Pubdate: Sun, 19 Jul 2015
Source: San Diego Union Tribune (CA)
Copyright: 2015 Union-Tribune Publishing Co.
Note: Seldom prints LTEs from outside it's circulation area.
Author: David Garrick


Marijuana Industry Considered Too Risky, at Least Until Federal 
Prohibition Turns Over

Fresh off a complex and expensive approval process, San Diego's first 
wave of legal medical marijuana dispensaries is facing the additional 
challenge of being shunned by banks and insurance companies.

Because marijuana is still considered as illegal as cocaine and 
heroin under federal law, banks won't approve loans for dispensaries, 
give them bank accounts or process credit card sales for them.

That forces dispensaries to operate almost exclusively with cash, 
increasing the risk of armed robbery, employee theft and many other 
problems that tend to make insurance companies queasy.

The businesses and the industry as a whole also have almost no track 
record of success or sound management, making it that much harder to 
convince banks and insurance companies to change their minds despite 
a nationwide trend toward legalization.

Recently proposed federal legislation would guarantee banks no hassle 
from regulators for working with dispensaries, but industry experts 
say prospects for the new laws are iffy.

Meanwhile, things went from bad to worse with insurance last month 
when Lloyd's of London, which had been insuring more than 80 percent 
of dispensaries in the United States, announced it was pulling out of 
the marijuana industry until the federal government legalizes the drug.

Lloyd's was the only large company willing to insure dispensaries, 
with insurers such as Farmers, State Farm and Allstate steering clear 
of a relatively new industry that still has a negative image in the 
minds of many. Against that backdrop, eight of San Diego's nine 
legally approved dispensaries are preparing to open in various 
locations across the city this summer and fall. They will follow San 
Diego's first legal dispensary, which opened in Otay Mesa in March.

"There are a lot of significant challenges facing these businesses," 
said Chris Lindsey, legislative analyst for the Marijuana Policy 
Project in Washington, D.C. "Can I find a place to rent, will I get a 
permit, can I find a bank, can I get a loan and can I get insurance?"

Lindsey said the conflict between federal and state laws has been key 
to the banking problems.

Four states have legalized recreational marijuana and 23 - including 
California - allow sales of medical pot, but federal law still 
includes it on the Schedule 1 list of the most dangerous banned drugs.

"The elephant in the room is that the federal government still 
considers marijuana to be a Schedule 1 substance, and that really 
casts a dark shadow over the whole banking industry's outlook on 
these types of businesses," Lindsey said.

Federal officials issued a policy statement last year saying they 
won't prosecute dispensaries that adhere to state laws or people 
doing business with those dispensaries, but Lindsey said that hasn't 
made a difference.

"Banks simply don't want to expose themselves to the risk of a change 
of heart on the part of the federal government," he said. "They also 
don't want to put their shareholders at risk, and the banks simply 
don't yet trust that the businesses setting up in this sector are 
going to withstand the normal pressures that any kind of new business faces."

Lance Rogers, an attorney representing multiple dispensary owners in 
San Diego, said the banking blackout is a significant problem.

"It creates real challenges for running a normal business," he said. 
"Imagine running a coffee kiosk and you don't have a bank account and 
you can't use credit cards."

Dispensaries have to use cash or money orders to pay their employees, 
buy supplies from vendors, submit sales tax to the state Board of 
Equalization and pay the Internal Revenue Service.

"When you're running any business you have to keep accurate records 
of expenses and revenue, and this all has to be tracked to the penny 
as cash," Rogers said.

The lack of credit cards also creates hassles for customers, forcing 
them to sometimes use ATMs inside dispensaries that charge relatively 
high transaction fees.

Jessica McElfresh, another attorney representing local dispensary 
owners, said credit cards were commonly accepted at San Diego's many 
illegal pot shops before a 2011 national marijuana crackdown by the 
federal government.

"After the 2011 crackdown, credit card processing was the first thing 
to go, even before the banks," she said. "The federal government put 
the fear of God in them is all I can say."

One possible reason for optimism in the industry is consortiums of 
people banding together to form their own banks in Colorado, one of 
the states where recreational marijuana is legal. Those efforts have 
been successful, but all of the available capital gets loaned out 
quickly because it's typically relatively small amounts.

Rogers said he's also optimistic many small insurance companies will 
come together and fill the void created by Lloyd's, but he said it 
won't be easy.

"It's typically difficult for cannabis businesses to get insurance 
because of the risks - the insurance business is all about risk," he 
said. "There are valuable goods around, like a jewelry store or 
pharmacy, which increases the risk of robbery and internal theft."

And there's also all that cash, said Ambere St. Denis, an insurance 
broker who has helped about two dozen dispensaries across California 
get coverage.

"Dispensaries tend to be very cash-heavy and have 1,000-pound safes 
bolted to the ground," she said. "So if anybody's going to rip off a 
dispensary, they have to go there when it's open and get employees to 
open the safe at gunpoint."

It's typically not difficult for a dispensary to get coverage for 
fire, floods and earthquakes, but St. Denis said insurers typically 
put in policy "exclusions" for dispensaries that make them not 
covered for employee theft, armed robbery and property loss.

If they do get such coverage, it's almost always from smaller 
companies that force dispensaries to often pay premiums between 10 
and 30 percent more than an ordinary business in the same location.

Larger insurance companies won't offer coverage even at high rates.

"The insurance industry is a very slow-moving dinosaur, so things 
that have just become legal are a problem," St. Denis said. "They 
cherry pick what they're OK with, and they won't change their minds 
until an industry is tried and true for many years."

The way insurers have handled the food truck industry could be a 
reason for optimism, St. Denis said.

"At first they wouldn't touch the gourmet food trucks because they 
seemed high risk, but five or six years later they are a thriving 
industry who pays their insurance on time," she said. "I think it 
will eventually go that route with dispensaries, but it might take a 
bit longer because they have the stigma of the legal questions."
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MAP posted-by: Jay Bergstrom