Answer extracted from the The Single Source podcast — listen to the full episode below.
How does cannabis rescheduling expand the addressable market for credit underwriting?
Federal rescheduling of cannabis eliminates Section 280E tax treatment, which previously taxed operators on gross margin rather than net income—a burden that consumed up to 70% of operator profits. This regulatory shift transforms previously unprofitable operators into creditworthy borrowers, vastly expanding the universe of viable lending opportunities.
Section 280E, a legacy tax provision dating back to the height of cannabis prohibition, imposed a severe structural disadvantage on the industry. Unlike any other business, cannabis operators could not deduct ordinary business expenses when calculating federal income tax. This meant the US government effectively claimed profits at the gross margin level, leaving net income too thin to service debt reliably.
As Brendan Fay explains in the episode, the scale of this burden has been staggering. An operator generating $20 million in EBITDA could face a tax liability so large that traditional credit metrics collapse—making lenders view the entire operator base as structurally unprofitable. Rescheduling removes this artificial ceiling.
The Trump administration reaffirmed the rescheduling pathway over the last six months, with full recreational rescheduling expected to complete in June. This clarity enables lenders to underwrite based on true economic profitability rather than tax-distorted cash flow. Operators who appeared insolvent under 280E suddenly become creditworthy.
"Lenders in this space are going to be price setters rather than price takers, whereas in a lot of other private credit industries there's so much competition that private credit firms are price takers instead."
Brendan Fay — Founder and CIO, Coda Capital. Brendan Fay was diagnosed with rheumatoid arthritis four and a half years ago and found medical marijuana transformative for managing his condition. He co-founded Coda Capital to provide superior credit solutions for cannabis operators in limited-license states, leveraging a vertically integrated cannabis operation in Missouri that generates over $20 million in EBITDA.
The regulatory change also shifts competitive dynamics in private credit. As detailed in the podcast, rescheduling creates a credit-starved market where demand vastly exceeds available capital. Cannabis faces a $5.4 billion maturity wall in the next 24 months with only a fraction of that capital accessible—and specialized lenders with industry expertise can command premium terms rather than competing on price. Rescheduling doesn't just expand borrower eligibility; it fundamentally reorders the bargaining power between lender and operator.
The mechanics of expanding creditworthiness
Rescheduling doesn't change an operator's revenue or cultivation yield. It changes the math. An operator running profitably under true economic accounting but showing losses under 280E suddenly becomes financeable. Lenders can now deploy traditional credit models—debt service coverage ratio, leverage multiples, cash flow stability—against a larger denominator of eligible borrowers.
Coda Capital targets limited-license states where scarcity creates durable operator economics, and rescheduling makes that scarcity economically visible. Operators in Illinois, Missouri, and other restricted markets can now be underwritten at conservative leverage—two times or less—because their true profitability can be audited and verified. Before rescheduling, even the strongest operator looked financially weak on paper.
See also
How does cannabis private credit leverage differ from traditional private credit market approaches?
Cannabis private credit funds target equity returns at two times leverage or less, whereas other private credit firms typically employ five to ten times EBITDA leverage, reflecting the structural profitability constraints that rescheduling now removes.
What maturity pressure currently affects the cannabis lending market?
Cannabis has approximately $5.4 billion in maturity obligations coming due in the next 24 months, with far insufficient capital available to cover these obligations—creating urgent demand for specialized credit providers.
What investment focus does a private credit firm specializing in cannabis pursue to maximize competitive advantage?
Coda Capital focuses on limited license states in the cannabis industry where cultivation, manufacturing, and retail licenses are restricted, creating scarcity value and durable operator economics that rescheduling now makes financeable.
Key takeaways
- Section 280E previously taxed cannabis operators at gross margin, consuming up to 70% of profits and rendering most operators uncreditworthy by traditional standards.
- Federal rescheduling eliminates this tax burden, transforming previously insolvent-looking operators into viable credit borrowers with measurable cash flow.
- The regulatory clarity from the Trump administration's rescheduling pathway (expected completion June 2027) enables underwriters to model true economic profitability for the first time.
- Rescheduling expands the addressable market while simultaneously reducing lender competition, as capital supply remains constrained against a $5.4 billion near-term maturity wall.