[DSCR](/blog/what-is-dscr-ratio) Loan for Cannabis Property: Financing Dispensaries & Cultivation Facilities

The cannabis industry represents one of the fastest-growing sectors in America, with legal marijuana sales projected to exceed $50 billion by 2028. Real estate investors and entrepreneurs increasingly seek to finance cannabis dispensaries, cultivation facilities, and ancillary properties. However, financing cannabis real estate presents unique challenges due to federal prohibition and banking regulations—making traditional [DSCR loans](/blog/dscr-loan-guide) difficult or impossible to obtain.

This comprehensive guide explores the realities of cannabis property financing, explains why DSCR loans are largely unavailable, and details alternative financing strategies for investors and operators in the cannabis space.

The Cannabis Real Estate Opportunity

Market Growth and Demand

The numbers:

• 39 states + DC have legalized medical cannabis
• 24 states + DC have legalized recreational use
• $33 billion in legal cannabis sales (2023)
• Projected $50+ billion by 2028

Real estate demand drivers:

• Dispensary retail locations (high-traffic areas)
• Cultivation facilities (industrial warehouses)
• Processing and manufacturing plants
• Testing laboratories
• Distribution centers
• Ancillary businesses (packaging, equipment)

Property Types and Values

Dispensary Retail:

• Prime retail locations
• 1,500-5,000 sq ft typically
• Lease rates: $30-$80+ per sq ft (premium locations)
• Purchase prices: $500,000-$5 million+

Cultivation Facilities:

• Industrial warehouse conversions
• 10,000-100,000+ sq ft
• Specialized HVAC, electrical, security
• Purchase prices: $2 million-$50 million+

Processing/Manufacturing:

• Industrial zoning required
• Specialized equipment and build-outs
• Purchase prices: $1 million-$20 million+

Why Investors Are Interested

Strong rental income:

• Cannabis tenants pay premium rents (20-50% above market)
• Long-term leases (5-15 years typical)
• Percentage rent clauses common
• Triple-net leases shift expenses to tenant

Scarcity value:

• Limited zoning for cannabis use
• Licensing bottlenecks create tenant demand
• Barriers to entry protect existing locations

Appreciation potential:

• As industry matures, property values increase
• Conversion to cannabis use adds value
• Exit opportunities to larger operators

The Federal Banking Problem

Why Traditional DSCR Loans Don't Work for Cannabis

The core issue: Cannabis remains a Schedule I controlled substance under federal law.

Consequences:

1. Federally-Insured Banks Can't Lend to Cannabis Businesses

• FDIC-insured banks risk federal sanctions
• Loans to cannabis operators violate federal law
• Banks could face criminal liability, fines, loss of charter

2. Fannie Mae and Freddie Mac Prohibit Cannabis Financing

• Government-sponsored enterprises follow federal law
• Won't purchase loans on cannabis properties
• No secondary market for cannabis mortgages

3. DSCR Lenders (Usually Banks) Won't Touch Cannabis

• Even "no-doc" DSCR loans come from banks
• Banks can't knowingly finance cannabis operations
• Risk outweighs potential profit

Result: Traditional DSCR loans are effectively unavailable for properties with cannabis tenants or uses.

The "Plant-Touching" vs. "Ancillary" Distinction

Lenders differentiate:

"Plant-Touching" Businesses (No Traditional Financing):

• Dispensaries (direct sales)
• Cultivation (growing)
• Processing and manufacturing
• Distribution

These businesses directly handle cannabis → Banks won't finance.

"Ancillary" Businesses (Sometimes Financeable):

• Property management companies (managing cannabis buildings)
• Equipment suppliers
• Packaging companies
• Software/POS providers
• Legal/accounting services to cannabis industry

Some lenders may finance ancillary businesses that don't directly touch the plant.

The SAFE Banking Act (Pending)

Proposed federal legislation:

• Would protect banks from federal penalties for serving cannabis businesses
• Passed House multiple times
• Stalled in Senate

If passed:

• Traditional banking (including DSCR loans) would become available
• Game-changer for cannabis [real estate financing](/blog/balloon-mortgage-explained)

Until then: Industry operates in legal/financial gray area.

