Is a new cash cow headed your way?

by Rachel.Norvell30 Sep 2014
Marijuana may be a new opportunity for lenders as the demand and legalization of it for recreational use continues to grow across the country. Many are entering the newly legalized business hoping to make a buck and investment dollars are flowing to finance new ventures.

Following Colorado and Washington’s paths, many states are reconsidering their laws surrounding recreational marijuana. Oregon, Florida, Alaska, Hawaii, California, Maine and Washington, D.C., are among those states looking to legalize the drug.  Currently, 23 states and the District of Columbia have some form of medical cannabis-friendly legislation on their books.

But with marijuana still illegal under federal law, getting involved can be tricky and there is no conventional lending source, said Glen Weinberg, chief operating officer at Denver-based Fairview Commercial Lending, a private hard money lender.

Weinberg said the FDIC has yet to set clear guidelines for banks to follow; instead the agency has just issued the risk factors involved with lending to the industry. “These banks see all these risks and think ‘no way,’” he added. “One would think with no banks involved we would be knocking the socks off this industry, but that’s not the case.”

In Denver, demand for industrial space, which is used by the industry to grow marijuana, is so high that it has pushed prices too high, said Weinberg. According to commercial real estate firm Cassidy Turley, the industrial vacancy and asking rental rates in Denver reached historical levels at the end of the second quarter in 2014.

Cassidy Turley reported the industrial average vacancy rate declined to 4.8% and asking rents climbed to $5.65 per square foot compared to a year earlier when vacancy was 6.7% and asking rent was $4.83. Currently, cannabis real estate vacancy rates in Colorado are around 2%, according to 420MLS, a marijuana real estate listing service.

Although landlords are reaping the benefits of above-market rents, it doesn’t necessarily mean the value of their properties is increasing, said Weinberg. One example is a transaction that he recently evaluated in Pueblo, Colo. He said the potential borrower contacted him about taking out a $300,000 loan on an industrial building he paid $250,000 for two months earlier. The borrower said the new appraisal on the building showed it was worth $500,000, because he was going to get a marijuana tenant.

However, after Weinberg analyzed the current market rents, he came to a different assessment of the value of the property – that it was worth much less. “The industry is going to change and these landlords aren’t going to be able to charge these high rents forever,” he added.

Fairview doesn’t lend to the marijuana tenant but the landlord. They also refinance properties that include marijuana tenants. Fairview, which has offices in Colorado, Georgia, Illinois and Florida, is a full-service lending firm that provides loans ranging from $50,000 to $1.5 million. 

Weinberg said he believes the marijuana business will continue to experience growth, but unfortunately come with a number of risks until it is not a controlled substance under the eyes of the federal government.

“They are going to have to deal with this industry,” he said. “Whether you hate it, like it – it doesn’t matter. It is here to stay.”

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