Through a rule making process, the federal government is on the verge of reclassifying marijuana to schedule three, similar to ketamine as opposed to its current classification where it is grouped with Heroin. What does this mean for Colorado’s recreational marijuana market? Who will be the winners and losers from the change in classification? Will this reclassification change the banking woes of the marijuana industry? What happens to real estate?
What is in the proposal to reclassify Marijuana?
Under the Controlled Substances Act of 1970, drugs are classified in the US in one of five categories and regulated on a federal level accordingly. Marijuana is listed under Schedule I — along with heroin, LSD and MDMA — as a drug considered to have the highest risk of abuse and no recognized medical use. The proposal is to move it to Schedule III, a category that includes anabolic steroids, testosterone and ketamine. These drugs have a “moderate to low potential for physical and psychological dependence,” according to the Drug Enforcement Agency. Statistics show cannabis use disorder — or use that interferes with relationships, work or daily life — affects as many as 3 in 10 users.
What does the reclassification of Pot mean for Colorado?
Not much. Already federal officials take a relatively relaxed approach toward enforcement of the Controlled Substances Act as it pertains to marijuana. Under the guidance of its 2013 “Cole Memo,” the Justice Department backs off of enforcement in states that have legalized pot, with certain exceptions.
Big changes to Marijuana sellers on taxes
Rescheduling is expected to provide a tax benefit to companies that sell legal, regulated marijuana under state-sanctioned programs in the US. As of now, they are prevented from taking tax deductions available to most companies under the federal tax code’s section 280E, which applies to companies that handle Schedule I or Schedule II controlled substances. Being able to write off ordinary business expenses would help companies become more profitable — and thus more competitive with the illegal market, which currently undercuts them on price with untaxed, untested products. The black market for pot in the US, though hard to quantify, is thought to be worth $66 billion a year. The legal industry is estimated at around half that — at $34 billion.
Does this reclassification open up banking to Marijuana companies?
Although the reclassification is a step in the right direction, unfortunately this reclassification does not address the banking woes the industry is facing. There will still be the same issues as currently with most banks and lenders shying away from the industry. The only real solution would be federal banking legislation that has been attempted but has yet to make it very far.
What does the reclassification of marijuana mean for Colorado real estate ?
Unfortunately the reclassification does not change much as banking is still off limits to the industry which means owners are weary of marijuana tenants including grows, retail, etc. Until the banking is resolved the initial impacts to real estate are muted.
Reclassification opens up a bigger challenge to the industry
With the reclassification look for larger companies to continue expanding and gobbling up smaller competitors. The business will continue transforming to a “commodity” business similar to the Wine industry. This will ultimately eliminate many smaller players and will also eliminate many indoor grows as they are no longer profitable.
Summary
Reclassification is long overdue regardless of your political stance. Pot is clearly not the same caliber drug as heroine and should be classified appropriately. Although the classification has been met with a ton of fanfare in the news, the reality is that it will have little impact in Colorado. Furthermore the reclassification does not resolve the banking issues the industry will continue to face without formal legislation.
It is also important to note that since this is going through a rulemaking process, future presidents can make new rules and or eliminate this rule which brings even more uncertainty to the industry. The best solution would be an actual legislative solution. Unfortunately it looks like there is more uncertainty ahead based on the political winds of the day.
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. He is the owner of Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Glen resides in Colorado, lends in Colorado, owns property in Colorado, and services loans in Colorado which provides a unique real estate prospective of what is actually happening on the ground both in Denver and throughout Colorado. My goal of this real estate blog is to provide an honest assessment of what I see happening in Colorado real estate and how it will impact real estate owners, buyers, realtors, mortgage professionals, etc…
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