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At a Glance

• The rescheduling will allow cannabis-related business to take tax deductions for their businesses, give greater access to bankruptcy court, and provide more certainty in how federal courts enforce agreements relating to cannabis growing and distribution.
• Even if cannabis were rescheduled there would be significant barriers for real-estate lenders, including, but not limited to, the banking access for these businesses, and the transferability the marijuana cultivation licence. In order to account for these issues on a federal level, state level, county level, and even municipal, additional legal due diligence will be required during the loan underwriting.

Then, you can use the News from Earlier this Year We thought that now that the U.S. Department of Justice is moving to reclassify marijuana under the Controlled Substances Act, from a highly-restricted Schedule I substance to an less-restricted Schedule III substance we would review the possible effects of such a reclassification on real estate lending.¹

Currently, federal banking regulations make it difficult to legally lend money or hold accounts for cannabis-related businesses.² Under the Bank Secrecy act (BSA), for instance, financial institutions are required to file suspicious activity reports with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN), even if the marijuana sales are legal in the state where they occur.³

Most commercial lenders view the complex and uncertain practices required to monitor cannabis-related businesses and manage the cash generated by them as problems that cannot be solved, and many refuse to accept cannabis-related assets for collateral.⁴

In addition to federal regulations, local and state laws also pose a risk for lenders when it comes to accepting cannabis-related businesses or real estate as a collateral. Some local laws, for example, only allow the transfer of cannabis cultivation permits to holders of cultivation permits and/or require prior governmental consent. As a result, state or local laws may prohibit or limit collateral transfers of cannabis cultivating licenses, making the foreclosure, deed-in-lieu of foreclosure, and other foreclosure processes complicated.

While the DOJ’s proposed rescheduling cannabis from Schedule I into Schedule III won’t solve all the issues mentioned above, it will allow cannabis-related business to take tax deductions and provide greater access to bankruptcy court and create more clarity with respect to the way federal courts enforce agreements relating to cannabis growing and distribution. Even if cannabis were rescheduled there would be significant barriers to lenders, including banking access and the transferability license for marijuana cultivation. In order to account for these issues on a federal level, state level, county level, and even municipal, additional legal due diligence will be required during the loan underwriting.

The rescheduling is one step in the right direction, but it’s not the only thing needed to make loans secured with cannabis-growing property more feasible.

Christopher J. Adan, a legal clerk, contributed to this update.