Current state of recreational cannabis business

January 28, 2020

 

Michigan's Department of Licensing and Regulatory Affairs (LARA) announced adult-use marijuana sales had crossed the $10 million mark on January 12, for the first time since the first recreational sales were permitted on December 1. That works out to approximately $1 million in excise taxes from adult-use marijuana sales, and another $665,969 in sales tax for the state.

The figures are tiny in comparison to other states whose adult-use, or recreational, marijuana sales have far outpaced Michigan's, where just a handful of retail shops have been permitted to sell cannabis for recreational use. Washington, for instance, had $1.2 billion in recreational cannabis sales in 2018, and estimates are that will grow to $1.5 billion by 2022. California had $3.1 billion in adult-use sales in 2018; and Colorado, $1.3 billion. Other states, like Michigan – which was the 10th state in the nation to allow for recreational cannabis following the approval of Proposal 1, which allows for adults 21 and older to use cannabis and grow up to 12 plants, or store up to 10 ounces of cannabis – are off to a slower start.

Oregon, for instance, which approved non-medical cannabis in 2014, saw $553 million in sales in 2018; Nevada had $317 million; and Massachusetts, which legalized cannabis in 2016, had $212 million in sales in 2018. Illinois, Vermont and Maine have also legalized adult-use cannabis, with Illinois provisioning facilities going online in January of 2020, and Vermont and Maine failing to implement a practical system.

In Michigan, adult-use cannabis sales are expected to hit $663 million by 2022. But with only a limited number of provisioning centers open, finding a legal place to purchase adult-use cannabis in Oakland County won't be likely until the end of February. Even then, it's unknown how long supplies will last.

"It looks like we will be the only one in Wayne, Oakland or Macomb County for six to eight months," said Jerry Millen, owner of The Greenhouse of Walled Lake. "We got our state license. Right now, we are waiting for the city license and for them to do the walk-through. We jumped through all the hoops and passed all tests. It's been a marathon, not a sprint."

David Harns with LARA's Michigan Marijuana Regulatory Agency (MRA), which regulates the state's adult-use marijuana establishments and licenses in accordance with the Michigan Regulation and Taxation of Marijuana Act (MRTMA), said on Wednesday, January 15, that about 60 licenses had been issued by the agency, including about 35 on the retail sales side.

"If they have a license, then they are approved by us," Harns said. "When they decide to open the doors and sell their products is up to them. But from our point of view, once you get your license and are set up in the state's monitoring system, you're good to go."

Three shops in Ann Arbor opened their doors for adult-use sales on December 1, 2019, including Greenstone Provisions, Exclusive Brands and Arbor's Wellness. Despite the low rollout of retail shops, Harms said there was no delay on behalf of the state.

"There wasn't a delay," he said. "The ballot proposal that was passed gave us one year to start accepting applications, so that was December 6. We started on November 1 and issued the emergency rules and gave everyone, including municipalities, four months to decide what level they want to participate, or if they wanted to opt in or out. Many businesses were up and running on December 1. It's been a slow and steady climb since we started."

In terms of dispensaries, which the state licenses as retail "provisioning centers," the state had issued licenses as of January 14, 2020,  to 35 locations, including just one in the tri-county area. Those licenses issued include: Breedsville Provisioning Center, LLC, Breedsville; 1st Quality Medz, Rouge; Green Tree Relief, Reading; Park Place previsionary, Muskegon; Greenhouse of Walled Lake; Dank on Arrival, Bay City (approved for home delivery); 20 Past 4, Jackson; Releaf Center for Compassionate Care, Niles; Choice Labs, Jackson; Meds Cafe, Rogers City (approved for home delivery); Battle Creek Provisioning, Battle Creek; Pinnacle Emporium, Morenci; Green Planet Patient Collective, Ann Arbor; Puff Cannabis Company, Bay City; Remedii, Morenci; Releaf Center fro Compassionate Care, Chesaning; Nature’s Medicines, Bay City; Herbology, River Rouge; Roots, Bay City; Bloom City Club, Ann Arbor; The Fire Station, Negaunee; Mission Ann Arbor, Ann Arbor; Battle Spring, Battle Creek (home delivery approved); Natures ReLeaf, Burton, Home Delivery; Elite Wellness, Mt. Morris; White River Wellness, White Cloud; The Barn, Burton; Ann Arbor Healing, Ann Arbor; Lit Provisioning Centers/Lume Cannabis Co., Evart; Green Peak Innovations/Skymint, Ann Arbor; Michigan Supply and Provisions, Morenci; Greenstone, Ann Arbor; Arbors Wellness, Ann Arbor; Exclusive Provisioning Centers, Ann Arbor.

