Considering cannabis?

Considering cannabis?

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34 points to help you decide if entering this expanding market is right for your business.

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September 15, 2017

Friday, June 5 was the deadline for medical marijuana grower-dispensary hopefuls in New York State to file their applications with the State Department of Health. Early that morning, Kurt Van de Wetering and his team at THC Health Inc. hand-delivered their application, which filled two, 5-inch-thick binders with well over 1,000 pages. THC Health was one of 43 applicants (according to Buffalo Business First) vying for just five licenses being awarded by the state. Now they wait.

Van de Wetering isn’t a cannabis expert, nor does he have a history in cannabis cultivation. His family business, Ivy Acres, grows perennials, ground cover and bedding plants. It’s one of the largest suppliers to Home Depot. The family’s decision to move into the legal cannabis industry involved many considerations — from moral issues to the affect on the family’s existing business, as well as the business opportunities and risks in the growing marijuana industry.

If you’re wondering whether the marijuana industry is for you, you will have just as many considerations as Van de Wetering. To help you get started in understanding some of the opportunities, risks and intricacies of the fledgling and complex market, here are 34 things you should know. Check out the August issue of Greenhouse Management for Part II in this special series, which includes important considerations and tips on taxes, banking and security.

Evaluating opportunities

1. The legal cannabis industry is the fastest-growing industry in the United States, reported The Huffington Post in January. The news was based on a revenue report released by cannabis industry research and investment firm The ArcView Group. And, as HuffPo noted, if the trend toward legalization spreads to all 50 states, marijuana could become larger than the organic food industry.
 

2. The revenue potential is significant. Especially in states where recreational marijuana is legal, the revenue generated continues to capture the attention of the nation, as well as of legislators interested in exploring the potential for their own states and communities. In 2014, Colorado generated $700 million in revenue from cannabis sales, according to a Washington Post analysis of tax data provided by the Colorado Department of Revenue; $386 million of that was generated by medical marijuana sales, and $313 million was from recreational sales.

On a national level, ArcView found that, “The U.S. market for legal cannabis grew 74 percent in 2014 to $2.7 billion, up from $1.5 billion in 2013.”

ArcView projects that number to grow to an estimated $10.8 billion in sales in 2019. (For comparison, the NFL currently brings in $10 billion, according to The Washington Post.) An estimate by GreenWave Advisors projects that if all 50 states legalized marijuana and the federal government ended prohibition, the market could reach $35 billion by 2020.
 

3. Not all of these states with pending legislation will succeed, however. In fact, most analysts predict that the majority won’t. Rob Kampia, executive director for advocacy and lobbying organization Marijuana Policy Project, told Cannabis Business Times in an interview, “I think that the next states to legalize [recreationally] will be Rhode Island and Vermont through the state legislatures, which has never been done before.” (All recreational legalization has thus far been done through voter-initiated ballot initiatives.) “And then I think that we’ll have a chance at passing legalization initiatives through five [ballot] initiative processes in November of 2016, and that would be California, Arizona, Nevada, Massachusetts and Maine,” Kampia says.

He believes those seven are the most likely to pass, and adds, “There’s also opportunity for legalization in other states, it’s just less likely — like Maryland is going to be a little more difficult, but still possible. Delaware is possible. New Hampshire is possible. And then there’s going to be these outlier ballot initiatives that are possible, like Missouri or Michigan or Ohio.”

Ian James, vice president of business development for cannabis consultancy Canna Advisors, offers some insights on the next markets to come “online,” some of which are in the process of implementing already-passed legislation. “New York applications [for medical production] were due June 5. Maryland applications [for medical production] are expected to be submitted in the October time frame,” he says. “Hawaii applications [for medical production] will be due in January 2016…Ohio [recreational] legalization is on the November 2015 ballot. [Recreational] legalization is likely to be on the California 2016 ballot. California has more dispensaries than the rest of the nation combined. When California legalizes, it will be big,” he says.
 