Alternative Financing Options for Cannabis Properties

Since traditional DSCR loans aren't available, cannabis real estate requires creative financing:

Option 1: Private Money Lenders

How it works:

• Individual investors or private funds lend directly
• Not subject to federal banking regulations
• Higher risk = higher interest rates

Typical terms:

• Interest rates: 10-18%
• Loan-to-Value (LTV): 50-70%
• Loan terms: 1-5 years (usually bridge/short-term)
• Points: 2-5 points at closing

Example:

• $3 million cultivation facility
• Private lender: 65% LTV = $1.95 million loan
• Rate: 12%
• Term: 3 years, interest-only
• Points: 3% ($58,500 at closing)
• Monthly payment: $19,500

Pros:

• Actually available
• Fast approval (30-60 days vs. 90+ for banks)
• Flexible underwriting
• Understand cannabis industry

Cons:

• Very expensive (12-18% vs. 7-9% DSCR)
• Lower LTV (need more down payment)
• Shorter terms (refinance risk)
• Harder to find reputable lenders

Finding private lenders:

• Cannabis-focused lending platforms
• Real estate investor networks
• Cannabis industry conferences
• Attorney/broker referrals

Option 2: Credit Unions and Community Banks

A few state-chartered institutions lend to cannabis:

Why they can (sometimes):

• State-chartered (not FDIC-insured or less federal oversight)
• Operate in legal cannabis states
• Willing to accept risk

Example institutions:

• Safe Harbor Private Banking (CO)
• Partner Colorado Credit Union
• Maps Credit Union (OR)
• Various California and Washington credit unions

Typical terms (better than private money):

• Interest rates: 8-12%
• LTV: 60-75%
• Terms: 5-10 years
• Requirements: Extensive compliance documentation

Pros:

• More affordable than private money
• Longer terms
• Some provide depository services too

Cons:

• Very limited availability
• Extensive documentation required
• Often require state licenses and compliance
• May require relationship with institution

Option 3: Seller Financing

How it works:

• Property seller carries the note
• Buyer makes payments directly to seller
• No third-party lender involved

Example structure:

• Purchase price: $4 million
• Down payment: 30% ($1.2 million)
• Seller finances: $2.8 million
• Interest rate: 8%
• Term: 5 years (balloon payment)
• Monthly payment: $22,860

Pros:

• No lender (no banking issues)
• Flexible terms (negotiable)
• Faster closing
• Works for cannabis use

Cons:

• Seller must be willing (uncommon)
• Large down payment required
• Balloon payment risk
• Seller has lien on property

When sellers are motivated:

• Can't sell property otherwise
• Cannabis tenant already in place
• Estate/inheritance situation
• Want passive income stream

Option 4: SBA 504 Loans (Ancillary Businesses Only)

For ancillary businesses that don't touch the plant:

How it works:

• Small Business Administration partially guarantees loan
• Must be operating business (not passive real estate)
• Cannot be direct cannabis cultivation/sales

Example eligible:

• HVAC company servicing cannabis facilities
• Security company serving dispensaries
• Packaging supplier

Typical terms:

• Up to 90% financing
• 10-25 year fixed rates
• Requires business operations (not just leasing)

Cannabis businesses directly handling the plant: Not eligible.

Option 5: Real Estate Syndication

How it works:

• Pool money from multiple investors
• Form LLC or partnership
• Purchase property with cash or limited financing
• Distribute cash flow and profits to investors

Example:

• $10 million cultivation facility
• Raise $3 million from 30 investors ($100k each)
• Private loan: $5 million (50% LTV)
• Sponsor equity: $2 million
• Triple-net lease to cultivator: $100k/month
• Distribute cash flow to investors quarterly

Pros:

• Access to larger deals
• Spread risk among investors
• Professional management
• Passive income for investors

Cons:

• Complex legal structure (securities laws)
• Management and sponsor fees
• Less control for individual investors
• Illiquid (can't easily sell shares)

Regulatory compliance:

• Securities registration or exemption required (Reg D, Reg A+)
• Must comply with state and federal securities laws
• Attorney and ongoing reporting costs

Option 6: Hard Money Loans

Short-term, asset-based financing:

How it works:

• Lender focuses on property value, not income or use
• Very short terms (6-24 months typically)
• Used for acquisition, renovation, or bridge

Typical terms:

• Interest rates: 12-18%+
• LTV: 50-65%
• Term: 6-18 months
• Points: 3-6
• Fees: Origination, exit, extension fees

Example:

• $2 million dispensary property
• Hard money: 60% LTV = $1.2 million
• Rate: 15%
• Term: 12 months
• Points: 5% ($60,000)
• Monthly payment: $15,000 interest-only

Pros:

• Fast (close in 1-2 weeks)
• Minimal documentation
• Based on asset, not business legality

Cons:

• Extremely expensive
• Very short term (must refinance or sell quickly)
• High fees
• Risk of foreclosure if can't refinance

Use case: Bridge to longer-term private money or until SAFE Banking passes.

