The cannabis industry has grown into one of the more interesting financing opportunities in private lending, precisely because the institutional capital that ordinarily competes for credit-worthy borrowers will not touch it. With cannabis still classified as a Schedule I controlled substance under federal law (and Schedule III reclassification still working through DEA rulemaking), national banks, credit unions, and most institutional lenders cannot or will not lend to cannabis-related businesses. That capital void has been filled by regional banks, state-chartered credit unions, and private lenders willing to operate at the state-federal seam — and the yields have reflected the supply-demand imbalance.
But cannabis lending is not just a higher-yield version of conventional real estate lending. The industry has its own diligence requirements, its own collateral considerations, and its own risk surface. Lenders entering this market without understanding the operational specifics get hurt; lenders who do their homework can build profitable, resilient cannabis loan portfolios.
This article walks through what cannabis lenders need to know about industry licensing, title insurance, collateral structuring, and the practical diligence that separates a clean cannabis loan from a problematic one.
Why Cannabis Lending Exists at All
Cannabis is legal for some form of use in the vast majority of U.S. states — 24 states have legalized adult-use recreational cannabis as of 2025, and roughly 38 states permit medicinal use. The industry generates over $40 billion in annual sales, and projections suggest it will reach $50 billion by 2029.
But because cannabis remains federally illegal, federally chartered banks and credit unions face fundamental problems offering banking and lending services to cannabis businesses:
- Bank Secrecy Act and anti-money laundering rules treat cannabis-related transactions as potentially involving proceeds of unlawful activity at the federal level
- Federal Reserve oversight creates additional disincentives for federally chartered institutions
- Insurance and reinsurance markets price the federal-illegality risk in ways that limit institutional appetite
Into that capital void step regional banks (often state-chartered), state credit unions in legalized states, specialty cannabis-focused lenders, and the broader private lending market. The yields on cannabis loans typically exceed those on comparable conventional commercial real estate loans by several hundred basis points, reflecting both the regulatory complexity and the limited competing capital.
Industry Licensing: The Diligence Foundation
The starting point for every cannabis loan is licensing. Cannabis is one of the most heavily regulated industries in the United States, with licensing requirements that often operate at the state, county, and municipal levels simultaneously. A cannabis business operating without all required licenses in good standing is operating illegally even within a legalized state — and a lender financing such a business has a fundamental compliance and collateral-value problem.
The first questions a cannabis lender should answer:
Is the borrower licensed? Verify the borrower holds:
- The state-level cannabis business license appropriate to the borrower’s activity (cultivation, manufacturing, distribution, retail, testing, transportation — these are typically separate license types)
- Any required county-level license or permit
- Any required municipal-level license, business permit, or conditional use authorization
License status verification should include not just confirming the license exists but checking that it is current, unsuspended, and in good standing. A pending license application is not a license; a renewed license that is delinquent on annual fees is in shaky territory; a license under regulatory investigation is an active risk.
Is the property zoned for the intended cannabis activity? Cannabis activity zoning is more granular than typical commercial zoning. A property zoned for cannabis cultivation may not be zoned for cannabis manufacturing or retail; a retail dispensary location may have specific setback requirements from schools, parks, churches, and residential zones that apply to cannabis differently than to other retail uses.
If the borrower’s intended cannabis activity does not match the property’s existing zoning authorization, the borrower may need:
- A conditional use permit for the cannabis activity
- A zoning variance
- A formal rezoning of the property
The lender should not fund until these are in place — or fund subject to specific covenants requiring the borrower to obtain authorization within a defined period and prohibiting cannabis operations until authorized.
Are the activities at the property consistent with the licensing and zoning authorization? Borrower compliance with the actual scope of the license matters as much as the existence of the license. A borrower licensed for cultivation operating a dispensary on the side is a borrower whose license is at risk — and a lender whose collateral value depends on continued operation has an interest in active monitoring of the borrower’s compliance posture.
Title Insurance: A Persistent Constraint
Title insurance availability in the cannabis space has improved over the past five years but remains a constraint. The major national title insurers — First American, Stewart, Old Republic, Fidelity, Chicago, and others — generally will not issue title policies on properties they know to be used for cannabis operations. Regional and specialty insurers have stepped in to serve the market, but their offerings come with restrictions.
Typical conditions a title insurer will impose on a cannabis-related transaction:
- Insurance limits typically capped at $20 million per property, with multi-property transactions requiring allocation to keep individual properties below the cap
- No zoning endorsement or other endorsements relating to property use — the policy will not insure the cannabis use itself
- No closing protection letter in connection with the transaction
- An extensive cannabis-specific questionnaire that the borrower must complete
- Cannabis-specific exceptions in the policy
- Either a CLTA policy or an ALTA policy with western regional exceptions in some markets, depending on the insurer
Lenders should not rely on a “don’t ask, don’t tell” approach to title insurance. Title insurers have explicitly stated that cannabis use is a material fact that affects their underwriting, and concealment of the use can void the policy. Any lender attempting a cannabis loan with a standard non-cannabis title policy is setting itself up for a coverage denial when a claim arises.