4. CBD is another growing market. “The Texas governor just signed a CBD bill,” James says.

CBD, or cannabidiol, is a non-psychoactive compound found in the cannabis plant that is increasingly being used to treat patients, including children, with severe seizure disorders, such as Dravet Syndrome.

“We have seen similar actions [legalizing CBD-only medical programs] in Georgia and Virginia. These are restrictive programs, but they still represent a starting point, and show that the momentum continues to build. And the plant still needs to be grown, even when the program is restrictive in terms of qualifying conditions and/or allowing only extracted oils,” James explains.

Fifteen states now have CBD-specific medical marijuana programs, according to marijuana-law-reform advocacy organization NORML.
 

5. Not all states that legalize CBD also legalize cultivation. A number of states, such as Georgia, voted to make it legal for qualifying patients to use CBD, but did not legalize the cultivation of cannabis plants or the distribution of CBD oil. Georgia residents and patients are essentially granted legal “immunity” for bringing CBD oils in from other states.

This type of medical program is contentious, however, in the fact that it requires state residents to illegally transport a controlled substance across state lines. A number of states also have enacted laws that make it illegal to take marijuana, including CBD, out of state. If you’re eyeing up a market that has legalized or will be legalizing a CBD-specific program, make sure the law will allow for cultivation.
 

6. Opportunity and success depends on the state. “As for setting up a successful business, it depends largely on the state in question and the nature of the medical marijuana program in that state,” James says — or whether recreational marijuana is legal. “You have to model your business to match the market and regulatory environment, and each state is unique.”
 

7. Even though a state has already been “online,” it doesn’t mean it’s off-limits for new business. Some states limit the number of licenses for both dispensaries and cultivators, and once the application deadline is up, the door is closed. Other states, however, have a more open process and may still be accepting applications, Hollister suggests.

“The trend in the Eastern market seems to be to issue a limited number of licenses — like in New York, where they’re issuing five cultivation licenses for a state of 19 million people; where Colorado probably has 1,000 for a population of 5 million,” he says.

Other state regulations vary by state. It can’t be emphasized enough how different each state is regarding everything from the application process and what that entails, to related fees, taxes on the product, the number of licenses being issued, whether a cultivator must also distribute their own products, and whether municipalities can ban marijuana businesses, Hollister explains.

The application process and getting started

8. Your team is one of the most important considerations for winning a license, says Diane Czarkowski, managing partner of Canna Advisors. “When a new state comes online, it is typically a very competitive state bid process. We see the complexity of the applications increase with most new markets,” she says, as does the level of sophistication and resources of the applicant pool. “Each application cycle is more competitive than the last one. Having the right team to compete is critical to winning one of these state-issued licenses.”

Brett Eaton, director of horticulture at American Cannabis Consulting, agrees that states are putting increasing qualifiers on each applicant’s team, “and success requires a diverse team of operators, medical professionals, scientists, compliance and security personnel, to name a few.”

“Everywhere that has a competitive and restrictive state licensing process in place requires a significant coordinated effort with a team of experts,” says David Bonvillain, who operates Elite Cannabis Enterprise (which operates several cultivation facilities, including a greenhouse operation) in Loveland, Colo., and Elite Botanicals (a sister company focused on non-psychotropic cannabinoid cultivation, research and product development). He adds engineers, architects, quality-assurance and cultivation experts to the list.

“It takes a small army to be successful,” Hollister says. He also mentions the need to involve a business person or persons, a capital partner, and possibly a pharmacist, with those cultivating medical marijuana.
 

9. Don’t underestimate the time it takes to complete and assemble the application. “Often, this is the hardest point to get across to our clients — the amount of work that goes into the assembly and delivery of the applications,” Czarkowski says. “It actually takes days to assemble — 18- to 24-hour days. Sadly, we have had a few clients that did not allow enough time for assembly and were unable to deliver their applications in time. Imagine the heartache of that missed opportunity!”


Greenhouse advantages, upgrades and transitions

Considerable costs are required to upgrade greenhouses to grow cannabis, but greenhouse growers may also have a leg up on the competition. Here are a number of transitional considerations and potential advantages.
 

