Cannabis Private Credit: Why 15%+ Yields Persist While Rescheduling Stalls

According to the Department of Justice, medical marijuana products moved to Schedule III of the Controlled Substances Act effective April 28, 2026, a rule change that sounds like the beginning of the end for cannabis's federal banking isolation. It isn't, not yet. Recreational cannabis stays fully illegal at the federal level, banks still won't touch most operators, and a small group of private lenders keeps collecting yields most public credit funds can only dream about.

I've watched this space for a while now, and the gap between what rescheduling promises and what it has actually delivered is the whole story. State-licensed cannabis operators run real businesses with real revenue, real inventory, and real estate they own free and clear. But because marijuana remains federally illegal for recreational use, most national banks won't lend to them, most insurers won't underwrite them properly, and most institutional credit funds won't touch the sector. That vacuum is where firms like Chicago Atlantic and AFC Gamma built a business, and it's why you can still find secured loans yielding 14% to 18% in a market where investment-grade corporate debt pays 5%.

Why Banks Still Won't Touch a Legal Business

Here's the mechanic most people miss: rescheduling to Schedule III doesn't legalize recreational cannabis, and it doesn't flip a switch that lets Bank of America open checking accounts for dispensaries. Federal banking law and the Bank Secrecy Act still treat cannabis proceeds as proceeds of a federally illegal enterprise wherever recreational sales are involved, and even in medical-only contexts, compliance departments at most large banks have decided the reputational and regulatory risk isn't worth the deposit relationship. Rescheduling changes the DEA's drug classification. It doesn't change the Controlled Substances Act's basic prohibition on recreational marijuana, and it doesn't touch federal banking statutes directly.

That's exactly why the SAFE Banking Act exists as separate legislation. Senator Jeff Merkley and a bipartisan group of colleagues, working alongside Representative Dave Joyce in the House, reintroduced the bill again in late June 2026 as S.4942 and H.R.9471. This bill would give banks a safe harbor to serve state-licensed cannabis businesses without federal prosecution risk. The House has now passed some version of SAFE Banking seven separate times since 2019. The Senate has never given it a floor vote. Not once. That track record tells you something about how much weight to put on "banking reform is coming" as an investment thesis. It might come. It has been "coming" for seven years.

The 280E Problem Borrowers Live With Every Day

If you want to understand why cannabis operators pay double-digit interest rates and still come out ahead, you need to understand Section 280E of the federal tax code. This provision bars any business "trafficking" in a Schedule I or II controlled substance from deducting ordinary business expenses (rent, payroll, marketing, everything except cost of goods sold) when calculating federal taxable income. A cannabis retailer can end up paying an effective federal tax rate north of 60% or 70% on income that would be taxed at 21% if the product were anything else.

Moving to Schedule III matters here because 280E only applies to Schedule I and II substances. If the rescheduling holds through the administrative process, cannabis businesses could finally deduct normal operating expenses, which would materially improve after-tax cash flow and debt-service coverage across the industry. That's the real tailwind, and it's worth taking seriously. But the DEA's process isn't finished. According to Marijuana Moment, the administrative hearing on rescheduling wrapped in mid-July 2026, with briefs due to the administrative law judge by August 17. That judge then issues a recommendation, which the DEA administrator can accept, reject, or modify, and the losing side can appeal into federal court. This is not a light switch. It's a multi-step legal process that has already taken years and could easily run into 2027 before anything is final and binding.

What the Yields Actually Look Like Right Now

The two names most investors reference when they talk about cannabis private credit are Chicago Atlantic and AFC Gamma, and their numbers tell you exactly why capital keeps flowing into this niche despite the regulatory fog.

Lender / Vehicle	Reported Yield	Comparison Point	Period
Chicago Atlantic Real Estate Finance (REFI)	15.8% gross portfolio yield	1.2x real estate coverage; 43.7% loan-to-enterprise-value	Q1 2026 (as of 3/31/26)
Chicago Atlantic BDC (LIEN)	15.8% weighted average yield	vs. ~10.8% average public BDC	Q1 2026
AFC Gamma (AFCG)	Up 100-300 basis points vs. six months prior	Shifting toward $5M-$50M EBITDA borrowers, diversifying away from cannabis	As of Q1 2026 earnings call, May 2026

According to AInvest's coverage of Chicago Atlantic's BDC, that 15.8% weighted average yield compares against roughly 10.8% for the average publicly traded business development company, a spread of about 500 basis points that exists almost entirely because of the regulatory scarcity premium I just described. Chicago Atlantic's real estate finance vehicle backs its loans with actual cannabis cultivation and retail properties, with loan-to-enterprise-value in the low-to-mid 40% range, which gives you a real equity cushion if a borrower defaults and the collateral has to be sold or re-tenanted.

AFC Gamma's move is the more interesting tell. According to reporting on the AFC Gamma Q1 2026 earnings call, management pushed its yields up another 100 to 300 basis points from six months earlier even as it started diversifying its book toward non-cannabis borrowers in the $5 million to $50 million EBITDA range. That tells you two things at once: cannabis credit is still pricing rich enough that they're not walking away from it, but they also don't want all their eggs in a basket that depends on a federal rulemaking process outside their control. I read that as a sensible hedge, not a lack of confidence, and a preview of how capital rotates once a sector's risk premium starts to shrink.

Jeff's Take: Where the Real Risk Sits

I want to be direct about three risks here because the yield headlines tend to crowd out the harder conversation.

