Marijuana Business Magazine February 2019

Marijuana Business Magazine | February 2019 86 In that case, a hemp business owner wanted to borrow $1.5 million from a California venture capital firm bank- rolled by several billionaires. “My client has $13 million in assets, and they wanted to charge him a 26% interest rate. That’s outrageous. I consider that a predatory loan,” said Emmi, who did not want to identify the client or the VC firm. “A well-managed marijuana op- eration should expect to pay an interest rate of 9% to 12%.” WARNING SIGNS Given that predatory lenders target the marijuana industry, it’s important for cannabis business owners to be alert to the warning signs that signal such operators. Predatory lenders, for starters, may try to scam cannabis companies by not being upfront, said Justin Moriconi, a partner in the law firm Moriconi Flowers in Elkins Park, Pennsylvania, outside Philadelphia. Some “hard money” lenders, for example, will circumvent state usury limits by securing the loan through a company’s assets—such as office equipment, machinery and even lighting fixtures—rather than a borrower’s creditworthiness. In such cases, a borrower risks losing assets if he or she fails to make the loan payments. Predatory lenders also may require an upfront fee in exchange for the loan. For example, one of lawyer Emmi’s Denver clients, a CBD extraction company, paid a $100,000 fee on a $950,000 loan, in addition to being charged a high interest rate. “Some lenders go further and ask for a fee tied to the companies’ gross or net profit,” Moriconi said. In some cases, he said, those fees can continue—even after the loan is repaid. How to Handle a Predatory Loan If you believe your cannabis business is caught in a predatory lending scam, you can take steps to try to mitigate the impact. First, make sure you have a paper trail. “Keep every piece of communication and every document related to any financing or lending arrangement,” advised Justin Moriconi, a partner in Pennsylvania law firmMoriconi Flowers. “Seek legal and accounting advice to determine if the lending agreement can be revised based on prevailing lending laws in your state.” You also should “approach the lender in a reasonable manner” to determine if the loan company is willing to revise the terms, he added. Another potential option is the same as a homeowner with an above-market rate loan: See if it is possible to refinance it. “Look to repay the loan or refinance the loan with better sources,” said Nick Kovacevich, CEO of KushCo Holdings, a diversified ancillary cannabis business in Garden Grove, California. Another option is to analyze whether it makes sense to walk away from the loan through a “controlled breach.” In some cases, the penalties for a halt in payment on the loan might be less than to continue paying the predatory loan, Moriconi said. If you are caught in a predatory lending scheme, you can report the lender to authorities. But be warned that state laws against predatory lending, if they exist, may not apply to cannabis operators, cautioned Evan Eneman, CEO of Los Angeles-based Ello, a financial, tax and advisory services firm for cannabis businesses. Still, even if you don’t get any relief, it could pay to notify local and state licensing authorities and trade groups “so that no one else falls prey” to the predatory lender, Eneman said. Perhaps the best news is that as medical and recreational MJ operations become more mainstream and accepted, businesses will have more traditional financing options, lessening the risk of dealing with predatory lenders. “Yes, things will get better with time as the stigma goes away and more competition is coming to lend in this space,” Kovacevich said. The best way to avoid the need to get out of a predatory loan is to not get one in the first place. Don’t feel as if you need to settle for a loan with unreasonably high interest rates and onerous terms. “There are more lenders now and options available,” including some selected banks and asset-backed lenders, Eneman said. “Rates are way more reasonable now depending on the risk profile” of the borrower, he added. – John Rebchook Attorney Justin Moriconi said one red flag of a predatory loan is if the funding originates from outside the United States. Courtesy Photo Donald Emmi killed a loan for a client in the hemp sector that had an extremely high interest rate of 26%. Courtesy Photo