Hot issue! As more and more states are making marijuana sales legal, it looks like SBA and the Department of Justice are thinking along the same lines when it comes to retail marijuana businesses. The DOJ has issued new directives and the SBA has incorporated new language in the very latest version of SOP 50 10 5 (J) which became effective January 1, 2018 and supersedes the previous version. So this is a big deal.

How does all this affect SBA financing? Dating from the original SOP 50 10 5 (A), SBA hasn’t addressed this issue directly. Until now. This latest SOP is a first. See SOP 50 10 5 (J) Subpart B, Chapter 2, V. Eligible Use of Loan Proceeds, F, 1, g, pg. 131:

“During the life of the loan, a borrower may not lease space to any business engaged in any activity that is illegal under federal, state or local law (such as a marijuana dispensary).”

Because federal law overrides state and local law, this instruction means that all originations for leased space dating from January 1, 2018 going forward may not be for marijuana dispensaries. Period. Well, that’s good to know.

Yet from a servicing standpoint what happens when you have a borrower that occupied 100% of a building at origination but four years later is now leasing 15% to a marijuana dispensary?  We came across this situation recently. Feeling we needed a definitive answer, we posed this question to SBA legal counsel. The recommendation was quick and brings up points to be well considered:

RECOMMENDED:  The borrower is to be advised that they are in violation of their loan agreement and the tenant must be removed from the property.

SBA counsel further pointed out: As selling marijuana is a federal offense the Federal Government looks to the borrower and the bank as owners of the property in question, the Federal Government could seize all of the borrower’s and the lender’s assets in case of a violation.

That’s it for now. Yet this isn’t the last we’ll hear about this topic as more states are looking at legalization. Look for increased heavy lobbying in D.C. and possibly more federal changes. If you come across this or a similar situation, please consult your nearest SBA Loan Service Center for guidance.