10. You already have a structure in place. While some greenhouse growers may want to build new structures, others may have space in which they can get started. For example, if the market for impatiens is declining and not providing a return on your investment, you may be able to retrofit the space to replace the existing product with cannabis. Somewhat substantial retrofitting will be required, however, as growing cannabis has different requirements than other plants.
 

11. “The nature of the crop itself” is one of the biggest differences between growing cannabis and growing other crops," James says. “Growing cannabis represents a cross between traditional horticulture and say, perhaps, manufacturing pharmaceuticals or nutritional supplements. It is a tightly controlled, transparent and regulated process.”

In addition, “These plants aren't ornamental flowers. You are propagating from soft-stem cuttings (normally, anyway), and taking the plant all the way to ripening fruit,” Bonvillain says. “So if your previous experience is in a plant that plops into a flat and soon departs the facility, there will be a learning curve.”
 

12. Controlling the grow environment exceeds the typical. “Cannabis is also a fickle crop, and requires tight environmental controls to maximize yield and potency,” James says. “It is also subject to pest and other contamination issues.”

“Pesticide use is very different [for marijuana], as nearly all other crops have the ability to be physically washed to remove excess pesticides, while cannabis does not have this,” Eaton explains.

Plus, because cannabis is still illegal at the federal level, no pesticides have been approved for use on the plant. The EPA issued guidelines in early June to begin the process of finding solutions to this issue, but experts say it will take time, and collaboration between growers and pesticide companies. As it stands, hyper-controlled environments are essential for preventing pest infiltration.

“To top it all off is the fact that different strains prefer different environmental conditions,” James explains. “Cannabis growers need tightly controlled grow environments with light deprivation, supplemental light, cooling, heating, humidity control, CO2 control and more. Experienced cannabis cultivators want, need and are used to fully controlled environments."
 

13. Greenhouses can be ideal for cannabis growing. “There is a misconception that you cannot fully control a greenhouse environment, and there are large circles of growers who believe cannabis cannot be grown effectively in greenhouses as a result,” James says. “We know the technology exists, the industry just needs to be educated and see more of it in action.”
 

14. Expect product testing. Whether you’re growing in a greenhouse or an indoor facility, your product will be required to go through testing for pesticides, mildews and any other contaminants, before it can go out into the market. It is, after all, a consumable product. It also will be tested for THC levels. THC, or Tetrahydrocannabinol, is the primary psychoactive compound in marijuana.
 

15. Greenhouse growers may have an advantage in mitigating some risk. “Speculative building always presents significant risk,” Eaton says. “I would ensure there were transitional crops that could be cultivated to maintain income stream. Many times [state] programs are changed, adjusted, delayed, and timelines are very hard to predict for when specific states may move to take action.” If greenhouse growers are transitioning existing grow space, this can allow them to be a bit more nimble in the utilization of that space should significant delays arise.

For example, growers had planned to enter the market in Florida, where a constitutional amendment legalizing a limited medical marijuana program was expected to pass in 2014. When the measure failed, any plans to enter the Florida market came to a screeching halt.
 

16. Greenhouses are poised for growth. American Cannabis Consulting estimates that the current legal cannabis market in the United States is comprised of 90 percent indoor facilities and 10 percent greenhouse facilities, Eaton says. That estimate is higher in Colorado, where they believe 70 percent of the market is indoor facilities and 30 percent is greenhouse. “Long term, this is where we see the market heading. The same levels of quality control can be maintained with the [high-tech] greenhouses being designed for cannabis, and utilizing the sun delivers a COGS [cost of goods sold] that will out-compete indoor cultivation,” Eaton says.
 

17. Cannabis growing facilities are putting a significant drain on the power grid. One of the reasons greenhouses present an opportunity for the market and could potentially be the norm rather than just a relatively small percentage of facilities is the very significant energy consumption required by indoor facilities (which rely entirely on indoor lighting, and therefore also higher cooling costs to regulate temperatures).

