Bankers’ Hours column: Federally legal pot could hurt some current businesses
The marijuana industry nationwide is morphing from a boom to a business, and that’s certainly true in Colorado, which has been in the forefront of growing and marketing pot for recreational use.
Weed is still illegal under federal law, and the principle of federal pre-emption, wherein a federal statue overrides a state law, is firmly in place. But, as more states legalize the drug, more members of Congress will back making it legal in the U.S., and letting individual states deal with its use.
So the pot boom will become the marijuana business. We’ve seen this transition repeatedly in the west: Look at the thousands of mines dotting the Continental Divide in Colorado, dug by prospectors looking to strike it rich. Harken back to the time between the world wars, where individual wildcatters, as immortalized by the Jett Rink character in the film “Giant,” sunk oil wells throughout the American southwest, and suddenly became millionaires when a drilled well anointed their heads with Black Gold.
There’ll be a collective sigh of relief, and party hats and horns, from the pot pioneers when that pesky federal law is wiped off the books. Being treated like just another business will be very good news to a lot of people, from growers to retailers to agronomists.
So what’s the bad news?
They’ll be treated like just another business.
Large corporations will move in with extensive, state-of-the-art growing facilities. Product supply will increase dramatically, with wholesale and retail prices dropping sharply. Smaller operators will be squeezed. In addition, there will be a corresponding drop in value of much of the real estate dedicated to marijuana production. Many growing and warehouse facilities are housed in old, obsolete industrial properties that were purchased at inflated prices, with loans to match, even with the conservatively low loan to value ratios espoused by hard money lenders.
As is always the case, the plunge in retail prices will be good for the economies of the pot legal states, but not for the survival of a lot of small growers, wholesalers and retailers.
It will … Hey, you in the back of the room, quit fiddling with your phone. What? … Yes, I know this is a column about banking, and we’re getting there. Pay attention; there’ll be a test on this.
Banks will welcome the brave new world of legal pot; it’ll be another lucrative line of business, both on the deposit and lending side. And, in Colorado, the marijuana industry will finally get its very own bank: Four Corners Credit Union. It will be an institution where weed workers and business owners will be welcome as depositors and borrowers. The marijuana business will finally have a friendly lender that understands the dynamics of the industry.
But not so fast. The industry will be in the midst of maturing, with rapid change prevalent at every level. This is the riskiest time for lenders, and good loans can become bad loans overnight. Bank examiners know this, and look at loans tied to such an economy very carefully.
Also, regulators have a key buzz-phrase that’s a basic mantra of bank oversight: Concentration of Credit. The execs at Four Corners CU will hear it cited a lot. Quite simply, it means that if your aggregate lending to a certain business line, loan type or geographical area gets too high, you’re told to back off and acquire car loans, home mortgages or some other paper with less perceived risk.
And, as always, the big dog banks, the TBTFs (Too Big to Fail) guys will skim off the best borrowers, leaving the smaller community banks and credit unions, including Four Corners, to fight over the rest.
This means that there will be a number of small- to medium-sized marijuana businesses that will see their profit margins narrow significantly, who will be compelled to look for loans for upgrading or operating capital, and who may not be able to get the money. Inevitably, there will be attrition and consolidation, with plenty of operations failing, as is always the case when a business grows up.
In short, everything normal, business as usual.
Be careful what you wish for. You may get it.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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