Cannabis Industry Jargon Tangles Real Estate and Insurance Ops

NEW YORK CITY – Real estate operators and insurers are trying to keep up with the quickly evolving cannabis industry as quickly as bills stack in congress for national legalization of cannabis, as well as changes to jargon crucial to operating their businesses compliantly, according to panelists on a Claims Magazine and GlobeSt.com webinar looking at the insurance and real estate implications of cannabis-touching companies, “Legalized Cannabis is Big Business.” (Click the hyperlink to listen)

Exposure to government risk is the biggest challenge for cannabis touching companies and as jargon changes to protect municipality interests companies have to adapt their operations to make sure they’re in compliance with local and federal law in underwriting real estate and insurance policy.

The evolving industry lingo is a challenge for the entrepreneurial groups entering the arena who strive to stay abreast of regulatory requirements, according to Kieran O’Rourke, vice president and director of underwriting at Cannasure Insurance Services. “The jargon of this industry and space can sometimes lead to some confusion and miscommunication,” he said. “We follow the market we can’t control it, it controls us.”

Policy changes month-to-month mean new entrants need insurance brokers and real estate deal makers who can keep up with rapid change, especially because coverage is difficult to come by, which is daunting to a new entrant, according to Steven Sherman, J.D., vice president of the cannabis risk group at PSA Insurance and Financial Services. “It’s frustrating you cannot get coverage on market properties that you would typically get in the marketplace,” he said.

Cannabis companies and real estate operators face an added set of challenges when securing financing, extending beyond industry lingo important to underwriting a loan. Simply paying for real estate through a bank account could pose a challenge, according to Stanley Jutkowitz, senior counsel at Seyfarth Shaw. “Most cannabis companies think they cannot bank a cannabis permissible business,” he said. “I’ve had to negotiate a provision in a lease that the tenant pays through a bank account, which can become a major issue in some cases.”

A majority of banks don’t want to lend on cannabis businesses, so it leaves the door open for private lenders, family offices and private equity firms to do so, and at a premium because of the risks involved, which adds another layer of legalese to sift through.  However, added rules are no cause to run, as long as the borrower is consistently compliant to defined the guidelines, according to Jutkowitz. “If you follow the rules, in my view these risks are more academic than real,” he said.

As the cannabis industry matures overtime, the challenges associated with legal ambiguity and operations will change. The rough tides are expected because the industry is still in its early stages, according to Taite McDonald, a partner at Holland Knight. “Marijuana and the new development of a commodity crop is the biggest thing to happen to the USDA and agriculture community since corn, she said.

News headlines and a changing congressional outlook about federal marijuana legalization has led to market sensitivity and volatility. And while all of this change is taking place, cannabis operators need the ancillary aspects of federal and local law ironed out on pace with the industry, McDonald said. “This is going to be an evolving industry that needs to be tracked legally, and on a diligent basis,” she said.