Bankers with commercial loans on properties that lease to a marijuana business say they’re unlikely to refinance the loans when they come due — contrary to normal business practices — leaving some property owners scrambling for financing.
In addition, Colorado’s two largest banks — Wells Fargo Bank and FirstBank — say they will not offer any new loans to landowners whose properties have a preexisting lease with a marijuana business.
Wells Fargo and Vectra Bank have already told commercial loan clients they’ll have to either evict the marijuana business or refinance their loan elsewhere.
In every case, bankers said their decision lies on the simple fact that marijuana, though legal in Colorado, remains illegal under federal law, which is their primary directive.
This comes just days after federal banking regulators announced what some said was a “green light” for doing business with the marijuana industry. Those rules require that banks continue to file reports on their interactions with marijuana businesses but must identify when transactions are questionable.
Banks are leery that notes collateralized by property theoretically subject to federal drug-seizure laws — and suddenly made subordinate to the federal government’s claims — are just too risky.
“It’s just awkward because we’re all caught in the federal-law issue,” said Vectra CEO Bruce Alexander. “We’re seeing that when banks find out (about a marijuana business leasing a property), they are given an element of time to cure it, to get the tenant out or move on.”
Vectra made that very demand on a commercial loan that had come due — the industry-standard commercial loan is about eight years — and the client opted to seek his own financing, Alexander said.
He would not identify the business or whether another bank picked up the refinancing.
Related: more coverage on marijuana banking
A landowner in Denver who leases to a marijuana dispensary said Wells Fargo has refused to refinance his note after a clean 10-year history of repayments and years more of other business loans.
That didn’t happen until the landowner, who asked that his name and location not be identified for fear the bank will begin immediate foreclosure, inquired about refinancing. The bank sent a representative to see the property, a normal business practice, and noticed the marijuana business.
“We have recently been informed that one of your tenants has been operating a medical marijuana dispensary on the real property that secures the above-referenced loan from Wells Fargo Bank,” a letter sent to the landowner says. “The operation of a medical marijuana dispensary is a violation of federal law.”
A possible forfeiture through federal prosecution “is not a risk that Wells Fargo can reasonably take,” the letter notes.
The bank refused to comment to The Denver Post but did say through a spokeswoman that it is operating legally.
“Our policy of not banking marijuana-related businesses and not lending on commercial properties leased by marijuana-related businesses is based on applicable federal laws,” spokeswoman Cristie Drumm said in an e-mail.
Although the note has come due, the bank appears to be allowing the landowner time to find other financing. His best bet: a private lender who will offer only about 80 percent of the money needed at a term of two years, 12 percent interest on an interest-only loan and about $6,000 upfront in fees.
“And in two years, I’ll need to do it all over again,” he said, noting he had approached about two dozen banks and was politely turned away.
A check of public records shows a number of marijuana businesses located on land where the owner is financed not through normal banking channels but through private financing, including hard-money lenders with heavy terms.
“Part of the interpretation (of laws) is the Controlled Substances Act prohibits anyone from dealing with the substances or their proceeds,” said Ron Tilton, executive vice president of FirstBank. “Someone collecting rent from a dispensary or grow house, that’s the proceeds of an operation and therefore is illegal.”
Said Alexander: “Anyone paying attention would not make a loan to anyone housing a marijuana business.”
Related: Banks need more than marijuana regulators’ promises (Denver Post editorial)
While FirstBank has not yet canceled a commercial loan in midstream because of a problem lease, Tilton said it will not offer new loans to landlords leasing to marijuana businesses.
Refinancing of existing commercial loans will depend on how much of a property is leased to a marijuana business.
“If it’s 100 percent of a property, we’ll not go for it,” he said. “A retail operation in a small strip center, and less than 20 percent is to a marijuana business, we’ll look at the borrower and see if he’s substantial enough (financially).”
Until about two years ago, commercial loans did not require borrowers to inform lenders about tenants or new leases on the property. That’s changed, and not only do many contracts carry default provisions should a lessee violate state or federal laws, but borrowers must also keep lenders up to date on tenants.
“All our lenders are to know their clients and the tenants in the spaces,” Tilton said. “We get rent rolls of all the properties we finance and require the list of tenants.”
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Bankers say they are not trolling their commercial loans to see whether marijuana businesses are located there — a simple-enough process using readily available public records.
“Every deal is different, but we’d say to a client that this is against the law and we can’t have the loan with this in there,” Alexander said.
Despite the hard-edged approach, Alexander said Vectra is simply conforming with federal laws.
“We’re not on a witch hunt of pot shops,” he said. “But we’re trying to be thoughtful and prudent.”
David Migoya: 303-954-1506, firstname.lastname@example.org or twitter.com/davidmigoya