Financing Cannabis-Related Real Estate: Structuring Options, Enforcement Issues, Regulatory Hurdles

Description

The year 2020 included several high-profile debt transactions in the cannabis industry, with hundreds of millions of dollars raised through such financings. But like anything in the cannabis industry, getting a debt deal done requires navigating unique regulatory challenges.

A key question for the parties to a cannabis debt transaction is whether the loan will require preapproval from regulators. Often, when a cannabis business undergoes its annual license renewal, it must disclose loans. States might not have an explicit requirement to disclose loans to regulators. However, attorneys and other practitioners still recommend disclosure if the license application did not reveal the loan.

Cannabis products and licenses are highly regulated. Only individuals and entities listed on the business license can exercise control over operations, so a conventional security interest in the related assets may not be enforceable. Regardless of the regulations regarding attaching a lien, pursuing an Article 9 sale is not generally possible with cannabis products or licenses.

Lenders and borrowers should consider what would occur if the borrower defaults on a loan. Federal bankruptcy is not an option since cannabis remains illegal at the federal level. Only certain states have regulations that address insolvency and state receivership programs. In a state without a cannabis receivership option, any sale of the borrower would need to run through typical change-of-control procedures.

Financing marijuana real estate locations presents special challenges. Notwithstanding legalization at the state level, local ordinances may prohibit marijuana businesses or restrict their locations. Local zoning often restricts licensed businesses to zones approximating their intended use. Stringent setbacks may also be in place, restricting cannabis operations from locating near schools, treatment facilities, and daycares, for example.

Listen as our authoritative panel discusses the unique legal and regulatory issues associated with financing cannabis-related real estate.