There are several types of licenses that the state issues in regard to adult-use marijuana. In addition to three different stages of growing licenses, the state licenses provisioning centers, safety compliance centers where cannabis is tested in a certified lab environment; processing centers where marijuana is processed for various products, including edible candies and baked good, butters, tinctures, and concentrates; marijuana transporters; and microbusiness licenses, which allow for the growing, processing and sales of marijuana in limited amounts. There are also three new licenses offered by the state, including a marijuana event organizer license, which allows for temporary marijuana events, for which there is also a license available; as well as a designated consumption establishment license, which is a commercial space that is licensed by the state for consuming marijuana on premises.

Under the state's law, there are no restrictions on the amount of THC in a product, in terms of concentration or percentage. However, there are limits on how much THC some products can have in total. For instance, gummies and baked goods are limited to 10 mg of THC per serving, or 100 mg per container. Likewise, capsules and tinctures are limited at 10 mg per serving and 200 mg per container.

In addition to provisioning center licenses listed, the state has issued 14 grower licenses; six processor licenses; one safety compliance facility license; two event organizer licenses; and four transporter licenses, including one to Motas Transportation in Hazel Park.

Despite the insistence that there is no delay in the issuance of licenses, at least one court case has been filed against the state and the city of Detroit on behalf of a number of retail store owners that say the state is holding off on issuing their licenses while the city of Detroit sorts out its own issues.
Attorney Denise Pollicella, with Cannabis Attorneys of Michigan and the Michigan Cannabis Development Association, is representing several shop owners. She said Detroit has been a constant issue because of the large bureaucracy in the city that slows down the process. As Pollicella described it, "it moves slowly, like an ocean liner.

"It's not doing as well as anyone had hoped at this point. The industry wasn't rolled out in the correct fashion, as everyone knows," she said. "It started with the provisioning centers, but we should have had growers and processing facilities first, but we had the sellers before we had any grow facilities licensed. Now, it's like having 100 fish in a bowl and only five pieces of food.

"There's a significant shortage of licensed marijuana in Michigan. That has been helped by testing standards that are very, very high. I'm not knocking the licensing agency for that – we want it to be the safest possible. I think everyone is doing their best, but the standards are very, very high. Some eastern states have learned you can't test for all molds."

When it comes to testing, the state requires testing labs to be accredited to the standards of the International Organization for Standards by an International Laboratory Accreditation Corporation. Testing requires samples be tested for more than 100 different contaminants, including molds, pesticides, heavy metals and solvents. For instance, labs are required to look for residuals such as acetone, chloroform, toluene and other chemical residues; heavy metals like lead, mercury and cadmium; various foreign matter; and other harmful contaminants.

Pollicella said that the rollout of the cannabis market has unintentionally incentivized the black market with changes that allow caregivers to sell to provisioning centers, rather than directly to patients.

