Navigating Title Insurance and Real Estate Lending for Cannabis-Related Businesses

By Aaron Aguirre

November 20, 2024

Real estate loan transactions for cannabis-related businesses (“CRB”) present unique challenges, particularly in navigating title insurance. A primary concern is the conflict between federal and state laws governing most types of cannabis. Under Section 21 U.S.C. § 841(a)(1) of the Controlled Substances Act (“CSA”), federal law prohibits:

1. knowingly opening, leasing, renting, using, or maintaining any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance; and
2. managing or controlling any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally renting, leasing, profiting from, or making available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.

Title insurance Companies are hesitant to provide normal coverage, in part to:

1. The Controlled Substance Act, which:
   • provides for criminal forfeiture of real estate (21 U.S.C. §853); and
   • prohibits the use and investment of income from illicit drug profits (21 U.S.C. § 854).
2. Federal laws providing for civil and criminal real estate forfeiture (18 U.S.C. §§ 981 to 987).
3. The Money Laundering Control Act of 1986 (MLCA) (18 U.S.C. §§ 1956, 1957).

Despite the existence of state legalization laws and even the descheduling of cannabis on the federal Controlled Substances Act, exclusions from coverage or specially crafted exceptions in title policies cannot protect a title company from prosecution under applicable federal laws. By participating in a transaction involving cannabis-related property, a title company may:

1. incur liability under its title policy resulting from a seizure of the real estate according to the CSA or other forfeiture laws; be subject to penalties under the CSA and forfeiture laws for real estate associated with criminal activity; and be prosecuted as complicit with unlawful activity under the Money Laundering Control Act or facilitating a criminal enterprise.
2. subject its employees who handle funds related to the transactions to potential personal liability under the provisions of the Money Laundering Control Act and Controlled Substance Act.

These concerns apply to acquisitions, new and transferred leasehold interests, and financing, even if the parties to the transaction and the party seeking title insurance is not the CRB, such as a lender providing financing to the owner of real estate leased to a CRB.

In order to mitigate risk, some common practices of title companies regarding cannabis loans are to not administer a funds escrow account; not handle the closing documents, sometimes an exception to recordables for insuring purposes; not administer any zoning or CC&R endorsements; not provide a closing protection letter; not provide basic title due diligence; require a Cannabis Questionnaire be completed; and add the following or similar title exception:

Without limiting, modifying, abridging or negating any provision of the Exclusions from Coverage stated in this Policy or any other exception included in this Schedule B, and as a supplement and addition thereto, this Policy does not insure or provide title insurance coverage directly or indirectly for or against any and all consequences and effects, legal, equitable, practical or otherwise, civil or criminal, of any violation or alleged violation of any United States federal, state, county, municipal, or local laws, statutes, ordinances or regulations or any actual or threatened action, court order, or mandate for the enforcement thereof, relating to or governing the use, processing, manufacture, growth, possession, distribution, sale, or any other activity on, about, or relating to or concerning the land, title thereto, or any interest therein, of any Schedule I drug as defined by the United States Controlled Substances Act, including, without limitation, marijuana and/or cannabis, and any component, derivative or product thereof. This Policy insures title only; nothing contained in this Policy shall be construed to insure the subject premises for any particular use.

In regard to title coverage and closing, title companies may insure if a Lender’s mortgage lien against real estate intended for, but not presently associated with, a cannabis use if the loan proceeds are used only for purchase of the property and not for costs associated with the cannabis use. The full amount of the loan must be funded when the loan closes. In this scenario, the title company is likely to exclude any coverage for future advances.

Lenders may have to do some in-depth independent research, prior to entering a loan with a CRB, such as:

Request a copy of an existing survey and obtain a survey affidavit from the Grantor to ensure survey coverage.

1. Obtain a Zoning Confirmation Letter from city, state, and/or county to confirm there can actually be a CRB on the premises.
2. Request a copy of the current title policy in place to see how the existing coverage looks, and any endorsements provided.
3. Obtain Real Estate Tax / Assessment Info / Status.
4. Obtain further searches for municipal liens, local violations, tax liens, judgments and pending litigation, and UCC financial statements.
5. Obtain an owner’s affidavit confirming the disclosure of any unrecorded matters that affect the property.
6. Obtaining the previous owner’s formation documents to ensure they can transfer title.
7. Require “full warranties” in the grant deed.
8. Obtain a GAP Indemnity Agreement.
9. Obtain Tenant Estoppels and / or SNDAs.
10. Obtain Easement or Encroachment Agreement with neighbors.
11. Negotiate a portion of the acquiring party’s consideration be held in escrow as a security for grantor’s warranties and indemnifications.

In summary, real estate transactions for cannabis-related businesses demand careful handling of title insurance and federal compliance issues. It is essential to minimize risks. With guidance from a skilled law firm, you can successfully navigate lending in the complex cannabis industry, while staying within legal boundaries.

About the Author

Aaron Aguirre

Aaron Aguirre is a Loan Documentation Paralegal at SW&M with experience in the banking and insurance industries. Aaron assists in the research, due diligence reviewing, documentation, and processing of the firm’s commercial lending transactions. He works closely with attorneys to […]

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