People in the United States who want to venture into the cannabis business where cannabis is illegal encounter a significant difficulty: how costly it is to open a new location.
The money involved is not easy to come by; many fees have to be paid, expenses such as the licensing application fees, consultation fees, real estate costs; all these fees are aside from the traditional start-up capital.
For traditional businesses, business owners resolve to get loans from family and friends, banks, investment institutions, and so on. But for the cannabis business because it is illegal at the federal level. So a business person who wants to venture into the business cannot just walk into any bank or investment organization (lending organization at large) to ask for loans.
Although few organizations and individuals are willing to give cannabis property loans, the interest rate is ridiculously high.
Cannabis real estate loans continue to evolve; this may later birth better options as time goes on. Looking forward and hoping for better days, however, let’s look at how things were as far back as 2016 and how things finally take a better turn.
The Real Estate Problems From Inception.
The most prominent difficulty cannabis business people faced was getting loans at the market rate. Because cannabis is illegal at the federal level, no national backing organization is willing to give them loans.
Hence, they had to turn to banks, investment institutions that are privately owned, or state-owned institutions that are present in States where cannabis is considered legal; these issues eventually give loans at high-interest rates.
This problem got worse mainly because purchase prices went up tremendously for cannabis-compliant properties in the early days. This meant getting loans to finance their businesses with a 40% to 50% loan-to-value ratio, which in turn amounted to only 20% to 30% of the purchase price.
Banks and investment banks (Lending organizations) that eventually led to the cannabis business demand to get their money back so quickly because of the risks involved in the business, mostly putting in mind that if cannabis becomes illegal in the states they are in; that means their money will be gone.
Thus, this makes being able to start the cannabis business very expensive. However, for business people who can get licensed and start operations, that was enough to keep them going forward in the cannabis business.
Cannabis businesses can now get loans from commercial banks, investment banks, and so on; lending zones for cannabis are now becoming more friendly than before. Banks and lenders located in States where cannabis is legal always have their hands open to lending to the cannabis business. However, federal-regulated banks are still not willing to do so.
At present, looking at the lending market, the interest rate on cannabis property loans is an average of 8.5% for dispensary assets, and industrial property is 9.25%. These rates may still look very high compared to the general commercial lending market, which has an interest rate of about 4%, but in the cannabis business space, these rates are considered fair enough.
Also, cannabis businesses have stopped putting up with inflated real estate valuations; hence they are getting better deals on less complicated terms.
The Future Of The Cannabis Business.
Going forward in the cannabis business space, lending will become much more accessible than in past years. The bill passed by the SAFE Banking Act seems like a matter of time, and people are hoping the federal government will legalize cannabis soon, hopefully in the next few years.
Few banks might not jump at lending to the cannabis business as soon as it comes legalized mainly because they feel the business is still young, and it is an industry that has proven itself with much maturation to go through.
Cannabis businesses expect that as soon as the federal government majority of banks have legalized cannabis are likely to keep their exposure to the barest minimum at first, and 6 months after the government legalizes cannabis, they will start lending to the cannabis business.
Getting loans readily available at lending organizations will help the cannabis business tremendously, there will be massive product innovation, brand expansion as well as investors’ profitability.
The effect of legalizing cannabis.
Having cannabis legalized in the United States will have an unmatched impact on the United States real estate market. There will be an expansion in the investment return on the cannabis business after legalization. However, there will be other economic and social impacts that will undoubtedly affect the entire business process.
From the beginning of the cannabis business, the legislation of cannabis has been a contentious topic, mainly because people did not know how the lifespan of the business would affect the masses as a whole; there were questions that the answers to them couldn’t be guessed or predicted.
A question such as will the cannabis business increase the rate of criminal activities in society? What age group will cannabis be available for usage? And so on. Hence the reluctance of the federal government to legalize cannabis.
Although the federal government has not legalized marijuana, the use of marijuana has been legalized in 15 states across the United States of America and Washington, D.C.
The National Association of Realtors (NAR) organization conducted a study. This study made it very clear that the legalization of cannabis will have a significant impact on the local real estate market.
In the states where cannabis has been legalized for over three years, the study has shown that there has been a rise in the demand for warehouses to 42% storefront has increased by 27%, and land transactions have also increased by 21%.
From all you have read in this article and looking through the cannabis business from a distance, you know that it is now a big industry involving a lot of money. Since the state regulations and restrictions had loosened in 2012, when Colorado and Washington made cannabis a recreational substance, cannabis retailers and growers are now looking to invest in commercial properties.