Facing a tough midterm election and divisions in Congress, the Biden administration is sidestepping the politically sensitive issue of loosening marijuana laws even as the idea has gained support of most Americans. With no movement at the Federal level, what does this mean for marijuana banking and in turn Colorado real estate?
Recent history of Marijuana legislation
U.S.-listed shares of major cannabis producers surged last year after Democratic vice president nominee Kamala Harris said marijuana would be decriminalized at a federal level in the United States under a Biden administration. This has not come even close to happening!
Unfortunately, major legislation to decriminalize cannabis appears stuck amid opposition from some Republicans and some moderate Democrats. President Biden hasn’t acted on his own campaign-trail promises to decriminalize marijuana and expunge criminal records of users. The White House said cannabis policy is under study, but declined to comment further.
With the midterms in sight and countless issues on the table from inflation, Ukraine, increased crime rates, etc… it is highly unlikely that Marijuana legislation will go any further anytime soon.
What is happening in Cannabis banking/real estate currently?
- No access to traditional financing as Cannabis classified as a schedule one drug similar to Heroine; there are some banks that are banking the industry but it is at premium rates and not widely publicized.
- Marijuana Businesses are paying above market rents due to a “risk premium” placed on the industry
- State by State patchwork of laws that are drastically different than one another. Furthermore there is no interstate commerce, so what is produced in a state must be sold/consumed in the state.
What does this mean for real estate?
Marijuana properties will continue to trade at premiums due to lack of traditional capital and steep barriers to entries. Even though banking is not changing there are still some big changes in the industry as other states come online to allow Marijuana businesses and consolidation takes hold. Below are the three primary types of Marijuana properties in Colorado and what we are seeing as the industry changes.
- Indoor grows: Indoor grows will not be profitable as prices continue to decline. Many of these growing operations will be mothballed. This is where the largest impacts will be in real estate.
- Manufacturing: The manufacturing of oils/products should do better than the grow side. There will be a continued demand for oils/finished products and the specialized locations/equipment for these processes. You will see consolidation on the manufacturing side as larger players either build their own processing capabilities (like a bottling plant for wine) or buy up smaller players.
- Retail Operations: Retail operations will be impacted as I see Cannabis evolving like liquor stores where it is a specialty store. There will be consolidation on the retail side as you will see large chains in many markets (like McDonalds or Wendy’s on the food side). Colorado has made online sales of recreational marijuana legal during the coronavirus pandemic. Now under Colorado’s emergency rules, customers can pay for marijuana online and then pick up their purchase at the store. This will further consolidate the retail side of the industry to larger players. What happens when sales go fully online with some sort of delivery option?
Summary
The lack of federal legislation is puzzling as over half of the states have legalized marijuana in some sort. Unfortunately, even though states can legalize the sale and consumption of Marijuana, they are unable to solve the banking issue as federal legislation is needed to ensure banks are not ensnared in prosecution/asset seizures due to marijuana clients.
Although banking is not changing, the industry on its own is starting to evolve as more states come online and consumer demand continues to rise. In turn marijuana real estate is beginning to see the impacts of the changing industry with grows becoming less valuable while extraction is increasing in value. Furthermore, retail operations will continue to consolidate similar to the liquor industry.
With everything going on in the world and US economy I don’t see any profound changes coming out of Washington anytime soon even though the Democrats control everything, and they have been traditionally more sympathetic to the industry. This legislative session was the best shot the industry has had since inception to get some meaningful laws changed such as decriminalization, access to traditional banking, and interstate commerce.
Additional Reading/Resources
- https://www.reuters.com/article/us-cannabis-stocks/weed-stocks-surge-as-kamala-harris-vows-to-decriminalize-pot-in-debate-idUSKBN26T3IH
- Push to Relax Marijuana Laws Hits Roadblocks – WSJ
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Written by Glen Weinberg, Owner 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.
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