Option 7: DSCR Loan on Non-Cannabis Property, Then Convert

Creative (but risky) strategy:

How it works:

1. Purchase property with traditional DSCR loan
2. Lease to non-cannabis tenant initially
3. After seasoning (12-24 months), tenant changes to cannabis use
4. Don't tell lender about use change

Why this is risky:

You're likely violating loan terms:

• Most mortgages have clauses prohibiting illegal use
• Federal illegality means cannabis use violates mortgage
• Lender could call loan due immediately
• Potential fraud charges

Discovery risk:

• Insurance company finds out (cannabis requires specialized insurance)
• Lender inspects property
• Public records (cannabis licenses are public)
• News coverage of tenant

Consequences:

• Loan acceleration (must pay off immediately)
• Foreclosure
• Fraud liability
• Criminal prosecution (unlikely but possible)

Better approach: Be transparent, use appropriate financing from start.

Structuring Deals Without Traditional Financing

The "Land Lease" Model

How it works:

• Investor buys land (or land + building) with cash or seller financing
• Leases to cannabis operator on long-term ground lease
• Operator builds improvements
• Investor owns land, operator owns improvements

Pros:

• Lower capital requirement (land only)
• Operator funds build-out
• Stable long-term income
• Less involvement in cannabis operations

Cons:

• Complex legal structure
• End-of-lease issues (who owns improvements?)
• Operator must have capital for construction

The "Master Lease" Model

How it works:

• Investor owns building
• Master lease to management company (non-plant-touching)
• Management company subleases to cannabis operator
• Creates separation from direct cannabis operations

Theory:

• Some lenders more comfortable with "ancillary" tenant

Reality:

• Most sophisticated lenders see through this structure
• Doesn't significantly improve financing options
• Legal risk if structure is sham

Due Diligence for Cannabis Properties

Zoning and Land Use

Critical verification:

1. Cannabis Use Permitted

• Check local zoning ordinances
• Verify specific use allowed (retail, cultivation, manufacturing)
• Distance requirements from schools, parks, residential

2. State and Local Licensing

• Limited licenses available (scarcity = value)
• Some jurisdictions capped at X dispensaries
• Verify tenant has (or can obtain) license

3. Conditional Use Permits

• May require CUP even if zoning allows
• Community approval process
• Can be revoked

Failure to verify:

• Illegal operation (tenant shuts down)
• Property value plummets
• Stuck with unusable property

Property Condition and Requirements

Cannabis-specific build-outs:

Cultivation facilities require:

• Massive electrical capacity (grow lights)
• Specialized HVAC (climate control)
• Water and drainage systems
• Security (cameras, access control, vault rooms)
• Odor mitigation (neighbors complain)

Costs:

• Electrical upgrades: $50,000-$500,000+
• HVAC: $100,000-$1 million+
• Security: $50,000-$200,000
• Total build-out: $100-$500+ per sq ft

Who pays:

• Ideally tenant (triple-net lease)
• Sometimes landlord builds-out, recoups via higher rent

Condition issues:

• Used cannabis facilities have wear (humidity, chemicals)
• Removal of equipment expensive if tenant leaves
• Conversion back to non-cannabis use costly

Tenant Financial Strength

Cannabis businesses are high-risk:

Verify:

• Years in operation (new businesses fail frequently)
• Financial statements (if available)
• Licenses in good standing
• Ownership background checks
• Business plan and market analysis

Red flags:

• Startup with no track record
• Undercapitalized (cannabis businesses need significant working capital)
• Multiple locations failing
• Regulatory violations or license issues

Protect yourself:

• Higher security deposits (6-12 months rent)
• Personal guarantees from principals
• Financial reporting requirements in lease
• Reserved right to audit financials

Insurance and Liability

Cannabis properties require specialized insurance:

Standard property insurance:

• Many carriers exclude cannabis use
• Must disclose to insurer
• Expect 2-3x normal premiums

Liability coverage:

• Higher limits recommended
• Cannabis-specific rider or separate policy

Environmental liability:

