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Financing woes still plague legal cannabis biz


Oregon's retail marijuana stores opened this month for legal recreational-use sales, and California will follow in January. The legal pot business is about to get much bigger. In terms of financing the multibillion-dollar industry, however, legal marijuana is no closer to the mainstream, advocates say.

Facing a host of threats, marijuana startups continue to be shut out from stable financing and banking sources, cannabis advocates told Scotsman Guide News. More than half of the states in the country now allow sales of legal marijuana in some form, but most of the legal weed businesses in these states still can’t get a checking account.

marijanabizMarijuana is still illegal under federal law. The legal industry, however, was only allowed to develop when the Obama administration agreed not to enforce federal law in states that pass marijuana legislation and follow a set of rules.

Now with the Trump administration in charge, advocates say the legal pot industry remains in a fragile state, even as it has proliferated across the country. 

“Right now our enemy is [Attorney General] Jeff Sessions,” said Justin Strekal, the political director for the National Organization for the Reform of Marijuana Laws (NORML). “He, quite frankly, hates us.”

As evidence of how skittish the banks still are with regard to the marijuana industry, Strekal said recently a bank closed NORML’s Ohio branch account, as well as shut down the account of the Marijuana Policy Project because of the nonprofits’ cannabis-advocacy work.

In California, there also are reports that the fledgling pot businesses is paying extraordinary high rates for financing. In one deal featured in the Los Angeles Times, for example, a Santa Ana marijuana dispensary was saddled with a 10 percent interest rate on a $2 million loan and also had to agree to give the investment fund lending the money the option to take a 50 percent stake in the business for $1.

“That is crazy, to be honest,” said Glen Weinberg, a partner with the Denver-based Fairview Commercial Lending, which has financed a number of real estate purchase for marijuana businesses. Even in established legal-cannabis states like Colorado and Washington, the industry is largely unbanked. In Colorado, Weinberg estimated that 50 lenders have done loans with marijuana businesses; however, the lending environment even in Colorado remains a thin patchwork of private money lenders and equity investors. In the states coming online, the number of lenders is likely far fewer.  

“I get a ton of calls from California and Oregon,”  Weinberg said. “We don’t lend in those markets, but from what I am hearing from the people calling me, the lending is not nearly as established.”

 A crackdown coming? 

Federal policy remains in doubt. President Donald Trump has not made his position on legal marijuana clear, but Sessions is a vocal critical. There has been much speculation since January that the feds will take a harder line.

Pushing back on that idea that the government will shut down the industry, some in the industry say the legal market has grown too big and too quickly for Trump’s Justice Department to put the genie back into the bottle, but Strekal bristles at that.

“We are living in very tumultuous times, and the attorney general [Sessions] has explicitly said that he does not think that good people smoke marijuana,” Strekal told Scotsman Guide News. “Just because it [a crackdown] hasn’t happened in the first nine months of the administration, no one should be fooled to think that it is not going to be happen period.”

He said it will take a change in federal law to remove the threat. Unless the laws are changed, he said the industry also will make no progress in obtaining stable banking and traditional financing sources.

“One RICO [Racketeer Influenced and Corrupt Organizations Act] suit would chill investment in the industry,” he said.

Other experts disagree that a general crackdown is looming. Dr. Dominic Corva, executive director of the Center for the Study of Cannabis and Social Policy, said Sessions doesn’t have a free hand to crack down in states that are complying with the terms of the Cole Memo, which laid out the framework for states to enable legal marijuana sales. He said the Justice Department may go after companies that are not complying with the letter of the law as spelled out in the Cole memo, however. 

“The feds are not going to shut down any of the state legal experiments,” Corva said. “It is not going to happen, 100 percent. There can still be more enforcement, though.”

Corva said the industry does have a host of problems to overcome, one being financing. Corva noted that a city council or county board could pass a moratorium on the production and sales in that locality. This has created another layer of risk for investors in real estate and businesses in states where that has happened, such as Washington. He also said businesses face tremendously high compliance costs, real estate costs and costs for borrowing.

“Given how difficult it is to actually get a cannabis businesses that actually touches the plant off the ground, and the compliance issues, [some] folks are looking at either giving up ownership or going out of business,” Corva said. “When they are in that situation, what they really want are banks and loans to help them out. It is a double pincher. They are getting pinched because it is too expensive to get into the legal market and also because, even if they do that, they are going to be giving up the long-term profits by taking on investors who will be expecting unrealistic terms on their investment right away. That will run them out of business sooner than anything.” 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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