It is not very common for banks and financial institutions to provide commercial loans to cannabis companies in Arizona. Why is that? The answer is not always as simple as it seems.
The first thing to consider is what collateral the lender could secure if they wanted to make a loan to an Arizona cannabis company. In general, there are two classes of collateral – real estate and personal property. To perfect a security interest in Arizona real estate, a lender must include a deed of trust on the real estate records of the county in which the property is located. Generally, to perfect a security interest in personal property, a lender must file a Uniform Commercial Code (“UCC”) funding statement (commonly referred to as the UCC-1 Funding Statement) with the Secretary of State of Arizona (the “SOS”).
All of this seems pretty straightforward, but there are multiple twists and turns. For a lender, these issues are paramount to ensuring that they can recover from a borrower’s default. And even if some of these issues can be resolved, banks and financial institutions must adhere to the Treasury Department’s Guidelines, BSA Expectations for Businesses Affecting Marijuana (FIN-2014-G001, issued February 14, 2014) (the “Guidelines “) Adhere to. ) during the term of the loan.
Can a cannabis license be used as collateral?
The most important asset for any cannabis company in Arizona is license. In fact, only one license in Arizona was reportedly valued in the $ 10,000,000 to $ 15,000,000 range. Can a Lender Take a Security Interest in an Arizona Nonprofit License? The short and long answers are – NO. A lender need look no further than the Arizona Administrative Code (“AAC”). AAC R9-17-306 (A) states: “A pharmacy may not transfer or assign the certificate of registration for the pharmacy.”
So if a lender tried to foreclose a nonprofit’s cannabis license, it would be a futile exercise. The Arizona Department of Health Services (the “Department”), the cannabis regulator in Arizona, would not recognize the lender as a new license holder, and therefore the lender would not be able to conduct the operations or sell the license to another Unit.
Would the outcome be any different for an adult use licensee or a dual licensee that is a nonprofit? The answer remains the same – NO. AAC R9-18-305 (A) states: “A marijuana facility that receives a marijuana operating license under R9-18-303 (E) may not separately transfer or transfer the pharmacy registration certificate or marijuana operating license Assign. ”So the most valuable asset in an Arizona cannabis operation is not subject to foreclosure or enforcement by a lender.
Can a lender have a security interest in cannabis itself?
The second question is whether a lender can take a security interest in the actual cannabis inventory or in the raw flower produced by a cannabis company. As noted above, in general, a lender must file a UCC-1 Funding Statement with the SOS in Arizona in order to perfect a security interest in a product or inventory. Once the plants have been converted into inventory, the lender’s security interest would need to be tied to that product (or the “proceeds” of the inventory). Again, this is usually accomplished through a well-drafted UCC-1 Funding Statement (there are other requirements to take on a security interest in the personal property such as granting the right of the borrower etc. but this is beyond the scope of this Article).
The unified commercial code in Arizona was codified according to ARS § 47-1101 ff. Chapter 9 of the UCC in Arizona, which deals with the creation and enforcement of security interests, can be found under ARS § 47-9101 ff. There is no express prohibition on providing or accepting collateral for cannabis collateral in Arizona. While this seems like the end of the investigation, there is more to consider. As mentioned above, an unlicensed lender with the department could never shut out and sell the cannabis collateral.
However, there are other creative solutions for lending to nonprofits. For example, a cannabis company that has a management agreement with another company may have collateral that can be both secured and enforced under Arizona law. A simple example would be if the management company owned a building where cannabis products are grown and manufactured. Certainly, a lender could have a security interest in the building itself. Likewise, certain furnishings, furniture and equipment could be subject to a security interest that the lender could achieve some value if the borrower defaults on the loan.
What are the implications of lending under the guidelines?
Most banks and financial institutions also need to adhere to the guidelines that we discussed in depth on this blog. Click here to view a copy of the FinCen guidelines. For commercial lending purposes, one of the “red flags” mentioned in the FinCen guidelines is: “A marijuana company that claims to be a nonprofit is engaged in a commercial activity that is inconsistent with this classification or makes excessive payments to its own Manager or employee. “
Therefore, in the Management Services Agreement (“MSA”) structure discussed above, it is critical to ensure that a cannabis operation complies with various Arizona nonprofit laws. MSAs can literally be a minefield for those unfamiliar with Arizona’s nonprofit laws and policies. Not only could a breach subject the cannabis nonprofit company to various penalties and loss of its nonprofit status, but a poorly designed MSA will almost certainly deter a commercial lender from lending to that company. No lender wants to be accused of supporting or promoting money laundering or the like.
The guidelines also require a lender to continuously monitor their commercial cannabis borrowers or customers. For example, the guidelines require: “[(a)] ongoing monitoring of publicly available sources for adverse information about the company and affiliated companies; [(b)] ongoing monitoring for suspicious activity, including any of the red flags described in this guide; and [(c)] Updating of the information that is regularly collected as part of the customer’s due diligence and according to the risk. “Therefore, a cannabis nonprofit that purchases a loan must ensure that it complies not only with various Arizona cannabis laws, but also with the Arizona nonprofit laws (and, by implication, the Guidelines).
While commercial lending is not prohibited for cannabis companies in Arizona, there are many points to consider for a lender interested in the Arizona market. We have just listed a few of the most important points to consider. Contact our Phoenix office to find out more.