by David Depman
These are the good old days
What is income? How is it defined? Does the source of the income have any bearing at all on whether or not it can be considered for the purposes of approving a mortgage? Of course it does. And that’s exactly why the current climate surrounding the legalization of marijuana is so compelling on so many levels. Not only is there the consideration of a broader social impact, but there are industry-specific impacts as well. (Just ask the water and power utilities in Washington and Colorado about spikes in power consumption due to marijuana cultivation…). So what is happening on the issue and how can it affect real estate, and specifically, loan officers?
Where are we now?
Currently, only Washington and Colorado have legalized cultivation and retail sales of marijuana. Legal marijuana sales in 2013 have been estimated to be about 1.5 billion. Sales of marijuana are expected to quadruple by 2018. Current initiatives across the country will be voted on in about 6 weeks that may have a very positive impact on the economy in general, though not without some complications…
Oregon: Voters will decide on Measure 91 potentially making it the third to legalize marijuana for adults outright. — UPDATE: PASSED — Approved by approximately 55% to 45%
Alaska: Another statewide marijuana legalization initiative is Measure 2. With passage, Alaska would be the first red state to legalize marijuana consumption and may give the legalization trend its first cross-over hit. — UPDATE: PASSED — Approved 52% to 48% with approximately 97% of districts reporting.
Florida: Amendment 2 is a statewide initiative to legalize medical marijuana This initiative is particularly interesting because of the size and status of Florida on the American political landscape. — UPDATE: REJECTED — Proposal needed 60 percent of the vote to pass, but had just 57 percent support.
California: Proposition 47 will push the legalization agenda to the top of the next election cycle if approved. California legalization initiatives may find 2018 as the year the world’s 9th largest economy approves marijuana for possession and consumption. UPDATE: PASSED — California’s prop 47 is approved by a wide margin 58.5% to 41.5%
District of Columbia: Earlier this year, the D.C. Council adopted the nation’s most far-reaching marijuana-decriminalization law. In November, voters in the nation’s capital will decide whether to go even further. Initiative 71 makes it legal for adults over the age of 21 to possess and cultivate small amounts of marijuana. UPDATE: PASSED – Washington, D.C., voters resoundingly passed a marijuana legalization initiative with 69 percent of the vote on Tuesday
Maine, Michigan and New Mexico also have major initiatives on the ballots ranging from statewide to local ordinances. In addition, Arizona, California, Connecticut, Delaware, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Hampshire, New Mexico, New York, Rhode Island, Vermont are all looking at the next 1 or 2 elections to bring full legalization to the ballot box.
Wait, we can do this?
The trend line is clear, and the opportunities are real. So now what? Well, for some insight, we have two states that can act as our test subjects. Colorado and Washington legalized in early 2014. Both are expecting tax revenue boosts and a positive economic impact from legalization not only from the retail activity but also from tourism.
State authorities are working with the industry to create a positive business environment, and last August’s Cole Memorandum made it clear that the federal Department of Justice would take a hands-off approach to the cannabis industry (provided that companies obey local laws and state regulations with agreement by the States that strict oversight measures would be in place).
However, as promising as all this is — new industry, massive potential income, legitimate money flowing into the pockets of potential home and commercial buyers, etc… — there is the complication of documenting the income. State and Federal laws are opposed to one another on the issue of legal income.
To some banks, like Wells Fargo, the only option to ensure risk aversion is to enact a scorched earth policy and divest holding entirely from any enterprise with even a whiff of marijuana related income. Others are carrying on banking activities with businesses that rely on marijuana as their revenue source in secret. The trend line, though, is heading in a positive direction in reaction to the massive amount of money being generated by the industry. Federal and State lawmakers are also on the move introducing legislation designed to open access to the industry and get the Federal laws in-line with the States.
Get ready
So how can an LO begin to account for income from a potential client where State and Federal guidelines are in opposition, and the stakes are high? One answer is to walk away and wait for the situation to sort itself out. Another answer is ‘carefully’.
While Federal laws provide the foundation for actions such as seizure of assets, FinCEN (the U.S. Department of Justice and Financial Crimes Enforcement Network) has broadcast a message of tolerance based on State oversight. Businesses in the industry in Colorado and Washington are in the early stages of integrating into the business community, and there will inevitably be rough patches, but in the end, the financial industry moves like water around a rock, and with best practices, full compliance and accessibility is inevitable.
In February 2014, FinCEN issued some guidance intended to give banks some assurances that they could lend money to marijuana operations that are in full compliance with state marijuana laws. According to FinCEN, banks considering offering services to marijuana-related businesses should implement the following procedures:
- Check and verify that the business is licensed and registered with the relevant State authorities
- Review all related documentation like license applications and registration filings
- Check with State licensing and enforcement authorities for all related and available information concerning the business itself and any related partners or contractors
- Understand the core activities of the business to get insight into the products sold and the clients served
- Keep up to date on publicly available information related to the business and any related parties keeping a sharp eye for adverse information and suspicious activity
- Keep all records updated as part of a strong due diligence plan
Loan Officers in States that have approved further legalization will be wise to keep an eye on legislative developments to ensure they will be ready for any opportunities. Preparing now will also require a better understanding of the Federal guidelines in cases where they complicate State directives. Further, individual organizations will enact their own risk aversion programs that will provide the institutions foundation and guidance for engagement with this new, and very interesting industry. Put that in your pipe.