Medical Marijuana – Risks for Lenders and Landlords

No matter what your personal views on the issues of medical marijuana (MMJ), it is clear that the growing and dispensing of MMJ has impacted the real estate market in Denver and the Front Range. As the retail and warehouse real estate markets became more depressed over the last few years, dispensers and growers of MMJ have been one of the few areas where demand has increased. Both landlords and lenders have had to address the respective issues of leasing to, or accepting deposits from and lending money to, those in the MMJ business. Banking or leasing to a customer whose operation remains illegal carries with it under federal law a unique series of risks that must be addressed.

How Did We Get Here?

Prior to 2000, a few individual cities in Colorado, including Denver, had approved the use of MMJ under certain circumstances. Since the distribution of marijuana, for any reason, had remained illegal under both federal and Colorado law, the isolated referenda passed by individual towns and cities did little, if anything, to change the legal landscape.

That all changed in 2000. In November of that year, Colorado voters passed Amendment 20, authorizing the medical use of marijuana "for persons suffering from debilitating medical conditions." This amendment gave certain protections from state criminal liability for patients, and primary caregivers, who qualified under the rules. The Colorado amendment had no impact, however, upon the existence and enforceability of numerous federal laws, which continued to make the growing and distribution of marijuana a crime. During the Bush administration, the Department of Justice continued to enforce federal marijuana laws, notwithstanding the passage of Amendment 20. As a result, those growers and dispensers, who attempted to take advantage of the provisions of Amendment 20, were still at serious risk over the violation of a number of federal laws on the books.

Over the last two years, two events have altered the enforcement scheme for MMJ growing and dispensing in our state. In 2009, after the election of our new U.S. President, the Department of Justice issued a memorandum, stating that, while under federal law the growing and distribution of marijuana is a crime, U.S. attorneys would not focus federal resources on individuals "whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." While this edict, known as the "Holder Memorandum" (in honor of Attorney General Eric Holder), purported to reduce MMJ prosecution on the federal front, numerous questions remain concerning federal law issues that cause risks for landlords and lenders.

Colorado attempted to better define the production and dispensing of MMJ by passage of the Colorado Medical Marijuana Code (HB 1284) in 2010. This law put into place a comprehensive scheme of registration, licensing, regulation, supervision, and enforcement for dispensaries and growing facilities. Among the important provisions of HB 1284 was the requirement that any Medical Marijuana Center purchase not more than 30 percent of its inventory from other licensed growers. In short, each dispensary must cultivate at least 70 percent of its inventory. As one dispenser of marijuana noted in a Denver Post article in November 2010, "It's like calling all the burger joints in town and saying now you have to raise your own cows." As a result, almost all dispensers must find a controlled location to grow the large part of their inventory, which increases their real-estate interests.

Second, HB 1284 allows a municipality to prohibit the sale of MMJ within its jurisdiction by either vote or ordinance. Since the passage of HB 1284, a number of cities have passed ordinances or held referenda to either regulate or prohibit the sale of medical marijuana within their city limits. The most public example was the town of Loveland, where the City Council voted to eliminate all dispensaries effective March 1, 2011. By that date, all fourteen of Loveland's MMJ dispensaries were shuttered, although a lawsuit was filed on their behalf in an attempt to enjoin the enforcement of the Loveland ordinance. All of the dispensaries remain closed as of this date.

Risks to Lenders and Landlords

Very few banks in Colorado will accept deposits from MMJ growers or dispensaries. In an informal survey, fifty banks in Colorado were asked if they would accept deposits from MMJ related businesses. Of that group, only two responded in the affirmative. Also, our experience has been that no lenders, whether they are banks or insurance companies, will knowingly loan money to MMJ businesses or to landlords where marijuana dispensaries or growing facilities are leased.

Why this hesitancy? Undoubtedly, banks and other lenders have a concern about lending money to, or accepting deposits from, any business engaged in an illegal activity under federal law. A major concern is the very broad power that the government possesses to require a defendant to forfeit any property related to the commission of a crime and the proceeds thereof. In a lender's situation, any cash of the grower (whether located under the mattress or in an account at a bank) can be seized. Also, any property, real or personal, that is owned by the defendant may be seized. For example, if a defendant leases three storefronts in a strip mall of ten stores, those stores can be shut down, all personal property and fixtures can be seized, and the lender's source of repayment proceeds can be confiscated.

Lenders may be able to assert a claim of an innocent lienholder; however, the burden lies upon the lender to prove its case. It must show that (1) it did not have actual knowledge that the property was impacted, (2) it did not "consciously avoid" learning that the property was tainted, and (3) it did not consent to, and had used reasonable efforts to prevent, the criminal use of the property. However, since most lenders undertake some due diligence upon the uses of their collateral, it is not easy for a lender to meet this burden in most circumstances. This defense is better raised in the circumstance where, after the loan was made, the landlord/business subsequently leased the property to the dispensary.

In a seizure situation, a lender sometimes can reach an agreement with the government in order to stipulate to the lender's innocence in exchange for allowing the government to seize and sell the forfeited property. After the government sells the seized property, the lender then is able to foreclose upon its deed of trust and to obtain its principal and interest. All in all, typically there is a significant amount of delay and the lender's rights in its collateral are thereby compromised.

Lenders also are justifiably concerned about the ability of a city or town to prohibit the growing and dispensing of MMJ, by a later referendum or ordinance (the Loveland scenario), as permitted in HB 1284. Also, as federal administrations change (as they always do), the next one may not be as lenient about the enforcement of federal marijuana laws. All of these items add up to a lot of uncertainty, which typically precludes lenders from becoming involved.

The risks to landlords are even more significant. Leasing to an MMJ dispenser or grower carries all of the risks described above; however, it is very rare for a landlord, who knowingly leases to a grower/ dispenser, to qualify for the "innocent owner" defense. As such, landlords who do decide to lease to growers/dispensers do so at tremendous risk.

Most leases do not contemplate the operation of a potentially illegal business on the premises. For those landlords who desire to lease to growers/dispensers, the leases must be tailored to address those eventualities; little or no tenant improvements should be part of the deal, and initial free-rent provisions are not favored. Essentially, landlords should look at such leases as month-to-month leases, and should incorporate adequate security in order to assure rent payment during any times when the premises may be closed unexpectedly due to legal enforcement activities, change in laws, or the imposition of a moratorium on operation.

Landlords are well advised to "get the money up front" in order to mitigate these types of concerns. If a landlord is able, it also should try to assure that its lender will not call its loan into default for leasing a portion of the collateral to a facility that is violative of federal law.

Finally, leases should be crafted with language that will require that notice be given to the landlord of any noncompliance by the tenant of HB 1284.

So far, the risks of entering into these transactions appear to outweigh the benefits, at least on the lending front. In May 2010, approximately fifteen members of Congress sent a letter to Treasury Secretary Geithner, asking for written guidance to assure that lenders would not be prosecuted for working with MMJ facilities. To date, there has been no official proposal by the Department of Treasury. Only time will tell if the medical marijuana business becomes an acceptable borrower, account holder, or tenant.

In summary, the operation of an MMJ growing or dispensing business still carries with it some risk. Most lenders attempt to avoid risk and will avoid accepting deposits from growers/dispensers, and will avoid making loans secured by collateral that is utilized in the growing or dispensing of MMJ. These risks also extend to landlords who face the potential termination of their leases to growers/dispensers through no fault of their tenants.


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