Bankers’ Hours column: Pot businesses are still risky for investors
The news that federal and state cops raided a couple of dozen black market pot operations in an upscale Aurora subdivision is interesting on several levels.
One question comes to mind relative to any financing that might be in place on the properties.
If a property is used for an illegal purpose, the mortgage holder isn’t always home free. I’ve had a bit of experience in this area. Back in the last century, the bank I worked for had a loan on a property out of which the borrowers were dealing illegal drugs. The DEA arrested the occupants and, more or less, the house as well. Since the premises were used in an illegal activity, the first word from the U.S. Attorney’s Office was that the house would be confiscated by the government and sold at auction, and too bad about the bank’s mortgage, which would be wiped out.
Our lawyers managed to get that position reversed, and we ultimately ended up getting paid off, and collecting delinquent interest.
But if a lender knows, or should have known, that the intended use of the property is for an illegal activity, then there’s no safe harbor for the lender. The mortgage holder is at great risk of losing the loan’s principal balance, plus interest and even possibly personal freedom.
This is one of several reasons why institutional lenders, banks, thrifts and credit unions shy away from lending to marijuana businesses. There’s simply too much business, regulatory and, yes, personal risk.
So financing pot properties — i.e. growing operations, retail stores and warehouses — is left to private, hard money lenders. In fact, there’s at least one well-established private lender that makes a point of advertising this form of real estate lending on its website.
So far, in Colorado, it’s worked pretty well, both for lenders and borrowers. But it’s always risky when a business operates, quite literally, in violation of federal law.
Here’s an intriguing scenario:
Say that the DEA busts a seemingly legitimate pot farm, that ostensibly is operating in accordance with Colorado state law, because it’s found to be producing weed to sell outside of Colorado. And, maybe, the federal prosecutor is ambitious and wants to make some political bones to possibly run for governor or the Senate.
So when the loan goes into default after the feds shut the operation down, the lender expects to foreclose, get the collateral and sell the property to retire its loan. After all, the mortgage holder didn’t know about the black market activity.
But our young, hard-charging prosecutor says, “Sorry, lender. We’re taking the property, and when we sell it, the money will go to the U.S. Treasury.”
“Why; how?” asks the shocked lender.
“Because,” responds the U.S. attorney, “You knew the business was engaged in illegal activity when you made the loan. Growing pot to sell is illegal under federal law, and it’s the federal statute that’s the high card here. And, oh, by the way, we’re seriously considering charging you personally for aiding and abetting the commission of a felony.”
Is that likely to happen? Probably not.
Could it happen?
Welllll, just maybe. …
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 email@example.com.
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