Brooklyn Cannabis Dispensaries Face Property Foreclosures as Federal Banking Restrictions Create Perfect Storm for Commercial Real Estate Crisis

The cannabis industry in Brooklyn is experiencing an unprecedented crisis as federal banking restrictions collide with rising commercial real estate costs, creating a wave of property foreclosures that threatens the future of legal dispensaries across the borough. The high-profile cannabis lifestyle brand Happy Munkey has shuttered its second New York City cannabis dispensary less than a year after it opened, with the closure of its Brooklyn location confirmed in August after opening in November 2024.

Industry experts are expecting a wave of more store closures in the not-too-distant future, due to harsh market conditions and ongoing competition from unlicensed cannabis shops. This alarming trend highlights a critical vulnerability in the legal cannabis market: the inability to access traditional banking services that could provide the financial stability needed to weather economic challenges.

The Federal Banking Dilemma

Although almost all states have now legalized medical cannabis in some form, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. The federal government therefore still considers the proceeds of cannabis-related transactions to be generated by illegal activity. This fundamental conflict creates a cascade of problems for cannabis businesses seeking to secure and maintain commercial real estate.

Due to the conflict between Federal and State laws, many financial institutions remain reluctant to conduct business with legitimate, State-sanctioned entities. As a result, these businesses and their employees are blocked from accessing deposit accounts, securing lines of credit and other financial services—including commercial and residential mortgages, and accepting credit and debit cards while operating a retail business.

The impact on commercial real estate is particularly severe. As a result of the federal illegality issue, many title companies will not issue title or handle the loan closing since it involves the processing and routing of funding. This creates significant barriers for cannabis businesses attempting to purchase or refinance properties.

Brooklyn’s Cannabis Market Under Pressure

Brooklyn’s legal cannabis market has shown promise, with the borough’s first legal dispensary opening in Gravesend late last year — and there are now eight licensed and legal marijuana stores in the borough. However, the financial pressures are mounting. Cannabis businesses report that their rent was too high, and that they were dealing with too much illegal store competition around them.

A lack of enforcement against possibly thousands of illegal marijuana shops in New York City and the rest of the state is “killing” legal New York cannabis dispensaries. Despite a crackdown launched by both the state and New York City officials in May 2024, there are still hundreds, if not thousands, of unlicensed marijuana retailers actively undercutting the legal market.

Commercial Real Estate Foreclosure Crisis

The broader commercial real estate market is already under significant stress. New York was next on the list with 95 foreclosures, which was a 58% surge from the previous months and 48% more than September 2023. Both states have extremely active real estate markets in major population centers, meaning the foreclosures likely represented billions in losses for the affected banks.

Cannabis businesses face even greater challenges in this environment. Cannabis businesses typically cash flow, and most of them quite well, investors must still consider the underlying collateral, namely, real estate. The primary factor in most cannabis loans is going to be the value of the property. However, the land and buildings you need to grow, cultivate, package and dispense cannabis is expensive and bank’s won’t provide the financing.

Alternative Financing and Its Limitations

Without access to traditional banking, cannabis businesses must rely on alternative financing sources. As banks reject the business, private lenders and hard money can capitalize by filling the void. Cannabis businesses are not only willing to pay a premium for access to essential capital, they expect to.

However, these alternatives come with significant costs. For example, if you are in California, have at least 2 years in business and net income that demonstrates it can service the requested debt, there is a bank that will fund commercial cannabis real estate transactions at rates starting at 8% with 3, 5, 7 and 10 year terms on a 30 year amortization. Banks and credit unions currently offer rates starting in the high seven percent to low 8% range but go as high as 13%.

Legal Protection and Foreclosure Defense

When cannabis businesses face foreclosure on their properties, having experienced legal representation becomes crucial. Property owners and cannabis operators need specialized knowledge of both real estate law and the unique regulatory challenges facing the cannabis industry. A qualified Foreclosure Lawyer Brooklyn can provide essential defense strategies that may help preserve business operations and protect valuable commercial real estate investments.

The Law Offices of Ronald D. Weiss, PC have been supplying expert bankruptcy, foreclosure defense, and debt negotiation services since 1993. They offer practical, compassionate solutions customized to each client’s financial situation. With their Brooklyn Location at Brooklyn Executive Office Suites 300 Cadman Plaza West One Pierrepont Plaza, 12th Floor, Brooklyn, New York 11201, they are well-positioned to assist cannabis businesses facing foreclosure challenges.

The Path Forward: SAFER Banking Act

There is hope on the horizon. The SAFER Banking Act, passed by the Senate Banking Committee with bipartisan support, aims to allow state-legal cannabis businesses access to traditional financial services, reducing the risk for financial institutions, lenders, insurers, and others serving the industry despite federal restrictions on cannabis. The Act provides “safe harbor” protections to financial institutions, lenders, insurers, and others serving the industry, ensuring they are not penalized for offering services to cannabis businesses.

Increased Access to Capital: More clarity around lending enables investment, real estate development, and expansion for cannabis license holders. This could provide the financial stability that Brooklyn’s cannabis businesses desperately need to avoid foreclosure and build sustainable operations.

Immediate Steps for Cannabis Business Owners

Cannabis business owners facing potential foreclosure should take immediate action. The firm often negotiates agreements that compromise both parties’ goals and represent both individual and commercial clients using litigation, negotiation, and bankruptcy options. Early intervention can often prevent foreclosure or provide alternatives that preserve business operations.

The intersection of federal banking restrictions and commercial real estate challenges creates a unique set of legal and financial obstacles for Brooklyn’s cannabis businesses. As the industry continues to evolve and federal policies potentially change, having knowledgeable legal counsel becomes essential for navigating these complex challenges and protecting valuable business assets.

For cannabis businesses in Brooklyn facing foreclosure or financial distress, understanding both the regulatory landscape and available legal protections can mean the difference between business failure and successful restructuring. The current crisis may be severe, but with proper legal guidance and strategic planning, many businesses can weather this storm and emerge stronger when federal banking policies eventually change.