"It has incentivized the growing of unlicensed marijuana on an unlicensed market," she said. "The intent was to allow for the market to be self-sufficient, but it has disincentivized caregivers that should be working for or owning a licensed facility to instead use the black market. Now we have an illegal adult-use market putting stress on the legal market. When the state does things they think will help the industry, like the incentive for caregivers to act in an illegal manner by selling to people who aren't their clients, they have incentivized growing in residential neighborhoods. And that is making marijuana the enemy all over again. There's no reason this can't be a licensed, regulated drug. For some reason, we are having a hard time."

In addition to policies that may inadvertently contribute to black market sales of cannabis, the basic laws of economics say that supply and demand influences prices. Therefore, a shortage of legal supply that drives up prices may simply drive others to the black market for lower prices.

"I think it will take months or years for the market to pan out, with the highest (number of) users having black market connections they will probably use," said attorney Matt Abel, who specializes in cannabis issues and serves as executive director for the Michigan chapter of the National Organization for the Reform of Marijuana Laws (NORML). "Until it gets a lot less expensive at stores, I think it will be more light to medium smokers and people experimenting (visiting shops). But, if we don't have any stores – if you want cannabis in Detroit and you don't have a medical card – you go into the neighborhoods."

Cannabis retailers must pay state licensing fees of about $25,000 each year, in addition to a $6,000 non-refundable fee, and traditional business expenses. Growers pay between $6,000 and $50,000 annually, depending on the amount of product produced. Each batch of cannabis must also be tested prior to being offered for sale, at $500 per test. Finally, there’s both a six-percent sales tax and 10-percent excise tax on each sale, all contributing to the legal cannabis costing two to three times more than black market cannabis.

At the federal level, marijuana is still considered a Schedule I illegal drug. Therefore, there exists no real way for many in the cannabis industry to conduct federal banking or claim some expenses on taxes, as their business is illegal in the eyes of the federal government.
Morgan Fox, media relations director for the National Cannabis Industry Association, said there are a number of policy issues that have been debated in Congress and the Senate, with the Safe Banking Act passing the House in December. Additionally, The Moore Act would remove marijuana as a scheduled controlled substance. Still, he said, progress is moving slowly.

"Michigan was unique in that until legalization, there was a vague system set up for medical, while most states had a system set up before hand, so you have more issues in starting an adult use market from scratch," Fox explained.

Abel said the slow rollout of the adult-use market in Michigan can be blamed on the poor system first set up by former Gov. Rick Snyder.

"But really, with recreational, the state is ahead of its required deadline," Abel said. "They haven't been terribly consistent and it really begs for a legislative fix. There has never been authority for caregivers to supply the system, and nobody had challenged it. But it doesn't look like supply will meet demand anytime soon."

Walled Lake City Manager Dennis Whitt said just prior to the state issuing Millen's license for Greenhouse, that it was waiting on the state to issue its license before the city could finish the process on its end. "We expect the state is updating the background on ownership and expect this month that the state will be in there," he said.

Whitt, who used to enforce laws against marijuana as a former police chief, is now helping to regulate businesses in Walled Lake, which has taken a proactive approach to cannabis businesses in the city.

"The idea to regulate them was so that it doesn't turn into the wild west of marijuana," he said. "I used to put people in jail for it. If it was 5 ounces or more, it was a felony. Now, I'm the guy who signs their licenses. The war on drugs that was declared in my time – those were failed attempts. We got half of America in jail for stupid decisions from arrogant politicians. Other states seem to have done it a little more efficiently."

With things moving forward with his shop, Millen said he's preparing for the grand opening of his adult-use cannabis business. He has been licensed and conducting medical marijuana sales since February of 2019.

"It's looking like the end of February," Millen said of adult-use sales. "We could go sooner, but I want to make sure it's done in the right way, and I want to make sure it's right for our patients."

Part of the new business plan is to add 700-square-feet to the building and six new registers. Millen has also added a second parking lot, reserving the rear lot for medical patients.

"I spent a half-million dollars on the parking lot across the street," Millen said. "I've turned that into a parking lot for the city. I'm allowing other businesses to use it, but we spent our own money to put it in."

