The substance of Cannabis remains illegal on the Federal level in the United States. To date, 37 states have deemed it legal in some form: medical & / or adult use. With regards to 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 credit worthiness of any such business entity operating in one of the 37 states where some form of cannabis is deemed legal.
Financial institutions that are lending to the space are primarily providing loans for the commercial real estate (CRE) piece with typical structures, whereas the underlining collateral is the property / dwelling, not the plant or equipment used to grow the plant. Furthermore, the financial institutions (both banks and credit unions) that are lending are taking a conversative approach, which is a very positive sign for 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 more closely comparable with hard money loans (which is disappointing). Will Federal Legalization change this…? 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 borrower’s. Federal legalization laws haven’t changed yet, however, the industry is seeing more and more financial institutions beginning to bank the sector, not only for deposits, but also providing loans.
As stated above, financial institutions (banks & credit unions) across the U.S. have been willing to lend on the commercial real estate (CRE) property in accordance with their underwriting policies, procedures, and credit standards. Which is great news, however, that still leaves the legal cannabis business entity in need of additional sources of debt / capital / equity. It has been my observation, that, the legal cannabis business entities have relied on their friends and family list for equity (typically done first) before turning to traditional lenders (for the CRE piece) and then turning to private equity / venture capital firms for the remaining funds. Again, the opportunities I’ve come across tend to be shorter in terms with rates and loan fees comparable to unsecured hard money loans. The legal cannabis industry in the U.S. is still very much a new and growing sector, and I fully expect more and more financial institutions will begin providing banking services to legal business entities in their communities – I expect competition to benefit the legal business owners.
According to Marijuana Moment Project (MMP) the top states and their legal cannabis adult-use tax revenues for 2021 are as follows:
1. California – $977MM
2. Washington – $480MM
3. Illinois – $388MM
4. Colorado – $368MM
5. Massachusetts – $206MM
6. Michigan – $188MM
7. Oregon – $138MM
8. Nevada – $123MM
9. Arizona – $121MM
10. Alaska – $24MM
11. Maine – $12MM
12. Vermont – Sales begin May 1, 2022
13. Montana – Sales began Jan. 1, 2022
14. New Jersey – Sales haven’t begun yet
15. New York – Sales haven’t begun yet
16. New Mexico – Sales haven’t begun yet
17. Virginia – Sales to begin Jan. 2024
18. Connecticut – Sales to begin July 1, 2023
If interested in reading the MMP article / data regarding tax revenues for adult-use legal cannabis, please use this link: Cannabis Tax Revenue in States that Regulate Cannabis for Adult Use (mpp.org). It is worth noting that the above data is from adult-use legal cannabis tax revenues, those figures do not include medical cannabis sales. If interested in the medical cannabis tax revenue data, please click the link to: Marijuana Tax Revenue: A State-by-State Breakdown | The Motley Fool.
Regardless of your position or thoughts on legal adult use &/or medical cannabis in your community / state, doesn’t change the fact that the industry is growing rapidly. I find it very hard to believe that 37 states with legal adult use &/or medical cannabis tax revenues of roughly $10B as of Dec. 2021 (see MMP article/data link herein) are being banked by 200-250 financial institutions across the U.S. – which most industry experts guestimate is the number of financial institutions with an active cannabis banking program. The raw numbers / data suggests that there are a LOT of financial institutions with legal cannabis funds flowing through their institutions. It’s been my experience that having the regulators tell you more about your financial institution than you know, doesn’t typically go well.
Best regards,
Michael A. Johnson, Founder & CEO
Eight Eleven Consulting
* This article can be printed via pdf format on our website at Newsletter (eighteleven-consulting.com).
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