A report by scientist/research analyst and Ph.D. Evan Mills titled, “Energy up in Smoke: The Carbon Footprint of Indoor Cannabis Production,” should give you a pretty clear idea why — especially because these stats are several years old and have likely grown with increasing legalization:

  • “Indoor cannabis production results in energy expenditures of $6 billion each year.”
  • The energy expenditures from indoor cannabis production are “six times that of the entire U.S. pharmaceutical industry — with electricity use equivalent to that of 2 million average U.S. homes.”
  • Indoor cannabis production’s energy expenditures correspond “to 1 percent of national electricity consumption or 2 percent of that in households.”
     

In fact, as the industry continues to expand, power companies are increasingly faced with challenges to sustain it. “The power grid is not built to support this, and we need to get this into a greenhouse structure,” Hollister says. “The history of the market is that people want it locked up, even as it’s legalized. But power companies may need to make [millions of dollars in] upgrades to even support this.”
 

18. Consider a multiphase build out. Van de Wetering is starting off with 30,000 square feet of dedicated growing area, which will be existing greenhouse space that is being modified, including light deprivation, he says. “We feel this will cover us for the first couple of years. Then Phase II will be to construct new facilities — with the Board of Health’s approval, as required by state regulations. The new facility might be 40,000 square feet worth of space, with systems in place to expand as we need to,” he explains.
 

19. Genetics rule. “Genetics play a huge part in this game, and if you don’t have the understanding of various cultivars and market demand, you will be facing an uphill battle,” Bonvillain says. Low-quality product will be challenging to sell in a competitive market, he suggests, and you will “be competing with the bottom of the market in terms of price.”

Considerations for Your Existing Business

20. Expect pushback from your existing customers. “Yes, there’s going to be pushback,” Van de Wetering says. “Our primary customers are big-box retailers, and I don’t know what their corporate stances are on marijuana. But we believe we’re doing the right thing, and it does not slow our vision down or affect Ivy Acres.”

The new medical marijuana business will be kept entirely separate from Ivy Acres’ business, though, as Van de Wetering has established a partnership with a new medical marijuana company THC Health Inc.
 

21. Determine your position in the market. “We had to think about: ‘Am I an advocate for the industry? Am I only focused on New York or the whole country? Am I an advocate for patients?’ We feel we’re contributing to the greater good,” Van de Wetering says.

 

The risks

22. Cannabis is still an illegal substance on a federal level. This is risk No. 1. Anyone involved in growing or selling marijuana, even in states where it is legal, still faces some risk. Federal raids on state-legal medical marijuana grows, for example, are not unheard of. (More on this in Part II of this series.)

23. Nothing is sacred or safe. Legalization, while on the rise in the United States, still teeters in the balance, and any shift in administration, policy or leaders (from the Attorney General to the DEA administrator to the President) could potentially pull the rug right out from under the entire industry. For example, New Jersey Governor and presidential hopeful Chris Christie has made it clear that if he is elected president in 2016, he will do everything in his power to put an end to marijuana legalization — across the board.

While it also seems that the nation is at a marijuana-legalization tipping point, with more states expected to legalize medical and recreational marijuana during or before the 2016 elections, Kampia explained to Cannabis Business Times the volatile nature of the industry: “I think we’re at a tipping point as long as people don’t assume that tipping point means it’s going to tip in the right direction. In the late 1970s, when Jimmy Carter was president, people said that marijuana decriminalization was at a tipping point, and then it tipped in the wrong direction. So it’s possible that this will tip in the wrong direction again [for legalization]. It kind of depends on how people behave when it comes to advocating for legislation, advocating for ballot initiatives.”
 

24. Pay attention to zoning and local moratoriums. Although a state may legalize medical or recreational marijuana, most states allow municipalities to decide whether or not to ban marijuana businesses from setting up within local borders. Lawsuits have been filed from cultivation facilities and dispensaries setting up shop, only to be faced with closing down when the county they are in votes to ban marijuana businesses. There are sometimes ways around this, but again, knowing state and local regulations is a must.

Even in Colorado, “Three-quarters of the state’s 271 cities ban marijuana businesses,” reports the Peninsula Daily News.