The delay in opening also allows Millen to make sure he has adequate product for both his medical customers and adult-use patrons.

"There's a product shortage," Millen said. "We are allowed to split our medical product in half, but just one time. And we will sell out."

Patients and provisioning centers, formerly classified as "dispensaries" by the state, have been contending with a shortage in product. The state in 2018 allowed shops to purchase cannabis from licensed caregivers as the state's licensing system gets off the ground. The move was deemed necessary by shop owners in short supply of product, but has been criticized as a means of encouraging sales on the black market instead of through the state's monitoring program.

Most recently, the state said it would allow licensed recreational dispensaries to use up to 50 percent of products originally earmarked for the medical marijuana market. The change allows for most products, including edibles, concentrates, tinctures and other cannabis products to be transferred to the recreational market, with some exceptions.

Under Michigan's law, products with concentrated THC levels, such as some medicated creams, oil cartridges, "wax" and "shatter," are allowed. Concentrates are made from processing cannabis to derive higher than normal levels of THC, which can then be consumed directly by smoking as a wax,  or can be used to create other products, such as topical creams and edibles. Shatter is a hardened, translucent wax made from marijuana extract. Items such as Butane Hash Oil, Rock Simpson Oil and wax are types of concentrates named for their textures.

"Some of the medical products have a higher dosage, so there's not a limit on the THC concentration, but total per product. Like a candy bar for medical sales can have a maximum of 200 mg of THC, and for recreational its 100 mg," Millen said. "The rules tend to change daily. Every day we wait for something else. It's definitely a challenge.

"Everyone thinks that once you get a marijuana license that you become a millionaire," he said. "I've been in the journey for 12 years, and we still haven't made a dime from the cannabis industry. Everything we make right now is being reinvested. It's still a business, and there are lots of hurdles.”

While Walled Lake is taking a proactive approach to the cannabis industry locating in its jurisdiction, many suburban communities have voted to opt out of allowing any licensed facilities, which include growing licenses, micro-business licenses, processors, retailers, transporters, safety compliance facilities, event organizers, temporary event organizing licenses and designated consumption licenses. Municipalities may opt out of allowing any licenses, or it may modify the amount and type of licenses it permits in a community. By regulating licenses in a municipality, the governing body can also determine through zoning where those facilities are located or designate other requirements.

In Birmingham, where voters approved adult-use recreational marijuana by 60.71 percent to 39.29 percent, the city is playing a wait-and-see game to see if opting in will even be advantageous.

"The idea being that in as much as this is new, and at the time that regulations weren't established, the thought was to wait and see how the regulations got worked out before we implement any regulations for the city," said Birmingham City Manager Joe Valentine. "They (city commission) passed that about a year ago, and the regulations went into effect at the end of last year. Now it's getting started. As the kinks get worked out, we'll have a better understanding of what the implications are with all of this and have an informed approach on how we regulate it."

In Bloomfield Township, where voters approved adult-use cannabis by 52.25 percent to 47.75 percent, the board of trustees has opted out of the marijuana field, citing a lack of appropriate locations in the township.

"In terms of recreational, we aren't the kind of community that has that kind of land and business area available. Anything that is available, the cost is so expensive that it wouldn't make sense for someone to start a grow operation in Bloomfield Township," said Bloomfield Township Supervisor Leo Savoie. “Nobody has brought it up. If others want to do it, I don't know, but we haven't had a request from anyone."

