Recreational use of marijuana is now legal in California and it is now rising as the hottest business item among Korean-Americans.
However, granting permits for marijuana businesses is still a process that has not been sufficiently prepared. Moreover, the federal law still categorizes marijuana as an illegal drug, making it difficult for businesses to strategize their plans.
As marijuana is still federally illegal, the transaction between businesses selling it and banks is entirely blocked at the moment. A business renting a shopping mall or storage could be restricted in developing a relationship with a bank, so it is still difficult for entrepreneurs to find the right property to lease. Some business owners are hesitant to rent to marijuana business for religious reasons as well.
Some bank employees have told the Korea Daily that inquiries from property owners have been increasing recently as those interested in starting a marijuana business are actively looking for locations to launch their stores. Most of the questions have been about whether or not renting to a marijuana business could put them at risk.
Marijuana is still an illegal drug according to the federal law, so the banks being audited by the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC) are prohibited from opening accounts for marijuana businesses. Hence, opening a business account and applying for a business loan is impossible for marijuana businesses as of now.
Then, why do property owners of storage spaces and shopping malls have to be concerned about dealing with their respective banks regarding marijuana businesses?
Most property owners are connected to banks as they are either making loan payments or utilizing their line of credit. There is a clause in most loan contracts that a property owner creating connections with an illegal business could lead to the bank defaulting the initial agreement. Even if the property owner has been making prompt payments, renting a commercial space to a marijuana business could be a valid reason for a bank to terminate the loan contract. The same concept also applies for other business-related loans.
It is natural for banks to react that way as they are obligated by law to be sensitive towards the regulations laid out by the FRB and FDIC.
Those reasons make it difficult for property owners to rent to businesses interested in selling marijuana. That, in turn, is slowing down business owners from officially embarking on the business that is only legal in some states.
“There are no legal restrictions within the state,” said a banker. “But federally, marijuana is still illegal. So for a shopping mall owner to rent to a marijuana café or allowing marijuana businesses to use a storage room could mean that he or she could risk a relationship that has been built with the banks.”
As of now, all transactions for legal marijuana businesses are mostly being made in cash. That also means the customers have to make purchases with cash, too. Cash-only transactions are vulnerable to criminal acts and also prone to government investigations on a regular basis.
That is also one of the reasons why the city of L.A. has been seeking ways to establish a city-run public bank for its marijuana businesses.
By Sungcheol Jin
