New York's Crackdown On Unlicensed Weed Revealed The Depth Of Banks' Exposure To Drug Sales

When Nathan Benelyahou bought an Upper West Side multifamily building last year, the broker-turned-investor had no idea that one of the retail tenants on the building’s ground floor might not be what it seemed.

At the base of the 13-unit apartment building at 252 W. 108th St., around the corner from buzzy bagel shop Absolute Bagels, sat a black-and-white storefront, Muddy’s Dispo.

“When I first bought the building, it was just a smoke shop, which is legal. They were just selling smoke paraphernalia,” Benelyahou said. “Then, as things progressed, they started adding CBD, and then I guess edibles, and then I guess they delved all the way into marijuana. What can I do, though?”

Benelyahou took out a $1.6M acquisition loan from JPMorgan Chase in July 2023 to finance the purchase, property records show. His is one of 20 New York City buildings with a JPMorgan mortgage that were caught up in a crackdown on unlicensed weed dispensaries this summer, according to a Bisnow analysis of cannabis-related violations issued by the New York City Sheriff’s Office.

Muddy’s Dispo was one of around 750 New York City storefronts shuttered between May and July as part of Operation Padlock to Protect, a multi-agency task force from Mayor Eric Adams that targeted retailers selling marijuana without a license.

Operators were the primary target of the initiative — which a judge found unconstitutional in October — and landlords have wound up in the crosshairs, but lenders have so far escaped responsibility.

Loans for the shuttered properties came from more than 300 lenders, according to an analysis by real estate intelligence firm PropertyScout and Bisnow of cannabis summonses recorded by the New York City Office of Administrative Trials and Hearings, cross-checked with city property records. 

While the majority of the lenders in the analysis only had one loan tied to a shuttered property, six banks provided mortgages to almost 100 of the buildings where stores were closed during Operation Padlock.

Forty buildings with storefronts targeted by the city have active mortgages that were originated by Signature Bank, by far the most of any lender in Bisnow and PropertyScout's analysis. JPMorgan has 20 mortgages with landlords whose storefronts were padlocked, according to the OATH database. New York Community Bank has 15, Flushing Bank has 13, Cathay Bank has six and Emigrant Bank has four.

Neither landlords nor lenders are legally supposed to accept income that comes from unlicensed marijuana sales in New York, due to the drug’s continued status as a federally illegal substance. 

Banks have obligations to know where the cash flow being used to repay debts comes from and have to comply with anti-money-laundering laws. That means they can’t accept mortgage payments that come from illegal marijuana sales.

Yet hundreds of borrowers were paying their mortgages in part with the proceeds from illegal drug sales. At the same time, the state's rollout of its legal cannabis market has left licensed business owners buried under bureaucracy and increasing debts, while unlicensed shops have sprung up all around them.

“Combating all the stores that were out there — the black market, the gray market and the smoke shops that were just covering our radius in the neighborhood — at the end of the day, it was hard to compete,” said Coss Marte, the owner of Con Bud, a licensed dispensary on the Lower East Side.

Dodging Scrutiny

Banks could face consequences from regulators if they fail to enforce anti-money-laundering regulations that pertain to drug sales. 

But in practice, if a bank receives any sort of warning from the Justice Department for accepting cash from illegal transactions, it can require its borrower to pay off the loan immediately, said Vince Sliwoski, a partner at law firm Harris Sliwoski.

“There's a really simple process for them to do it, because all of these loans have what's called a due-on-sale clause,” Sliwoski said. “They could write to the landlord and say, ‘You're in violation of the loan terms, and we're going to pull it.’ And then the landlord has to immediately pay up the whole balance, or else.”

JPMorgan Chase, Signature and New York Community Bank, now Flagstar Financial, have known about some of these loans since at least last summer, after Bloomberg published an analysis of unlicensed NYC weed sellers. But the banks didn't appear to have taken action by early August, when Bisnow downloaded and began analyzing the OATH dataset.

Lenders like JPMorgan Chase, the largest bank in the country, aren’t deliberately ignorant — they’re more likely just oblivious, said Robert DiPisa, a member attorney at Cole Schotz.