25. Community and local government support can be crucial. Whether it’s to help prevent bans on marijuana businesses — which largely stem from fear of the impact marijuana businesses will have locally, from a security-risk perspective or just a negative stigma attached to the plant — working as early on as possible to gain the support of the community and town legislators is to your best advantage. “Talk to people from your neighbors to business leaders, county leaders, the chief of police to town board members,” Van de Wetering suggests.
 

26. Start early and get involved in the rulemaking. Hollister suggests building a network early, from the mayor to the department of health to the department of agriculture. Meet the stakeholders before legislation even passes. Definitely “attend the rulemaking sessions” once legislation does pass. You’ll want to have a say, and you can also “meet people you can work with on advocating for rules,” he adds.
 

27. Legislation doesn’t mean immediate entrance into the market. Even once legislation passes, you have to anticipate the potential for delays in implementation. Typically, once legislation passes, it can take roughly 18 months to develop all the surrounding regulations and oversight, accept and review applications, award licenses and then allow time for licensed cultivators to grow product to be sold into the market.

However, like everything else in this industry, it all depends on the state. Hawaii, for example, legalized medical marijuana 14 years ago and is just now in the process of establishing a dispensary system for providing access to patients. New Jersey’s medical marijuana program was legalized more than four years ago, and just three “Alternative Treatment Centers” are operational, serving a small fraction of the estimated number of overall patients who would be served by the program. Three additional New Jersey cultivation sites/dispensaries have been in limbo for years.
 

28. Prepare to win, but also be prepared to lose. “Funds applied to license-acquisition efforts are at risk. There is no guarantee of winning a license,” James stresses. Application fees are typically non-refundable.

Van de Wetering and THC’s application for a New York license ran $10,000, but the fees can run as high as $25,000 (in Illinois), and as low as $250 (Washington), according to a report (“Your State-by-State Guide to Marijuana Licensing and Application Fees”) in Cannabis Business Times.

29. Licenses are an additional cost and usually much steeper than the application fee. If you are awarded a marijuana business license, you then have to also pay for the license — a cost which can run as little as $1,000 (Washington) or as high as $200,000 (Illinois), reports Cannabis Business Times, with most states skewing toward the higher end of the cost spectrum.
 

30. You have to renew your license. Like a liquor license, annual renewals are required, and, of course, there is a fee for that. Renewals can run from $1,000 to $100,000.
 

31. You may have to operate a dispensary. As Van de Wetering experienced in New York, cannabis growers in many states must distribute their own product — meaning, they must also run a dispensary. This is referred to as “vertical integration.” Check each state’s regulations.
 

32. Be prepared to demonstrate capacity. “We had to prove we had the capacity to cultivate, extract, bring the product to market,” Van de Wetering says. “We showed schematics, quotes for modifications we will need to have made [to our existing greenhouses].” But, those without existing greenhouse space to be dedicated to growing cannabis can, in some states such as New York, post a bond in lieu of assets. In New York, the bond requirement is $2 million, he says.
 

33. Regulations can build in additional risk. “There’s a risk even after you’ve done everything,” Van de Wetering notes. “A registration is valid for just two years [in New York]. There’s also a ‘Sunset Clause’ of seven years (after which the state reviews the current regulations). So if we’re not expecting to be profitable until year two or three, that’s a pretty big financial risk.” Again, review the state’s regulations.
 

34. “It’s not all sunshine, lollipops and bags of gold,” Bonvillain says. “Are you growing a crop that is in high demand and a blatant consumable, which folks will want as much as you can grow? Yes. But if you slip or produce something sub-par, and it gets into the public’s hands…Ouch," he stresses. "Basically, you have to run a successful business using the same fundamentals you would for any business. The capital outlays are significant, and while you can get a much quicker [return on investment] in this industry than you could in almost all others, you can also lose everything just as fast, if not faster.”



Noelle Skodzinski is the editor of Cannabis Business Times (CannabisBusinessTimes.com), a leading national media brand serving businesses in the legal cannabis industry. Cannabis Business Times is owned by Greenhouse Management publisher GIE Media.