaries registered across the state. But because marijuana is still a Schedule I substance at the federal level, banks and credit unions are for the most part hesitant to operate accounts for cannabis companies or give them startup loans.

But for real estate, arguably the most expensive part of starting a small business, the lack of financing sets the bar unattainably high for aspiring entrepreneurs who don’t have tens or hundreds of thousands of dollars of cash on hand to cover startup costs themselves.

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Don Childears, president and CEO of the Colorado Banker’s Association, said there are about 20 banks in his trade group that service marijuana businesses, while the rest aren’t willing to take on the herculean task of monitoring those funds for any hint of illegal activity.

However, he thinks cannabis banking could be a niche that local banks and credit unions could occupy if those restrictions were lifted.

“This is pure guesswork, but 40 percent to 50 percent of community banks might be interested in serving this business if the regulatory risks were eliminated,” he said.

That hesitance extends to dealing with companies that provide services to cannabis companies and get paid with money traded for the federally controlled substance, ranging from electrical services to printing merchandise. In particular, that includes real estate.

Rob Mann, a cannabis-focused Realtor with Boundary Realty LLC in Denver, said cannabis’ restrictions from the larger financial system means it’s near-unheard of for a landlord to rent a property for use in the marijuana industry, especially if that property has a loan on it. Leases often carry forward the restrictions of lenders, namely that properties will not be used for illegal purposes.

“You won’t see too many people willing to stick their neck in the noose,” he said. “…A lot of people want to be a part of it, but when it comes down to it, the reality is they don’t want to be associated with it, because it’s a violation of federal law.”

While there is some funding available for hemp businesses, he said, the majority of cannabis-related real estate deals are all-cash. The capital that is available for financing usually requires a business owner to pay higher interest rates and put up exorbitant security against the loan, as it’s likely the loan-to-value ratio is high and a riskier bet for a financier.

There is momentum in Congress to allow marijuana dollars into the financial system. The SAFE Banking Act, sponsored by Colorado Rep. Ed Perlmutter (D-Arvada), cleared the House in late September with a three-fourths majority. The bill would permit marijuana and hemp businesses to set up accounts with banks, credit unions and credit card companies and create a safe harbor for vendors that service marijuana businesses.

As of press date, the bill is in the Senate, where it may face greater resistance in the Republican-controlled chamber. A majority — 53 percent — of House Republicans voted against the bill on the floor when it went to a vote in late September, but that does show the SAFE Banking Act has a fair amount of bipartisan support.

Speaking to BizWest, Perlmutter said the support of nearly half of House Republicans and all but one Democrat, along with the support of multiple industry groups, gives the bill a strong starting position in the Senate.

He believes the bill would quickly open up the real estate market for cannabis companies upon passage based on the positive feedback it received from real estate, banking and title insurance trade groups.

“A number of banks have had real reluctance in providing banking services or mortgage services to the owners of the shop-ats, because the owner of the shop is receiving proceeds from a cannabis business and using those proceeds to pay part of his mortgage,” he said. “This addresses a lot of that.”

But at this point, it’s unclear how quickly the bill could make it through the Republican-controlled Senate, particularly as the chamber looks at other issues like trade, stopgap measures to keep the government open and the possibility of the House voting to impeach President Donald Trump.

Perlmutter deferred questions on how quickly the bill could move in the Senate to Jeff Merkley (D-Oregon) and Cory Gardner (R-Colorado), the bill’s handlers in the Senate. However, he said it took six years and plenty of heavy lifting to get the bill out of the House.

Mann said the industry is prime to expand rapidly if the SAFE Banking Act or some other federal legislation opens the financial system to cannabis. But until then, he is seeing some financial institutions start to change their tune.

It’s kind of been one of those things where some banks find out that you have medical marijuana investments and they call you on the phone and say, ‘Nope, we want you to withdraw your money and leave our bank,’” he said. “And I’ve seen that banks that have made people leave, they’re encouraging people to come back. It’s ever-changing.”