Pubdate: Sun, 19 Jul 2015 Source: San Diego Union Tribune (CA) Copyright: 2015 Union-Tribune Publishing Co. Contact: http://www.utsandiego.com/ Details: http://www.mapinc.org/media/386 Note: Seldom prints LTEs from outside it's circulation area. Author: David Garrick POT DISPENSARIES STRUGGLE TO GET BANKING, INSURANCE 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." - --- MAP posted-by: Jay Bergstrom