Drug Dealers Disrupted
There might be a really big, new problem for the pot industry.
Many people know about one big problem since day one for pot and the communities that have legalized it: all of the cash.
If you don’t know, there are hundreds of millions of dollars trading hands in this new industry – billions of dollars – and it’s all cash. I mean actual cash, like stacks of bills. No credit cards, no checks and no banks.
Marijuana is still illegal at a federal level. Banks are state licensed, however to be FDIC insured and backed, they have to follow rules that are set by the federal government. The federal government says that as a bank, if you accept deposits or give loans to a person or company that you know to be breaking federal laws, they can take away your FDIC charter and worse.
So banks can’t officially talk to anyone in the marijuana trade, and there are warehouses full of cash and drugs being guarded by top-rate private security with automatic weapons. It sounds fun for a movie, but it’s dangerous in real life. It also means that the money isn’t flowing through the economy like it should be.
A few attempts in the House and Senate to change this in the past few months have been getting closer but so far, no dice.
Here’s the new, and bigger version of a problem: real estate.
Not just owning it, leasing it too. Having to work in all cash isn’t good for anybody, but it’s still workable. Not being able to lease or buy real estate isn’t.
Lenders won’t lend money against real estate without being able to guarantee that their collateral is secure. That they are in first lien position and that they can take action if the borrower defaults. That’s the point of collateralizing real estate.
That guarantee comes from title insurance underwriters. About 90% of all real estate transactions in the US are underwritten by four companies.
One of those companies recently told us that they won’t guarantee any property that has anything to do with marijuana, regardless of legality. Their reasoning is the same as the banks in Colorado: without legislation, the federal government could seize a property if they decide.
This could be a very big problem for a very new and growing industry that a lot of people are very excited about.
Sally Vander Veer, CFO of marijuana dispensary Medicine Man in Denver is quoted in Forbes in November 2016, just before California and a handful of other states approved recreational and medicinal marijuana by vote:
“With so many obstacles and regulations in our way, owning your real estate is the only thing we can control in this industry. It’s essential to long-term success.”
A huge benefit to legalized marijuana in Colorado has been to the commercial real estate from bottom to top.
Warehouse vacancy rates in Colorado fell from 7.6% in 2011 to 3.1% in 2015. One out of every 11 industrial buildings in central Denver is full of pot. The ‘high demand’ (eye roll) for warehouse and industrial space has pushed some businesses that would otherwise occupy those buildings up into office space. Commercial real estate in all classes is booming, fueled by the legal marijuana trade.
It’s like Miami in the 80’s but much better.
The federal government is obviously the big variable.
Until owners can borrow against that real estate and not risk federal government seizure regardless of lending, exciting potential growth is getting choked.