Likewise, neighboring Bloomfield Hills City Manager David Hendrickson said the city commission has opted out of recreational marijuana businesses, and doesn't expect any change. Bloomfield Hills residents voted against adult-use cannabis, 52.61 percent to 47.39 percent.
Along with Birmingham, Bloomfield Township and Bloomfield Hills, about four dozen municipalities in Oakland County have opted out of permitting adult-use and medical cannabis businesses in their community, including: Addison Township; Auburn Hills; Berkley; Beverly Hills; Bingham Farms; Brandon Township; Clarkston; Clawson; Commerce Township; Farmington; Farmington Hills; Franklin; Groveland Township; Highland Township; Holly Village; Holly Township; Huntington Woods; Independence Township; Keego Harbor; Lathrup Village; Leonard; Lyon Township; Milford; Milford Township; Northville; Novi; Oak Park; Oakland Township; Orchard Lake; Oxford Village; Oxford Township; Pleasant Ridge; Rochester; Rochester Hills; Rose Township; Royal Oak; Royal Oak Township; South Lyon; Southfield; Southfield Township; Springfield Township; Sylvan Lake; Troy; Waterford Township; West Bloomfield Township; White Lake Township; Wixom; and Wolverine Lake.
Voters in Michigan on November 6, 2018, approved Michigan's Proposal 1 Marijuana Legalization Initiative by a vote of 55.89 percent (2,354,640 votes) in favor to 44.11 percent (1,858,354 votes) against legalizing adult-use cannabis. The law allows municipalities to opt out of allowing marijuana establishments in their community. However, the law provides voters to petition a municipality to allow for marijuana establishments if a petition is signed by more than 5 percent of votes cast in that municipality for governor in the last gubernatorial election and then the issue would appear on a local ballot for voters to decide.

Troy city attorney Alan Motzny said the city hasn't opted into recreational facilities and doesn't believe there is any plan to do so. Voters in Troy rejected recreational marijuana at the ballot by a vote of 51.28 percent against and 48.72 percent for approval.

"Medical was also discussed some time ago when the state authorized commercial facilities, and they specifically opted out," Motzny said.

West Bloomfield Township Supervisor Steve Kaplan said the township board voted 7-0 to opt out of allowing any retail marijuana businesses. However, it does allow for some non-retail facilities for medical marijuana. Voters in West Bloomfield approved adult-use marijuana by a vote of 58.53 percent to 41.47 percent.

"We don't allow establishments or dispensaries of any kind," Kaplan said. "It's a dead issue. We were one of the first in Oakland County to opt out on recreational businesses, and we never approved medicinal dispensaries. We respect the will of the people regarding marijuana, but we don't have to provide dispensaries."

Despite the prevailing "not in my backyard" approach to cannabis businesses in most local communities, some municipalities are taking their time to craft ordinances that will best regulate the businesses. For instance, Royal Oak has a local moratorium on marijuana businesses, and has opted out of the state's permitting. However, interim city manager David Gillam said the moratorium will soon expire and marijuana businesses are on the horizon.

"The city has never opted into the medical side, but the city commission has expressed an interest in doing that. In terms of adult-use, or recreational, we do have an opt-out on the books, but that provided for a sunset on February 1," he said. "We wanted to see what the state did on their regulations before we move forward on everything. We are looking at that, and the current commission wants to move forward with recreational – we had about 70 percent of people that voted in favor of Prop 1."

Voters in Royal Oak voted 69.05 percent in favor of adult-use marijuana and 30.95 percent against.

In addition to voter figures, Royal Oak hired a third-party advisor to survey residents about marijuana businesses in the city, including what kinds of businesses, where they should be located and whether to limit the number permitted by the city.

"The numbers in the survey were pretty comparable," Gillam said. "It's something the city wants to do. We are working on getting an ordinance framework in place. I don't think it will be by February 1, so we will ask the commission to further extend the moratorium to allow us to get all our ducks in a row."

Cobalt Community Research in April, 2019, sent out 3,000 surveys to residents in Royal Oak and received 1,149 responses. The survey found the majority of residents support all types of marijuana businesses in the city, but that some limits should be put in place, with comments having a strong theme of being consistent with alcohol regulation. Overall, the survey found 65 percent agreed to allow growing businesses; 76 percent to allow safety compliance facilities; 66 percent to allow processors; 64 percent to allow micro-businesses; and 67 percent to allow for retailers.

