The House of Representatives passed a cannabis banking bill with bipartisan support that would allow banks to provide services to Cannabis companies where it is legal. What was in the bill? How will this impact real estate throughout the country? Before you pop the magic muffin in celebration, there are still a couple major hurdles before cannabis banking becomes law.
Why should you care about Cannabis banking?
With Cannabis legal in some form in 33 states, the amount of cash being utilized is astounding. It doesn’t matter what your political affiliation is or whether you support or hate legal marijuana. It all boils down to dollars and sense. I’ve seen tax predictions in Colorado from 100-184 million in tax revenue. Currently the industry operates in cash with little access to mainstream banking.
I would be willing to bet a million bucks not all the revenue is being reported in a cash business. For example, how many waiters/waitresses or other workers who get paid in cash report all their tip income? The heavy reliance on cash enables less scrupulous activity (money laundering, drug cartels, etc…). Forcing legitimate businesses into the cash arena is bad public policy.
What is in the proposed house cannabis banking bill?
The cannabis banking bill clarifies that proceeds from legitimate cannabis businesses would not be considered illegal and directs federal regulators to write up rules for how they would supervise such banking activity.
Banks have thrown their weight behind the legislation, telling lawmakers they need clarity on whether they can do business with cannabis companies where it is legal at the state level even though marijuana remains illegal in the eyes of the federal government.
“Our members are committed to serving the financial needs of their communities – including those that have voted to legalize cannabis,” said the American Bankers Association in a letter sent to lawmakers seeking their support.
What is the impact on real estate if the Cannabis banking bill passed?
Currently Cannabis operates in a legal gray area with legalization at the state level, but not the federal level. This ambiguity has made legal cannabis operations very difficult to finance. For example, a bank will not make a loan on a property with a cannabis tenant. As a result rents and prices for cannabis properties are well above market to price in the lack of traditional funding. A property owner will demand a premium for a cannabis tenant vs. a non cannabis tenant due to the lack of financing available.
As banking becomes established for the cannabis industry either through this bill or a subsequent bill, real estate prices will also come into line. The premium for a cannabis lease will be eliminated leading to drastic reductions in the value of cannabis real estate. Below is a quick example. In Denver, Colorado, Cannabis space is going for about double what a traditional tenant would pay. With Cannabis banking on the horizon, this premium paid by Cannabis tenants will be eliminated. As you can see below, the value of the industrial building in the example dropped by almost four million dollars due to the steep reduction in lease rates. Remember that commercial property is valued based on the income it will produce divided by the desired rate of return (capitalization rate).
|Non-Cannabis Tenant||Cannabis Tenant|
|Lease Rate||$ 12||$ 24|
|Net Operating Income||$ 240,000||$ 480,000|
|Value||$ 4,000,000||$ 8,000,000|
Will the bill pass the senate?
Unfortunately, in the current senate session, I am doubtful the bill will pass. There are several competing priorities along with an upcoming election cycle that will force the house bill onto the backburner. It will likely be a few more years before there is federal legislation to enable cannabis banking.
Although cannabis banking at the federal level will likely not be resolved this year. With 33 states involved in some form of cannabis (either recreational or medical) it is only a matter of time before the banking issues are addressed. I would suspect, after this election cycle to see this issue resurface with a resolution. It is important to note that when the banking is solved look for a quick “adjustment” in real estate prices in this industry as they come into line with more traditional industries.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).