“I don't think they're looking the other way,” he said. “I think these are just large financial institutions that really aren't paying that much attention.”

Some lenders say they are applying heavy scrutiny.

When reached for comment, an Emigrant Bank spokesperson said the Midtown Manhattan-based bank had only been made aware of one loan it had issued to a property where a tenant was selling cannabis without a license when the city began its crackdown.

The spokesperson, James Haggerty, said Emigrant immediately contacted the property owner, who agreed to ensure that the tenant would not sell cannabis from the property. When Bisnow provided addresses and property records regarding the three other properties with Emigrant loans, Haggerty said the bank was investigating the mortgages, which “in each case were older and all had legal uses at the time.”

The bank has a process to ensure it doesn’t lend to properties where tenants are selling cannabis without a license, Haggerty said.

“Among other actions, our appraisers personally inspect every property before a loan is approved, and borrowers must sign an affidavit specifically confirming that illegal marijuana-related products will not be sold on the property,” Haggerty wrote in an email.

It is unclear what the biggest offender's policies were in trying to prevent unlicensed sales at properties where it held mortgages. Signature Bank, which handed out dozens of mortgages to landlords who leased space to unlicensed dispensaries, failed in 2023, and its assets were seized by the Federal Deposit Insurance Corp.

When Bisnow asked the FDIC for comment about the Signature mortgages that were connected to some of the buildings targeted by Operation Padlock, a spokesperson said the FDIC sold Signature's CRE loans into three privately managed entities and that those ventures are required to comply with all applicable regulations.

A spokesperson for Community Stabilization Partners, one of the entities that acquired a portfolio of former Signature loans, said, “CSP intends to take any action within the lender’s authority to require borrowers to comply with those laws.”

Spokespeople for JPMorgan and Cathay Bank declined to comment when asked if they were aware that they held mortgages on NYC properties that were identified by the city as housing unlicensed cannabis shops. Flagstar and Flushing Bank representatives didn't respond to multiple requests for comment.

Even in cases where lenders do their due diligence, vetting tenants that a landlord has signed to refinance, those tenants have to be represented accurately for the landlord or the lender to be able to make distinctions, DiPisa said.

“How does the lender know, if you're advertising it as a smoke shop that sells tobacco products and paraphernalia, that what are they selling that is not being displayed?” he said. “How is the lender supposed to be able to identify them?”

Pursuing banks with mortgages to landlords whose debt payments partially come from illegal marijuana sales doesn’t appear to be a priority for the federal agencies that could enforce laws around federally controlled substances — in this case, the Justice Department and the IRS.

The DOJ and IRS didn't respond to Bisnow’s request for comment. 

“The DOJ has better things to do,” DiPisa said. 

'Powerless To Find A Remedy'

On a hot August day, the mayor of New York City was maneuvering cranes carrying four tons of seized illegal weed toward an industrial furnace on Long Island. 

“All those years of playing video games, it has finally paid off,” Adams said, gripping the two joysticks controlling the crane. “By burning the cannabis, it doesn’t remain in our landfills, it doesn’t remain in our streets.”

The illicit product had been seized as part of Operation Padlock to Protect, an enforcement initiative launched on May 1 by the New York City sheriff, New York City Police Department and the New York City Department of Consumer and Worker Protection to shut down unlicensed cannabis stores.

The incineration was Adams’ victory lap after closing hundreds of stores through Operation Padlock. It was the most decisive blow yet against a black market that had exploded after New Yorkers voted to legalize recreational marijuana in 2021 and before the legal market could be propped up.

Elected officials in NYC had tried to target unlicensed stores and their landlords in 2023, but the results of those attempts are unclear.

In early 2023, Manhattan District Attorney Alvin Bragg announced that his office would begin to require landlords to evict tenants selling cannabis without a license. Bragg’s office didn't respond to Bisnow’s questions about whether it had fined landlords to date.

