The problem with marijuana mortgages
There is a lot of stigma around the cannabis industry, but there’s no denying it’s a growing industry. The CannaVative Group is a medical marijuana cultivation facility in Reno eager to expand, now that recreational marijuana is legal in the state.
“We have 17 employees right now,” says Kristin Enasz, Vice President of Sales and Community Outreach for the CannaVative Group. “But our employee rate will definitely be growing. When we are fully built out, we will have the capacity to grow 80,000 square feet indoors.”
But one thing is making growth more challenging.
“Banking is a mess,” Enasz said. “Marijuana is still federally illegal so most banks will not let cannabis businesses store their money. We just want to operate like any other employee. There's nothing different happening in our facility than across the street.”
But the problems don’t only affect the marijuana businesses. The dreams of home ownership are being derailed for employees working in the cannabis industry.
“The problem is even though you're seeing marijuana approved at the state level, the feds obviously haven't approved it,” Sam Britt, sales manager at iServe Residential Lending, said. “Therefore, we're running into a scenario where if you get somebody who comes in and let's say they work at a vape shop, if their income is derived 50% or greater from marijuana, we can't give them the credit for income, meaning that we can't write them the loan because the Feds aren't going to back it.”
Britt has worked in the mortgage industry for the past ten years, and has seen several changes. But he calls the questions surrounding lending to this group of people a ‘pioneer moment’.
“It's an area were basically nobody's really explored it yet,” Britt said. “I can kind of tell that all your big banks are trying to follow the lead of somebody else to see who's going to step out of bounds so to speak.”
But right now the lead is coming from the Federal government.
“Fannie Mae, Freddie Mac, FHA, those are your traditional places to get a home loan when you want to go buy a house,” Britt said. “Obviously the government backs all three of those entities, so to speak.
A lot of your banks, including mine, we're in a situation where we are shying away from it because nobody wants an unsellable loan.”
These loans are unsellable because, with few exceptions, FHA, Fannie Mae and Freddie Mac do not allow marijuana-related income to be counted toward mortgage qualification. Britt says companies like his are being told they can write the loans at their own risk.
“[They are saying] if you the bank-write this loan, you better be able to service it and handle it because we're not going to buy it.”
The exception comes with Fannie Mae’s 3% down payment assistance program. Fannie Mae does allow employees of a marijuana business with a W2 tax form to use their marijuana related income for loan qualification. Independent contractors, or those with a 1099, are not permitted to count marijuana-related income toward mortgage qualification. People who own 25% of a marijuana business are considered independent contractors.
But it’s a grey area, and mortgage lenders like Britt are hesitant to approve loans for fear of losing their FHA licensing.
“It's critical for any bank to have a FHA,” he said. “You've got to have that FHA licensing because, for example, in the state of Nevada over 80% of your home loans being written are FHA.”
That’s not to say those working in the industry are without options.
“They could find an alternative lender,” Britt said. “So it's a matter of looking at alternative banks out there and states that have already been doing this longer than Nevada has to figure out what you and use for lending. The sad thing is, I don't know anyone locally who is doing these home loans. That bank does have to be licensed in the state of Nevada to be able to give you the loan.”
But Britt says those ‘alternative lending’ options tend to have higher interest rates to cover the risk. Another option would be finding a co-signer to offset the income mortgage companies can’t use.
A third option would be taking a note from the CannaVative Group. Banks frequently deny loans or close bank accounts if a paycheck is coming from a company with marijuana or cannabis in the name.
"There's ways of going around having that full cannabis name,” Enasz said. “If you structure your company and call it ‘Blue Skies, LLC’ it's a little bit easier to maintain a banking relationship.”
The CannaVative Group also uses a PEO, or Professional Employer Organization- a third party group that handles things like payroll.
“So the check that's written to the employee comes from that payroll group instead of directly from a cannabis corporation,” Enasz said. “So that check doesn't say ‘Cannabis 123 Company’, it says “National PEO”.
PEOs have been around since the 1960s and have recently been beneficial for marijuana companies.
“It's basically, and it sounds really terrible, legal money laundering is what they are doing,” Britt said. “These companies take that money, and they wash it so to speak, they change it to where when a bank looks at it, it's lendable.”
Which Britt says is beneficial for these employees.
“For me personally, my biggest frustration is it's one thing penalizing somebody who owns [the business],” he said. “But it's another penalizing the poor clerk who says, ‘Hey I just want a house but you can't help me out because I'm a clerk at a marijuana shop? I'm finding that the clerks are a little frustrated because they want to apply for a home loan in Washoe County and they're frustrated. They can't understand why it's still not technically okay to use that income, even though it's been approved at the state level.’”
Another concern for Britt is even though this affects a relatively small group of Nevadans, he says it could have some affect on our housing market.
“We already know there's a shortage on inventory, so now to compound that situation with we can't give a home loan to somebody because of their industry, I can't imagine it's going to be a positive. How many other companies are coming in for medical or recreational that now have to think twice about coming in here because they can't get a loan. You already have a hard housing market already. To top that, you're not stimulating our housing market, you're not stimulating our economy because you're cutting these people out.”
For now, it seems this is a problem with no solution- at least until the federal government changes its stance.
“I think that with the way cannabis is going, it's already legal in half the states and more and more are coming on board every single year,” Enasz said. “Eventually banks are going to have to start getting into the industry.”
“You just never know,” Britt said. “They're constantly rewriting guidelines for the banks every year.”