Gillam said the city's planning commission has already done the zoning work, which will likely recommend allowing five different recreational types, including provisioning centers. Those businesses could include processing or growing centers in the city's industrial zones, or provisioning shops in commercial districts.

"In Royal Oak, that means along Woodward for the commercial areas, and on the mile roads, along with the north end of town," Gillam said. "Some commissioners may be trying to make allowances for micro-businsses. They find that particularly attractive. It wouldn't surprise me if we see a recommendation from the planning commission soon."

Gillam said local municipalities can include local licensing fees, and some portion of tax revenue eventually trickles down to the municipalities which allow for businesses. However, without knowing what will be allowed, there is not yet an estimate on the impact on the city's tax revenues.

In Pontiac, the city on January 6, started accepting applications for medical marijuana provisioning centers, with a closing date of January 27. The city is also accepting applications for growers, processors, safety compliance testing and secure transporters. While the city's leadership has yet to say whether a move to adult-use businesses is expected, local property owners say businesses are lining up to get a space in the city's downtown area.

Voters in Pontiac voted 67.79 percent in favor of legalizing adult-use marijuana and 32.21 percent against.

Alan Bishop, who recently sold Mr. Alan's Shoes, said while he won't be directly involved in the cannabis industry, as a property owner, he has been approached by dozens of parties who want to open shop in his Pontiac buildings.

"I'm not going to be involved in any of the businesses. I don't understand that business. I'm a landlord. I understand retail and property, but truthfully I don't do cannabis and don't know anything about the business," he said.
With dozens of prospective tenants to weed through, Bishop said he looks for professionals with business experience who have the capabilities and resources to operate a successful business that will not only help his property, but the business district overall. A key location, he said, may be at his original Mr. Alan's location at Telegraph and Huron.

"The people that have a possible lease there are the best I've come across," Bishop said. "They are very honest business people who were also in the retail business."

In addition to Bishop, Pontiac property owners Tim Shepard and Bob Waun are handpicking tenants they believe will create a safe and financially secure atmosphere. Shepard, owner of Riker Properties, and Bob Waun, C3 Ventures, envision a Haight-Ashbury vibe downtown, with yoga studios, independent restaurants and specialty stores, and even a farmers market for cannabis that will serve as a destination.

"I believe Pontiac will be taking a professional approach, with a sort of 'Starbucks of weed,' in Pontiac," Waun said. "I don't think it's bad for Pontiac. It's in the city's blood to try new things. My role as a property owner is to eliminate those who would do it wrong. Pontiac will be a safe experience. There is a way to do it here that is very professional."

Shepard said that with medical facilities on the way, there will be an estimated 20 dispensaries in Pontiac that will eventually transition to adult-use provisioning centers. While he said 20 sounds like a lot of retail shops, consider they are drawing on a population of about 1 million individuals from communities that have opted out of providing consumers with a product.

"It's never really been done to revitalize a town because looking at history, people think marijuana is a drug, and I think most people agree that's not the case," Shepard said. "Here we have a downtown but we don't have pedestrian traffic...we connected the dots and found about 250 to 750 people per day will walk into a dispensary. The foot traffic is massive. If you put five in downtown and scatter 15 around the city ... we said it's a great way to do it."

Despite the promise of cannabis, Shepard said whether the actual marijuana businesses make as much money as people believe is yet to be seen. It's one reason, he said, that he's not investing in the industry himself.

"It's a hard process. The amount people spend on licenses from the state and getting a location – it's a massive amount of money that people are putting out," he said. "Then they can't expense normal business expenses in a retail location (on federal taxes). I don't know if I could survive if I can't write off expenses.

"It's like any business. If it's profitable, then everyone is doing it until it's not profitable. That's just supply and demand. They are all trying to establish their brands and be here for years, not worrying about short-term gains."

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