By Joseph M. Reynolds, Esq. and Alexis M. Florczak, Esq.
While the Marijuana Regulation and Taxation Act legalized adult-use cannabis and the establishment of an adult-use market in New York State, challenges remain for business owners hoping to participate in this industry due to the current tensions between New York State and federal law. Currently, the federal government classifies marijuana as a Schedule I drug. As a result, it remains illegal to possess, use, distribute and sell under federal law. Federal prohibition has far-reaching consequences in states like New York that have legalized cannabis for adult recreational use and will impact various aspects of real estate financing for prospective business owners hoping to join New York State’s newest industry.
The DEA has been under pressure to change the classification of marijuana to a Class 2 substance, which would allow for interstate commerce & transport under the guidelines set forth by the DEA. This pressure on the DEA stems from the number of states which have either decriminalized or legalized the possession and use of cannabis , as well the increasing number of physicians who acknowledge the benefits of medicinal use of marijuana for certain diseases or disorders.
However, the fact remains that the federal & state laws are not harmonized; thus, federal interference in lending opportunities remain inherent risks for traditional lenders. In the Buffalo market, there is word of one large commercial lender that is “considering” the refinancing of a commercial property, and one tenant of the tenants is a cannabis dispensary. This lender (who asked for anonymity) is handling each transaction on a case-by-case basis. These transactions are also only being made on a verbal approval – the loan will not go higher up the ladder until some vital terms are met, one of which is the amount of rentable space this dispensary will occupy. BankOnBuffalo’s president, Michael Noah, has gone on record to say that BankOnBuffalo will not outright dismiss cannabis industry lending but will handle requests on a case-by-case basis.
If the route with conventional lenders does not pan out, for whatever reason, there are other avenues which may be available. In particular, the New York State Budget for 2022-23 established a $200 million New York Social Equity Cannabis Fund to make funds available to conditional adult-use retail dispensary licensees. There are also private equity firms which specialize in cannabis projects.
Title Insurance Requirements. Another hurdle to secure financing for a cannabis-related property is the possible requirement to acquire title insurance for the property. A property owner may get over the source of funding hurdle only to discover that the lender or source of the funding, especially an institutional lending entity, will require the property owner to provide a title insurance policy on the property to be financed. Obtaining title insurance on a property for a cannabis-related business may prove challenging for the same reasons that traditional lenders face, i.e., the lack of harmony between federal law and New York State law. One local title insurance company expressed it would underwrite a mortgagee title insurance policy for a cannabis business if a number of factors were met – two of which could be deal-killing hurdles. First, the tenant must be “unrelated” to the landlord, a term which was not defined by corporate officials. Second, the cannabis-related tenant must generate less than 50% of the rental income from the premises to be insured. Another title insurance underwriter had an even more stringent rental income requirement, putting a ”cap” of rental income generated by the cannabis-related tenant to be no more than 20%, together with several other requirements, all of which needed to be met before either an owner’s policy or a lender’s policy could be issued.
 Dan Miner, Funding Options do exist for New York’s adult-use cannabis businesses, Buff. Bus. First, 2/21/22, at 3, https://www.bizjournals.com/buffalo/news/2022/02/01/funding-looms-as-challenges-in-new-yorks-adullt-use.html
Hurwitz Fine’s Cannabis Law and Commercial Real Estate & Development teams continue to monitor and analyze updates. Please contact any member of the firm’s team for guidance on these evolving issues at 716-849-8900, or by e-mail.