3 Reminders for CUs Lending to Cannabis Businesses: Onsite at CUBG
PORTLAND, Ore. – Cannabis businesses loans are a territory most credit unions would choose to steer clear of, but at the 2017 CUBG National Conference Tuesday, Dennis Baranowski and Nema Daghbandan of Geraci Law Firm offered pointers on how to do just that to a small group of curious lending executives during a breakout session, “What Every Credit Union Should Know About the Green Rush – Lending to the Cannabis Industry.”
Their Irvine, Calif.-based firm provides services related to the legal aspects of loans, including cannabis business loans. While marijuana remains federally illegal, the federal government has released enforcement memos that allow marijuana businesses to carry on with their operations without being prosecuted.
“It’s a green rush,” Baranowski said, pointing to a U.S. map showing which states have legalized the drug. “As you know, a wave has taken over the U.S. where states have passed recreational or marijuana laws.”
Baranowski and Daghbandan discussed three keys for credit unions to keep in mind if they’re considering lending to the cannabis industry.
1. Beef up your knowledge of each business. When evaluating a potential cannabis business loan, it’s critical to understand the lending environment, what the collateral might be and the business itself. First, the credit union must ask if the business is engaged in medical or recreational activity, and if that type of activity is allowed in the business’ location. In determining collateral, Baranowski said this can be anything in the business’ possession, such as real property or equipment, but can’t be the cannabis product itself.
In examining the business itself, the credit union must ensure it is properly licensed (this can be confirmed by local authorities) and take a hard look at its chances of succeeding financially.
“It’s similar to the gold rush, where you have tons of people thinking they will strike it rich,” Baranowski said. “But those who struck gold were very few. So the percentage of who will succeed is very small. You have to determine: Who is operating? Do they have a finance background? Can they give you a sound statement of profits and losses?”
2. Tailor your loan terms to cannabis businesses. Loan terms must contain the following, the legal experts said: The definition of a default and cure requirements in the event of default, a requirement for the borrower to provide notice in the case of government action, money laundering provisions, reporting requirements and subordination agreements.
Daghbandan called the subordination agreements the most contentious point of the loan terms and recommended that the option be made available for the business owner’s landlord to take action and for the business owner’s property to be foreclosed upon.
3. Make post-closing considerations. Credit unions should remember three things when making their post-closing considerations for cannabis businesses: Require the borrower to comply with reporting requirements, refuse to accept cash payments, and if there is a risk of forfeiture, act quickly.
“Really make sure you enforce the reporting requirements,” Baranowski emphasized. “If they haven’t met them, tell them to get their stuff out [of the business], whatever that may look like, until they can comply.”