The practical implication: confirm title insurance availability for the specific property before issuing a term sheet. Some markets have multiple capable cannabis-friendly insurers; others have one or none.
Collateral Structuring: Real Estate Over Operating Assets
Most experienced cannabis lenders focus their collateral on real property and avoid taking security interests in the cannabis business itself. Several reasons drive this:
Cannabis license non-transferability. In many states, cannabis licenses cannot be sold, assigned, or pledged as collateral. A lender who took a security interest in the borrower’s cannabis license would find the security interest worthless at default — the license cannot transfer to the lender or to any subsequent buyer through enforcement.
Federal illegality of cannabis inventory. Cannabis flower, processed product, and other inventory remain federally illegal. A lender taking a security interest in cannabis inventory takes on direct exposure to federal Controlled Substances Act issues that secured creditors of legal businesses do not face.
Anti-money laundering complications. Active financial relationships with the cannabis-touching aspects of the business (operating accounts, inventory revenue, point-of-sale processing) raise BSA and AML issues that many lenders prefer to avoid by limiting their relationship to real estate financing.
The cleaner structure is real-estate-secured lending: the lender takes a deed of trust on the property where the cannabis business operates, with the cannabis business as either the borrower or as the operating tenant under a lease. The collateral value depends on the property’s underlying real estate value and on continued cannabis use as a permitted activity at the property — not on direct enforcement against cannabis-related assets.
Lease-to-Operator Structures
A common pattern in cannabis lending is a property owner — often a real estate-focused entity that does not itself touch cannabis — who leases to a separate cannabis-licensed operator. The lender finances the property owner; the property owner collects rent from the cannabis operator; the cannabis operator’s licensing and operational risk is one degree removed from the lender’s direct exposure.
This structure has advantages and constraints:
Advantages. Cleaner federal-illegality posture for the lender, easier title insurance, simpler collateral analysis at default, and a borrower entity that the lender can transact with using more conventional banking relationships.
Constraints. The lender’s collateral value depends on the cannabis-operator tenant continuing to perform — a non-cannabis fallback use for the property may have substantially lower rent and may require zoning re-authorization. The lender’s underwriting needs to consider both the cannabis-operator scenario and the fallback non-cannabis-use scenario.
Default Considerations
Cannabis loans default for many of the same reasons as other commercial real estate loans, but with several cannabis-specific overlays:
License loss or suspension. A cannabis operator whose license is suspended or revoked has a fundamentally impaired business. The borrower may continue to perform on the loan from other resources, but the underlying cash flow supporting the loan is likely impaired.
Regulatory enforcement actions. A borrower targeted by state or local regulators for compliance violations may face significant penalties and operational restrictions even short of license loss.
Federal enforcement risk (limited but real). Federal enforcement against state-compliant cannabis operations has been rare under current Department of Justice posture, but not zero. Federal asset forfeiture is a tail risk that lenders should be aware of.
Foreclosure and eligible-buyer constraints. Cannabis-licensed properties that go through foreclosure face a more limited buyer pool than conventional commercial real estate. The lender’s foreclosure recovery may be substantially less than what the property would fetch in a normal commercial market.
Best Practices for Cannabis Lenders
For private lenders operating in this space:
1. Build a cannabis-specific underwriting checklist. License verification, zoning verification, compliance history review, and cannabis-specific financial diligence should be standard.
2. Engage cannabis-experienced counsel from the term sheet stage. The legal complexity is meaningful, and counsel discovering issues at closing rather than at term sheet creates expensive deal disruption.
3. Confirm title insurance availability before issuing term sheets. Don’t promise terms you can’t ultimately fund.
4. Structure as real-estate-secured, lease-to-operator where possible. The cleaner federal-illegality posture is worth significant operational simplification.
5. Build covenants around continued compliance. The loan documents should require the borrower to maintain all licenses in good standing, comply with all zoning and regulatory requirements, and provide ongoing reporting on compliance status.
6. Monitor the regulatory landscape actively. Cannabis regulation evolves at the state, county, and municipal levels constantly. Borrowers who were compliant at origination may not be compliant a year later.
7. Plan for default scenarios specifically. A cannabis-property foreclosure has different dynamics than a conventional commercial foreclosure. Plan for the scenario before the loan is in trouble.
The Bottom Line
Cannabis lending offers attractive yields to the lenders who understand the industry well enough to underwrite it cleanly and structure their loans defensively. The complexity is real, but it is also navigable — the playbook for cannabis-specific due diligence, collateral structuring, and risk monitoring has matured substantially over the past several years. The lenders who treat cannabis as just-another-loan-type tend to learn the difference; the lenders who treat it as a specialty practice tend to thrive.
If you are evaluating a cannabis lending program, structuring a specific cannabis loan, or managing a cannabis loan default, the corporate, banking, and litigation teams at Geraci LLP advise private lenders on this industry across multiple states.
Geraci LLP (949) 403-3488 90 Discovery, Irvine, CA 92618
