Bank Loans on Cannabis Property: Tread Carefully

My law firm represents a large number of cannabis operators in Oregon, Washington and California. Some of these operators own the land they trade on; others simply lease. Whenever we are lucky enough to meet the client before the onset of cannabis activity, our first question is often whether the target property is mortgaged, or if it is owned free and clear. If the property is mortgaged, we ask ā€œby whom?ā€ If the answer is ā€œa bank,ā€ we tend to say, ā€œletā€™s talk about that for a minute.ā€Cannabis mortgages and bank loans

Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct ā€œillegal activity.ā€ Lenders wonā€™t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible. If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running a risk of foreclosure, to say nothing of allegations of fraud.

When a bank discovers that cannabis is being grown, processed, held or sold on its mortgaged property, it has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owing on the spot. In practice, if a loan is in good standing it wonā€™t always get called; but if a bank learns that cannabis is beingĀ tradedĀ on the property, a realĀ possibility exists that the mortgage will get called. And refinancing with the lender will be all but impossible.

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Although banks typically do not troll their commercial loans looking for pot merchants, many loans require borrowers to inform lenders about tenants and new leases on the property. When a bank decides to call a loan due to cannabis activity, the bank may give the mortgagor a limited window of time to cure the defect (stop the cannabis activities), or to find alternative lending. Given the realities of business investment and operations, the strictures of leases and the high cost of private lending, this can cause tremendous headaches.

There is no work-around for the ā€œillegal activitiesā€ issue in institutional lending, but that hasnā€™t stopped some folks from trying. Among other creative ideas, we recently saw one owner give a second, unrecorded mortgage to a cannabis operator as ā€œinsuranceā€ against the first loan getting called. Not only would this approach fail to prevent the first mortgage from getting called, it would typically allow the first mortgagee to declare the balance of its loan payable immediately, as ā€œdue on sale.ā€ Such an action could wipe out the junior, unrecorded mortgage interest in any subsequent foreclosure.

Finding a cannabis property is not always easy, but itā€™s important to understand how the property is financed (or otherwise encumbered) before youĀ sign a lease or begin operations. If you intend to purchase a cannabis property and cannot pay cash, seller financing is a popular optionĀ we have written about elsewhere. Otherwise, itā€™s hard money or trying to fool the bank. Neither of those is a good business plan.

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