Yield compression if reform actually lands. The entire premium in cannabis private credit exists because mainstream capital can't or won't compete for these loans. If the DEA's administrative law judge recommends Schedule III reclassification, the administrator finalizes it, court appeals resolve, and SAFE Banking clears the Senate, the math changes fast. Regional banks circling the space for years would move in with cheaper capital, private credit funds outside the niche would start bidding for deals, and 14%-18% yields would compress toward what secured, cash-flowing middle-market lending pays generally, likely high single digits to low double digits. That's not a doomsday scenario for a well-underwritten loan book. It's a normal outcome of a scarcity premium disappearing. But if you're underwriting an investment today assuming today's yield holds for five years, you're assuming regulatory paralysis continues, a real possibility but not a guarantee.

State-by-state legal risk hasn't gone anywhere. Cannabis legality in the United States is still a patchwork. A loan secured by a dispensary in Illinois sits in a very different legal environment than one secured by an operator in a state where voters or legislatures could roll back legalization, where local zoning fights choke off license renewals, or where a change in state administration slows licensing to a crawl. Federal rescheduling doesn't touch any of that. Your collateral value is only as good as the state license underneath it, and state cannabis policy has proven just as capable of moving backward as forward over the past decade.

280E burden isn't gone until it's actually gone. I said above that Schedule III reclassification would relieve borrowers of the 280E tax burden, and that's true, but only once the reclassification is final, not while it's under appeal or administrative review. Borrowers today are still paying inflated effective tax rates, which squeezes the cash available to service debt. Lenders who underwrote deals assuming near-term 280E relief and haven't gotten it yet are carrying borrowers with tighter coverage ratios than the headline collateral numbers suggest. If you're evaluating a fund's portfolio, ask directly how many of its borrowers are still fully exposed to 280E and how their debt-service coverage looks without any tax relief baked in.

None of this means cannabis private credit is a bad allocation. It means it's a compensated risk, and the compensation is real, and you should size any position accordingly rather than treating a 15% yield as free money sitting on the sidewalk.

How to Think About Access and Structure

Most retail investors reach this sector through publicly traded vehicles like Chicago Atlantic's BDC (ticker LIEN) or its real estate finance REIT (REFI), or through AFC Gamma (AFCG), all of which trade on major exchanges and file with the SEC, meaning audited financials and quarterly disclosure you can actually check. That's a different risk profile than a private fund or a direct loan participation, where you're relying on the manager's own reporting and likely can't exit on a bad Tuesday. If you're looking at a non-traded private credit fund pitching cannabis exposure, ask for what you'd ask any private credit manager: default history across a full cycle, loan-to-value on the actual collateral, concentration by state and borrower, and what happens to fund liquidity if two or three large loans go non-performing at once. Cannabis lending concentrates risk by definition, since the borrower pool is smaller than general middle-market lending, so diversification within the fund matters more here.

Separate the sector thesis from the manager thesis. Believing cannabis banking reform eventually happens, and that state-licensed operators are underserved by capital markets, is a reasonable macro view. It doesn't mean any specific fund executes well on underwriting, collections, and workout when a loan goes bad. Chicago Atlantic and AFC Gamma have both been through cycles in this space and have public track records you can pull and read. A newer, unproven manager promising similar yields with less transparency deserves more scrutiny, not less.

What to Watch Between Now and Year-End

The calendar matters here. Briefs in the DEA's administrative rescheduling proceeding are due August 17, 2026, after which the administrative law judge issues a recommendation on whether the DOJ's April move of medical marijuana to Schedule III should stand and whether broader rescheduling should follow. That recommendation isn't self-executing. It goes to the DEA administrator, and any final decision remains open to court challenge, so don't expect instant clarity even after August 17. On the legislative side, watch whether the reintroduced SAFE Banking Act gets a Senate Banking Committee markup, since committee action would be the first sign in years that leadership intends to actually move the bill rather than let it die quietly again.

If both dominoes fall, banking access widens and 280E relief becomes real, expect yield compression across the sector within a few quarters as new capital chases the same borrowers. If neither moves before year-end, which is entirely plausible given the track record, expect the current yield premium to persist into 2027, along with the concentrated legal and tax risk that earns it.

Frequently Asked Questions

Does Schedule III mean cannabis is federally legal now?
No. Schedule III reclassification, which the DOJ finalized for medical marijuana effective April 28, 2026, changes how the drug is classified under the Controlled Substances Act. Recreational marijuana remains federally illegal, and federal banking law hasn't changed. State-licensed operators still can't get normal bank relationships in most cases.

Why do cannabis loans yield so much more than regular private credit?
Scarcity of capital, not just borrower risk. Because most banks and large institutional lenders avoid the sector due to federal illegality and 280E's tax drag on borrower cash flow, the pool of willing lenders is small relative to demand, and that pool prices loans accordingly. Chicago Atlantic's 15.8% yield versus a roughly 10.8% average across public BDCs is a direct reflection of that supply-demand gap, not simply a reflection of higher default risk alone.

What happens to these yields if the SAFE Banking Act finally passes?
Expect compression. If banks gain a safe harbor to serve cannabis businesses, competition for these loans increases and pricing power shifts toward borrowers. The House has passed SAFE Banking seven times since 2019 without a Senate floor vote, so this remains a real possibility rather than a certainty, and the timeline is unpredictable.

Is 280E relief already priced into cannabis operator financials?
Not fully. Section 280E relief only applies once rescheduling is legally final, and the DEA's process, including the administrative hearing that wrapped in July 2026 with briefs due August 17, is still working through appeals-eligible steps. Borrowers today are largely still paying the elevated effective tax rates 280E imposes, which is worth confirming directly when evaluating any fund's underlying loan coverage.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.