• Cultivation uses chemicals, fertilizers
• Potential contamination issues
• Environmental insurance recommended

Landlord protection:

• "Cannabis-use" endorsement on insurance
• Require tenant to carry high liability limits
• Indemnification clauses in lease

Tax Implications (IRC Section 280E)

The 280E Problem for Cannabis Businesses

Federal tax code Section 280E:

• Businesses trafficking in Schedule I or II controlled substances cannot deduct ordinary business expenses

What this means:

• Cannabis businesses can't deduct rent, payroll, marketing, etc.
• Can only deduct cost of goods sold (COGS)
• Effective tax rates of 70-80%+

Impact on real estate:

For cannabis operators (tenants):

• Huge tax burden limits profitability
• Affects ability to pay rent
• Many businesses struggle financially

For landlords:

• 280E doesn't apply to you (you're not trafficking)
• You can deduct all normal expenses
• But tenant's financial strain is your risk

Landlord Tax Considerations

As cannabis property landlord:

You CAN deduct:

• Mortgage interest
• Property taxes
• Insurance
• Maintenance and repairs
• Depreciation
• Management fees
• Professional fees

Normal real estate tax treatment applies.

Depreciation:

• Buildings: 39-year commercial property
• Cannabis-specific improvements: May argue shorter life (5-7 years)
• [Cost segregation](/blog/depreciation-real-estate-guide) study maximizes deductions

Capital gains:

• If hold >1 year, long-term capital gains rates
• 1031 exchange to defer (but finding replacement cannabis property difficult)

The Future: What Happens When Cannabis is Federally Legal?

SAFE Banking Act Passage

If/when passed:

Immediate impacts:

• Banks can serve cannabis businesses without federal penalty
• DSCR loans become available
• Interest rates normalize (8-10% vs. 12-18%)
• LTV ratios improve (75-80% vs. 50-65%)
• Traditional [commercial real estate financing](/blog/commercial-real-estate-financing)

Property value impacts:

• Lower cap rates (more buyers compete)
• Properties worth more (easier financing = higher prices)
• Early investors benefit from appreciation

Federal Legalization/Descheduling

If cannabis rescheduled or descheduled:

Industry transformation:

• National brands emerge
• Institutional capital floods in
• Consolidation accelerates
• Real estate values surge

Risks to current investors:

• Corporate chains buy out small operators
• Your tenant may close (can't compete)
• Oversupply develops (barriers to entry lowered)

Opportunities:

• Sell to larger operators at premium
• Refinance at lower rates
• Expand portfolio

Timing Considerations

Current environment = higher risk, higher reward:

• Limited competition (most investors can't access financing)
• Premium rents (scarcity value)
• Legal uncertainty
• Expensive financing

Post-legalization = normalized market:

• More competition
• Lower yields (cap rates compress)
• Easier financing
• Less risk

Strategic question: Get in now (higher risk/reward) or wait for legalization (lower risk/reward)?

Common Mistakes and Risks

1. Assuming Cannabis = Easy Money

Reality check:

• Many cannabis businesses fail (30-40% failure rate)
• Heavily taxed (280E)
• Over-regulated
• Intense competition
• Tenant turnover can be high

Not all dispensaries are profitable ATMs.

2. Overpaying for Property

Mistake: Paying retail price assuming cannabis tenant will always pay premium rent.

Risk: If tenant leaves, non-cannabis rent may be 30-50% lower.

Solution: Underwrite conservatively assuming non-cannabis fallback rent.

3. Inadequate Legal Documentation

Cannabis leases require specialized clauses:

• Compliance with all laws
• Tenant responsible for all licenses
• Landlord not liable for tenant's violations
• Indemnification
• Right to terminate if illegal

Use attorney experienced in cannabis real estate.

4. Ignoring Neighboring Property Owners

Cannabis facilities create:

• Odor issues (cultivation)
• Traffic (dispensaries)
• Security concerns (perceived or real)

Neighbor complaints lead to:

• Zoning challenges
• CUP revocation
• Lawsuits

Mitigation:

• Odor control systems
• Security measures
• Community engagement

5. Not Planning Exit Strategy

Cannabis properties are illiquid:

• Harder to sell (financing challenges)
• Smaller buyer pool
• Longer marketing periods

Exit plan:

• Can you convert to non-cannabis use?
• What's the value then?
• Are you prepared to hold long-term?

