Bankers’ Hours: Lending to marijuana industry full of unknowns
How risky, really, is lending to Colorado’s marijuana industry? It depends on whom you talk to, and, whoever it is, you’re not going to come away feeling any better, or worse.
That’s because the unknowns abound, more than in any other business lending, and unknowns are anathema to lenders, as opposed to venture capitalists, who assess what is known, and then bet on it.
Both investor categories are making assumptions about future events, with lenders taking the conservative approach. It’s pretty hard to know what those events might be when you don’t even know the rules of the game.
Pot is legal in Colorado, according to state law. Federal law says it’s illegal. A basic element of American jurisprudence is that federal law trumps a state statute with very few exceptions. (One is in the instance of consumer protective legislation: If state law is more stringent, and thus is assumed to provide more protection to the consumer, then it would prevail.)
So, as we’ve noted before in this space, if the feds decide to enforce the law nationwide, then a lot of bad things happen to a lot of people involved in the pot industry, including lenders. Especially lenders.
But maybe the federal statute will be repealed, and the states will be left to decide if they want marijuana or not. Then, pot will be legal in Colorado, with no caveats whatsoever.
Wouldn’t that be wonderful for everybody involved, including lenders? Especially lenders?
It could happen. Instead of tightening the screws on weed, the feds could say, “The heck with it. Go and do what you want.” After all we’ve got an ex-hippie, Bernie Sanders, aiming at the Oval Office. Of course, the executive branch doesn’t repeal laws, but an administration in favor of legalizing the drug certainly would have some influence. For one thing, there’d be no presidential veto.
Now, cut to what’s happening to industrial real estate in Colorado. Warehouses that were listed for, say, $2 million or so five years ago, and weren’t selling, are being snapped up for as much as $8 million for pot production. These are class C properties that, under other circumstances would have been demolished to clean up the site for sale.
We can’t predict everything that will happen if U.S. law makes marijuana legal, but some things we can be sure of:
Big money, and big corporations, will move in. State-of-the-art growing and manufacturing facilities will be built, and the retail product will increase exponentially. Inevitably, the commodity’s retail price will drop significantly. Today’s big weed producers will suddenly become very small, and struggling ones at that.
Maybe that $8 million warehouse has a nice conservative 50 percent loan on it with a rather typical three-year term. It comes due about the time that, say, Anheuser-Busch InBev gets its state-of-the-art mega facility up and running in, maybe, Longmont, and Archer-Daniels Midland cranks up in an industrial park in Pueblo.
The weed producer tries to refi. No luck; that class C building is just that, and maybe worth $3 million, maybe less. The lender is left holding the bag on the collateral and facing a big loss. Hey, don’t laugh kids. Just six years ago, a lot of 50 percent loans suddenly had 110 percent loan to value ratios, and even higher.
That dichotomy has to keep lenders with marijuana properties as collateral up nights. How’s this for alternative nightmares: Monday night, the feds start enforcing the federal statute; Tuesday, Congress repeals the law on weed.
Wednesday, I guess you light up a joint, and maybe get a few hours of sleep.
Pat Dalrymple is a western Colorado native and has spent almost 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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