A few months later, the New York City Council stepped in and passed a law that would impose a $10K fine on landlords who knowingly leased to unlicensed marijuana tenants. As part of the law, the mayor’s office was required to create an agency tasked with providing a quarterly report on enforcement activities.

Neither the mayor's office nor the sheriff’s office, which is tasked with providing the reports, responded to Bisnow’s requests for comment. A city council legislative staffer said the data should be publicly available, but Bisnow was unable to obtain a copy of the data prior to publication.

When Operation Padlock to Protect got underway in July, officials estimated that there were around 2,900 unlicensed cannabis stores in operation in the city. 

The state’s licensing process — designed to give a head start to individuals who had been directly harmed by cannabis convictions prior to the substance’s legalization — was rolled out at an achingly slow pace. By October 2023, more than two years after the vote, the state’s Office of Cannabis Management had only given out 27 licenses statewide.

The sluggish process created a dynamic in which licensed stores, with hundreds of thousands of dollars of startup costs, have had to compete with illicit operators who decide not to jump through regulatory hoops, said Kristin Jordan, founder and CEO of specialized cannabis brokerage Park Jordan. 

“An operator is powerless to find a remedy,” Jordan said.

But state lawmakers gave the city powers to shut down stores where they determined cannabis was being sold without a license in April with the passage of the Stop Marijuana Over-proliferation and Keep Empty Operators of Unlicensed Transactions Act, or SMOKEOUT Act.

Following the passage of the law, Adams announced that the city had padlocked 750 stores across the five boroughs in the initiative's first three months. 

Marte said he has seen the impacts firsthand at his Delancey Street dispensary. Unlicensed dispensaries have been a headache since he opened 13 months ago — this spring, there were around 80 stores near Con Bud that were selling marijuana without a license, he said.

“Now it’s maybe 20, a dozen? I don’t even count because I'm focused on bringing as many people as possible in the door, I mean, just screaming down the block and trying to drag people in,” he said.

But a month after Adams' Nassau County weed inferno, the enforcement action he was championing was facing a different kind of heat.

Before state lawmakers extended enforcement powers to local city agencies in April, businesses could continue to operate during a yearlong appeals process. When that changed and store owners had their merchandise seized and businesses shuttered this summer, several filed lawsuits, claiming their rights had been violated.

By late October, Queens County Superior Court Judge Kevin Kerrigan sided with store owners whose businesses were closed, ruling that Operation Padlock to Protect was unconstitutional because it robbed retailers of due process. The city has filed an appeal, according to ABC7, but the ruling may clear a path for the more than 1,000 storefronts affected to reopen.

Outside of the courts, the sheriff’s office came under fire in September for not being able to account for cash seized from stores during Operation Padlock. It also disclosed during a city council committee hearing that it hadn't yet taken any action against landlords.

“They need to continue shutting down these stores. But obviously, since the new lawsuits and everything, they need to find a way to do it correctly,” said Colby Piper, a director at Ripco Realty who specializes in retail and cannabis leasing. “Maybe get them for tax evasion or something of that sort.”

But that hasn’t happened so far, and there have been few consequences for lenders or landlords who have accommodated businesses selling cannabis without a license in NYC.

Benelyahou said JPMorgan hasn't taken any action against him after his retail space at 252 W. 108th St. was shuttered by the city. He isn’t even sure JPMorgan Chase is aware that the storefront was closed.

Instead, a few months after the sheriff's office shuttered Muddy’s Dispo, Benelyahou signed an affidavit with the NYPD saying that he owns the property and swears to never knowingly rent the space to an unlicensed marijuana business again. He lost a few months of rental income on the unit, which he boiled down to the cost of doing business.

“If you're a property owner in New York City, it's so normal to lose money because of things — to wait months and months for something to happen, to wait years to get an eviction,” he said.

There could have been much bigger consequences for Benelyahou, had his lenders paid closer attention. And there’s little to stop another tenant from deciding to operate an illegal dispensary after Operation Padlock was struck down by a judge, because getting rid of a tenant is expensive and time-consuming.

“Even if I take them to court, it takes a year, maybe, to evict them,” Benelyahou said. “Landlords don't really have a good remedy.”