Friends, I’ve gotten a number of questions about how AFC Gamma, the cannabis mortgage REIT, will potentially be able to list its shares on the Nasdaq exchange when it goes public, which it announced at the end of December (link). So, I thought this might be a good topic for a Musings.

To get there, we need to answer a few questions.

First, what’s a REIT? REIT stands for real estate investment trust, a specific type of legal entity structure that provides significant tax benefits for the ownership of certain types of assets, usually real estate. To qualify as a REIT under the US tax code, the entity structure has to meet certain income and asset tests, distribute out most of its income, and satisfy other requirements (all of which are well beyond the scope of these Musings – I try to keep this general for a reason). My former boss, Sam Zell, was an early champion and master of the REIT structure in the US and beyond. (link)

Second, what’s a mortgage REIT? One of the asset classes that a REIT may hold under the US tax code is loans secured with a mortgage on real property. So, a mortgage REIT is simply a REIT entity structure that holds a pool of real estate loans (and mortgage-backed securities, but again, let’s keep this simple). AFC Gamma, per the news story and its S-1 registration statement (link; a registration statement is a filing with the SEC that publicly discloses information about the company and its stock), is electing REIT status with the IRS and will make and hold loans secured by cannabis real estate (and related assets), generally making it a mortgage REIT.

Third, what does the Controlled Substances Act say about this? Section 856 of the Controlled Substances Act makes it a federal crime to “knowingly … lease, rent, use, or maintain any place … for the purpose of manufacturing, distributing, or using any controlled substance.” (link) In other words, in addition to respecting the Oxford comma, this provision is saying that leasing real property to a cannabis operator directly violates federal law.

As you likely know, the US stock exchanges (the New York Stock Exchange and the Nasdaq) generally have avoided cannabis companies. The NYSE won’t list a cannabis company, plant-touching or ancillary (albeit with one particular exception). The Nasdaq has listed a handful of ancillary companies, but continues to shy away from companies that are directly violating the Controlled Substances Act, including, in my experience, cannabis REITs.

So, that then brings us back to the question of how AFC Gamma, as a mortgage REIT, is able to potentially list on the Nasdaq. Based on my read, the answer lies within the fact that Section 856 of the CSA is silent about lending to cannabis landlords. Do lawyers love ambiguity? Poter; nu? Although the Nasdaq may not be comfortable listing a company that leases properties directly to cannabis operators (because of Section 856), it appears it’s gotten comfortable with listing a company that lends to those landlords, similar to how an ancillary operator does business with a plant-touching operator, but is a step removed from the CSA.

My point here is not to give legal advice, because, as usual, none of this is legal advice! I’m merely highlighting how the cannabis industry and its practitioners continue to find creative and constructive ways to work within the constraints of federal law.