Related Articles

• Dscr Loan 1031 Into Dscr
• [Dscr Loan Bowling Alley](/blog/dscr-loan-bowling-alley)
• Dscr Loan Cap Rate Compression
• [Dscr Loan Ghost Kitchen](/blog/dscr-loan-ghost-kitchen)
• Dscr Loan Insurance Optimization

FAQ: Cannabis Property Financing

Can I get a DSCR loan for a property leased to a dispensary?

No, not from traditional lenders. Federal banking regulations prevent FDIC-insured banks from financing cannabis businesses or properties with cannabis tenants, even indirectly. DSCR lenders are almost all banks, so they won't finance cannabis properties. You'll need private money lenders, credit unions in cannabis-friendly states, or seller financing.

What interest rates can I expect for cannabis property financing?

Private money lenders charge 10-18%, significantly higher than traditional DSCR loans (7-9%). Some credit unions and community banks in cannabis states may offer 8-12%. Hard money can exceed 18%. The premium reflects federal illegality risk and limited lender competition. If the SAFE Banking Act passes, rates should normalize to near-traditional levels.

Is it legal to own a property leased to a cannabis business?

Yes, owning property and leasing to a cannabis business is legal in states that have legalized cannabis. You're not trafficking in cannabis yourself—you're a landlord. However, because cannabis remains federally illegal, you can't get traditional financing, and federal tax code (280E) affects your tenant's finances (increasing their risk of default).

How much down payment do I need for a cannabis property?

Expect 30-50% down, much higher than traditional DSCR loans (20-25%). Private lenders typically offer 50-70% LTV, meaning you need 30-50% down payment. The higher equity requirement reflects the lack of traditional financing and higher risk. If you can find seller financing, you may negotiate better terms (20-30% down).

Can I convert a regular property to cannabis use after getting a traditional mortgage?

Technically possible but risky and likely violates your mortgage terms. Most mortgages prohibit illegal use (cannabis is federally illegal), and discovery could trigger loan acceleration (must pay off immediately) or foreclosure. Better approach: use appropriate cannabis financing from the start, or wait until federal legalization makes this a non-issue.

What's the best financing option for a cannabis dispensary property?

Private money lenders are most common, offering 10-18% rates at 50-70% LTV with 1-5 year terms. If you can find a credit union in your state that serves cannabis, rates may be better (8-12%). Seller financing is best if available (negotiable terms, no third-party lender). Consider combining: seller finances 20-30%, private money 40-50%, you bring 30% down.

What happens to my financing if cannabis is federally legalized?

If legalized or the SAFE Banking Act passes, you can refinance into traditional DSCR or commercial loans at much lower rates (7-9% vs. 12-18%). Your property value likely increases (easier financing attracts more buyers, cap rates compress). If you have private money with prepayment penalties, factor refinancing costs. Overall: very positive for property owners.

Conclusion: High Risk, High Reward (For Now)

Cannabis real estate offers exceptional returns for investors willing to navigate the complex financing and regulatory landscape. Premium rents (20-50% above market), long-term leases, and scarcity value create compelling investment opportunities. However, the lack of traditional DSCR financing, federal illegality, and tenant business risks require sophisticated underwriting and higher risk tolerance.

Key takeaways:

• Traditional DSCR loans are unavailable for cannabis properties
• Alternative financing is expensive (10-18% vs. 7-9%)
• Require 30-50% down payment (vs. 20-25% traditional)
• Tenant risk is high (280E taxes, competition, regulations)
• Exit liquidity is limited (smaller buyer pool, financing challenges)
• Future legalization could be transformative (values surge, financing normalizes)

Cannabis real estate is not for beginners. It requires:

• Substantial capital (large down payments, cash reserves)
• Risk tolerance (legal and financial uncertainty)
• Industry knowledge (regulations, operators, market dynamics)
• Long-term horizon (illiquid, hold through cycles)
• Legal and financial advisors (specialized expertise)

For the right investor with capital, expertise, and patience, cannabis properties offer outsized returns unavailable in traditional commercial real estate. As federal legalization approaches, early entrants stand to benefit from [property appreciation](/blog/best-cities-for-appreciation-2026) and financing normalization.

But tread carefully—high rewards come with high risks.

Looking for financing for traditional rental properties? While cannabis properties require specialized private financing, HonestCasa offers DSCR loans for conventional investment properties. Check your rate today for traditional commercial and residential rental financing.