The marijuana banking conundrum in Colorado may be driving banks to distraction, but it's opening up the funding business to high-cost, low-publicity private money sources.
From hard-money lenders — investors who offer short-term, high-interest loans — to publicly traded real estate investment trusts focused on marijuana clients as tenants, the lack of conventional financing has created a sector that's gaining steam and drawing stares.
They are investors with an appetite for high risk and high returns, all of it hinged on an industry that's been around for a few years — retail sale of medical marijuana has been legal since 2009, but the business began to boom Jan. 1, when recreational retail sales began.
What the new breed of lender is doing is focusing on real estate as collateral for the loans it makes to the marijuana business, which theoretically lowers the risk if the marijuana business goes up in smoke. Of course, that assumes that the business operates in accordance with state law and that the federales never exercise their legal right to seize the assets of a drug business that violates federal law. Heightened risk justifies high interest rates.
The higher-risk-higher-rates-and-fees rationale makes sense unless you're in the payday lending, deposit advance, or tax anticipation refund loan businesses where the borrower is a consumer. In that case, the regulators will be all over you for taking advantage of the fog-brained poor consumer. Taking advantage of a smoke-brained Mary-Jane business is just fine, than you very much.
Obviously, there's so much money being made in the state-legal marijuana business that businesses that need the funds can foot the higher bills. On the other hand, what choice do they have? The high-cost private money lenders are the only game in town.
It would be extremely helpful to banks in Colorado if the federal banking regulators would rouse themselves from their torpor and give soem guidance on this business. They've issued guidance in the past on such high-risk, disfavored business as subprime lending, payday lending, third-party payment processors, money services businesses, etc. All we've seen thus far is the extremely problematic FinCen Guidance that raises more issues than it resolves.
The critical risk for bankers at the moment isn't in banking "direct" marijuana businesses. It's in banking the "indirect" marijuana businesses, those that service businesses that are directly involved in the marijuana business. The business that installs and services the drying and heating units. The landscaping business that installs and services the irrigation system. The trucking company that hauls the product. The alarm company that monitors the premises. And on and on.
The FinCen Guidance, in addition to dealing only with BSA issues, mentions "indirect" banking of a marijuana-related business only in a footnote:
FinCEN recognizes that a financial institution filing a SAR on a marijuana-related business may not always be well-positioned to determine whether the business implicates one of the Cole Memo priorities or violates state law,and thus which terms would be most appropriate to include (i.e., “Marijuana Limited” or “Marijuana Priority”). For example, a financial institution could be providing services to another domestic financial institution that, in turn, provides financial services to a marijuana-related business. Similarly, a financial institution could be providingservices to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between “Marijuana Limited” and “Marijuana Priority.” Whether the financial institutiondecides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.
Yeah, that clears it up. All any bank needs to do is to determine "the number of factors specific to that institution and the relevant circumstances," then go for it. No problem!
Banks in Colorado need just a wee bit more than that from regulators. Until they get it, any business that even touches a marijuana business is potentially problematic.