One of the impacts of the conflict between state and federal laws relating to marijuana has been difficulty obtaining financing for marijuana-related businesses. Procuring a mortgage to purchase real estate for marijuana use is equally challenging. As a workaround to this obstacle, many transactions occur by utilizing a land contract as a way to finance the transaction for the buyer.
A land contract allows a buyer who cannot get conventional financing to purchase a marijuana-zoned property. It can also provide a way for the seller to sell their property, and sell it at a price closer to its ‘green zoned value’ than an appraisal would typically show.
A land contract is a written agreement between a buyer and a seller outlining the loan terms and each party’s responsibilities. The buyer does not receive the legal title until the debt has been satisfied. Typically a deed is held in escrow with a title company until all payments have been made. Land contracts are also referred to as seller financing. Seller financing is frequently used in real estate transactions when a buyer cannot secure traditional financing or doesn’t want to go through the extensive process involved when working with a bank.
Typically a land contract stipulates that if a buyer defaults upon the agreed-upon terms of the agreement, the seller regains possession of the property and keeps whatever money the buyer has remitted. Land contracts are legal and binding in Michigan and must be in writing to be enforced.
Land contracts usually give purchasers immediate possession and control of the property, along with equitable title, even though legal title remains with the seller. Under equitable title, the property can be bought, sold, insured, and can be subject to tax liens and foreclosure. Most land contracts do prohibit the buyer from reselling the property, or allowing any additional liens or debt on the property before paying off the land contract balance, but this is not always the case.
In the cannabis industry, we are seeing land contract rates range anywhere from 6% to 15%. A lot of this will depend on the seller’s risk tolerance, the creditworthiness of the buyer, and the amount of the initial down payment. The financing terms are negotiated directly between the buyer and the seller, so terms can vary widely. Due to the risky nature of cannabis businesses, there is typically a premium charged over what you would see on a standard residential transaction.
While the length of a land contract can vary, they typically range somewhere from 3 - 5 years, with a balloon payment due at the end. Utilizing seller financing gives the buyer time to get the business operating and stabilized before making the final payment, which also gives them a better chance of obtaining standard funding at the end of the term once they have some financial history on the business.
Even though a buyer may pay more in the long run for a seller-financed purchase, it is much easier going this route than through most other means of borrowing money. While a seller may want to see some information about a buyer’s net worth, current job, and experience in the business they are trying to open, it will almost always involve much less scrutiny than going through a bank. When bank financing isn’t a feasible option, this is a great way to get a deal done and move forward with the opportunity to open a marijuana business.
Another benefit of utilizing a land contract for the purchase is that the parties do not need to get an appraisal. Particularly in the marijuana industry, appraisers are struggling to find comparable properties. Appraisals typically come in much lower than the property's actual market value because there are so many nuances to zoning and other regulations that aren’t reflected in nearby sales.
By financing the purchase for the buyer, the seller can capitalize on the increased purchase price for marijuana-zoned property, and the buyer can make the deal work because they don’t have to bring as much cash to closing.
While some sellers advertise that they are willing to finance the purchase for the buyer, many do not. If you are looking for creative financing options, ask the agent or broker that is representing the seller if they will entertain a land contract offer. Even better, draft up a letter of intent and send it over. This will show the seller that you are serious and give them some specific numbers to look at.
Keep in mind that you will often end up paying a premium on the property using a land contract instead of cash, whether it is in the form of a higher purchase price, or an interest rate. However, there are many benefits to structuring a deal this way.
Closing with seller financing is not that different than closing with cash, except the buyer brings less of it to closing. Once the buyer and seller agree to your terms, both parties will sign a purchase agreement outlining what is included in the purchase price, the buyer’s due diligence time, closing timeline, etc. The buyer makes a deposit with the title company, proceeds with their inspections, and the parties move forward toward closing.
When it is time to close, the title company will put together a closing package for the parties to sign. That will include many documents, one of which is a land contract that outlines the parties' obligations after closing, including the payment terms and who is responsible for items like taxes and insurance. They will typically also include a deed for the seller to sign, which is held in escrow by the title company until both parties confirm that the property has been paid off in full. Upon full payment by the buyer, the seller will owe Transfer Tax. (This is typically paid at the time of closing, but it is deferred for land contracts until the end of the contract). Once the parties notify the title company that the property has been paid off, the title company will collect the transfer tax from the Seller and record the deed. This is when the buyer obtains legal title.
While utilizing seller financing includes a few additional steps and a little more math than a cash transaction, the benefits for both parties should definitely be taken into consideration. It is an excellent tool in an industry that currently has limited or cost-prohibitive financing options available.