California recently passed its own medical cannabis legislation to replace Proposition 215 (also known as the Compassionate Use Act of 1996). The new law known as the Medical Marijuana Regulation and Safety Act, known as MMRSA is set to take effect January 1, 2018. This new statewide for-profit licensing, distribution and taxation plan is meant to stop the criminal and environmental abuse that has been occurring with the current law as passed in Proposition 215 which will sunset when the new law takes effect. ReProp has been making marijuana loans also known as cannabis loans in Oregon and Arizona which have well-defined statewide regulatory systems already in place. We are also looking into cannabis loans in Washington State. ReProp never made a marijuana related loan in California until MMRSA was codified because of the danger of abuse under the Prop 215 system. However, until MMRSA is implemented there remains a real danger to cannabis lending in most of California.
What is the Danger in Providing Cannabis/Marijuana loans?
First and foremost, Marijuana or Cannabis is still a Schedule 1 narcotic as classified by the DEA, illegal under federal law. That said, 25 states and District of Columbia have some form of legalized use and there are nine states with recreational use initiatives in their ballots this November. There is also guidance from the Department of Justice about what DOJ will enforce (and by inference what they may ignore) when it comes to states which have legalized some use of marijuana. This is known as the “Cole Memo”. The DOJ is currently not funded to enforce marijuana operations that are lawfully abiding by their state cannabis laws. The 9th District Court of Appeals just ruled in favor of defendants arguing they were doing just that. All of this could change under a new administration in the future. Given how many states have or will have their hands in the cookie jar, it is ReProp’s opinion that the feds will have a tough time reversing course. To read an article that supports our opinion, read this article from reuters.com.
Second, and we believe more ominous, is the fact that in California or other states that have yet to implement state wide, its perilous to loan in jurisdictions (counties and cities) that may allow you to operate now but do not have ordinances on the books that are consistent with the new state standards come 1/1/18. The new legislature will require environmental review, “seed to sale” tracking, various licenses, and other requirements. Converting cannabis operations to fulfill these new demands will be very expensive. It is safe to conclude that many medical marijuana operations may close up shop or move underground, which can leave landlords and their lenders in a jam. As a result, foreclosures may be inevitable which places both landlords and responsible cannabis growers at significant risk. To date, we know of only Humboldt County, arguably the largest cannabis growing region, which has an ordinance compliant with MMRSA. Others will come and need to be reviewed individually.
California’s Gold Rush Mentality
In addition to the new legislation, there is the issue surrounding California’s gold rush mentality. To further explain—the value of real estate perceived as being properly zoned for indoor and outdoor cannabis production has gone through the roof even though there are no proven connections to any macro research backed studies regarding need or absorption. Many people are also assuming the recreational use of cannabis will be approved on the November ballot for California, which is only making matters worse. All of these factors are heavily contributing to the unstable valuations of properties used for cultivating, processing, and distributing medical marijuana/cannabis. ReProp does believe that there is value added to certain locations and is working with its appraisers to add modest value where value should be added.
Our Policy for Cannabis Lending
As you can imagine, ReProp has put in many hours of research on how to underwrite and service cannabis loans and which ones it could reasonably make ReProp was asked to present its findings to the California Mortgage Association at their quarterly meeting in San Diego in July. We explained the difficulties of making these loans in California due to uncertainties surrounding the compliance of existing operations and reconciling those operations to new state mandates. We also explained that certain operators and landlords of operators are willing to pay for unproven prices for real estate in “green zones” throughout the state. Oregon, Washington and Arizona have marijuana license systems already in place and valuations are much more stable because they have not experienced the same gold rush mentality as California. In any state that we lend in, we require that we know the owner/operators and are very reluctant to make loans to landlords of operators unless we have that connection.
Interested in Obtaining a Loan for Marijuana Investments in California, Oregon Washington or Arizona?
The good news is that we will make certain loans in certain cases. If interested in getting a cannabis/marijuana loan you should know:
To be Considered for the Marijuana Related Loan
- ReProp must make direct contact with the cannabis operator(s) located at the collateral being considered for the loan
- The operator must also already meet or be able to reasonably meet all state and local licensing standards as of the time of making the loan
Loan Terms ReProp is Suggesting
- Since there is no coherent exit to a short term cannabis “bridge loan,” we are making 15 year fully amortized loans to potential cannabis borrowers
*Please note that we will look at other loan terms if the operators can provide business plans that suggest alternative terms which are reasonable.
For Investors Who Want to Participate
ReProp will be getting a bit more yield on these loans commensurate with the additional risk but will stay consistent to its core value of being the lower cost provider by insisting more equity in each transaction meaning we will loan less than a competitor who would charge a higher rate.
Interested in learning more about cannabis offerings through ReProp Financial?
NOTE: Cannabis lending is limited to States where it is legal and have well-defined regulatory structures. Investors must be Accredited and qualified by ReProp Financial.