Banks Get Exposed by New York’s Unlicensed Cannabis Dispensaries

Major banks like JPMorgan Chase and Wells Fargo, as well as landlords such as BentallGreenOak and Ashkenazy Acquisition Corp., have found themselves indirectly involved with New York City’s unlicensed cannabis dispensaries, potentially exposing them to legal issues. This situation arises due to the proliferation of unlicensed retail shops in the city, with as many as 2,000 of them now operating since New York legalized recreational marijuana in 2021.

A new law known as Local Law 107 of 2023 (“LL 107”) that came into effect in July allows the city to fine landlords up to $10,000 if they knowingly lease space to tenants who illegally sell cannabis. (See our commentary here.) While cannabis consumption is legal at the state level in New York, it remains illegal at the federal level. Banks receiving payments from cannabis sales, and especially unlicensed cannabis dispensaries, could face regulatory penalties.

An analysis by PincusCo and Bloomberg revealed that more than two dozen landlords had multiple unlicensed cannabis stores as tenants. It can be challenging for some landlords to determine whether their tenants plan to sell cannabis, as some of these stores initially appeared as convenience stores or bodegas that later added cannabis products alongside snacks and cigarettes.

Landlords attempting to evict tenants engaged in illegal cannabis sales have encountered a slow eviction process. Some cases won’t reach a courtroom until September, even after receiving notices from the Manhattan District Attorney’s Office.

Banks that have financed properties with unlicensed cannabis tenants could also face repercussions. A Bloomberg analysis found that JPMorgan Chase & Co., Signature Bank, Bank of America Corp., Wells Fargo & Co., and New York Community Bank had numerous mortgages for properties leased to illegal smoke shops. Banks have been cautious in states where recreational cannabis sales are legal, including language in loan agreements that could put borrowers in default if the property is used in violation of federal law.

The takeaways here are that failing to conduct proper due diligence could: 1) lead to serious tenant headaches, including exposure under LL 107 with respect to unlicensed dispensaries, and 2) expose concerns about the strength of the bank’s anti-money laundering programs. Banks and all other landlords should take care to diligence their incoming retail clients carefully, and include strong lease language with respect to “allowed use” on site.

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Legal Issues, New York