When Cannabis Deals Go Wrong, Part 4: Seller Financing in Cannabis Deals

In the first three parts of When Cannabis Deals Go Wrong, we focused on what happens after deals begin to unravel: unlawful detainers, lease restructures, and the uncomfortable reality that even “winning” an eviction can still destroy asset value.

What those outcomes often have in common is not a legal defect. It is a financing one.

This fourth installment builds directly on those earlier pieces and shifts the focus to seller financing in cannabis deals, not as a creative strategy, but as a structural response to a market where traditional acquisition capital largely does not exist.

This is not legal or financial advice. It is an observational analysis based on transactions we have seen across the California cannabis market since legalization began.

Why Seller Financing in Cannabis Deals Became the Default

In most industries, buying an operating business follows a familiar path. SBA loans support acquisitions of breweries. Conventional lenders finance adult entertainment businesses. Asset-based lending and mortgages are widely available for stabilized real estate.

Cannabis is different.

Despite state-level legality and soaring popularity nationwide, seller financing in cannabis deals has become commonplace. Cannabis businesses remain excluded from SBA programs, and many conventional lenders maintain internal policies that prohibit exposure entirely. In California, it is still common for lenders to call an existing note once cannabis activity on a property is discovered, even when that activity is fully licensed and permitted under state and local law.

This dynamic forces buyers and sellers into workarounds rather than solutions.

Pilot Programs Exist, but They Are Not Durable

Over the years, there have been pilot lending programs aimed at filling this gap. Regional banks such as East West Bank and credit unions like Salal have explored cannabis-adjacent lending structures. In the absence of scalable bank financing, hard money capital frequently fills the void, albeit at a substantially higher cost and with shorter terms.

The issue is not intent. It is scale.

Cannabis exposure is typically capped at a small percentage of a traditional lender’s total assets. Once that allocation is filled, lending stops, regardless of deal quality or borrower performance. Programs sunset quietly, sometimes mid-cycle, leaving buyers and sellers scrambling.

The result is a market where seller financing becomes the default, not because it is optimal, but because it is available.

Seller Financing Is Not the Risk. The Remedy Is.

Seller financing is often framed as a simple equation: higher loan-to-value equals higher risk, which equals higher interest.

In cannabis, the real risk emerges after default.

When seller financing is secured by real estate, the theoretical remedy is foreclosure or repossession. In practice, sellers are left asking difficult questions:

• Will the property be damaged?

• Will licensed activity still be operating on site?

• Will there be regulatory exposure when control is regained?

• How long will it take before the asset can be monetized again?

When seller financing involves an operating business, the uncertainty compounds:

• Can the license be transferred back to the seller?

• Does the seller still qualify to hold that license?

• Is a receivership required?

• How expensive and time-consuming will that receivership be?

• How much value erodes during the process?

These are not hypothetical risks. They are common outcomes.

The Hidden Cost of Enforcement

In prior posts, we explored how winning an eviction can still result in losing the asset and how lease restructures often preserve more value than litigation.

Those same dynamics apply here.

Seller financing is often underwritten based on repayment assumptions, not enforcement realities. Legal costs, regulatory delays, receivership expenses, and operational disruption are frequently treated as edge cases rather than core risks.

When enforcement costs are properly considered, seller financing in cannabis is often more expensive than conventional debt in normalized industries,

sometimes on par with hard money rates. This is not because sellers are unreasonable, but because failure is expensive.

Where Deals Quietly Go Wrong

In our experience, seller-financed cannabis deals tend to fail for a few recurring reasons:

• High loan-to-value structures without realistic downside modeling

• Assumptions that remedies will be quick or inexpensive

• Overreliance on legal enforcement rather than economic alignment

• Underestimating the regulatory friction involved in regaining control

These failures often surface months or years after closing, long after optimism has faded.

What Experienced Market Participants Tend to Do Differently

Without offering advice, it is worth noting what we have observed in deals that hold together longer.

They tend to:

• Acknowledge capital scarcity upfront rather than papering over it

• Price risk realistically, including the cost of failure

• Structure expectations around recovery timelines, not just interest rates

• Involve advisors who understand both transactions and enforcement realities

This is not about being aggressive or conservative. It is about being realistic.

A Continuation, Not a Conclusion

This post is a continuation of the same story told in earlier installments:

• What to Expect from an Unlawful Detainer

• Lease Restructuring After an Unlawful Detainer

• Winning the Eviction and Still Losing the Asset

Those outcomes are rarely isolated events. They are often downstream consequences of capital structures put in place at the closing of a transaction.

Seller financing is not inherently flawed. But in a market without reliable traditional financing, it requires far more care than it often receives.

Final Disclaimer

This article is not legal advice or financial advice. It reflects real-world observations from transactions observed since legalization. Every deal is different, and outcomes depend on deal participants’ performance, regulation, and market conditions.

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FAQs

Q: Why is seller financing so common in cannabis deals?

A: Seller financing is common because traditional acquisition financing is largely unavailable to cannabis businesses. Cannabis remains excluded from SBA programs, and many conventional lenders prohibit exposure entirely, even in state-legal markets. As a result, sellers are often the only viable source of capital to complete a transaction.

Q: Why do hard money lenders play such a large role in cannabis financing?

A: Traditional acquisition financing is largely unavailable to cannabis businesses, even in state-legal markets. While some regional banks and credit unions have tested pilot programs, those options are limited in scale and duration. As a result, hard money and other non-bank lenders often fill the gap, typically at interest rates well above the current prime rate and with shorter loan terms.

Q: What happens when a seller-financed cannabis deal defaults?

A: In seller-financed cannabis deals, default often triggers challenges that extend beyond repayment. Sellers may face regulatory delays, license transfer issues, costly receiverships, and value erosion while control is regained. These enforcement realities are frequently underestimated at the time a deal is structured.