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Promise and reality of recreational cannabis


By Lisa Brody


Depending upon your age and proclivity, marijuana has been considered a plant that, when smoked or otherwise enjoyed, can produce a mellow high and make life a little more pleasant, no different than enjoying a cocktail. To others, it is seen as a dangerous and illegal substance, a gateway drug that can, and likely will, lead to harder drugs and possibly a life of crime.


For decades in America, it was all black and white on the topic of cannabis – the world was divided: there were stoners and there were anti-drug crusaders, and rarely should the twain meet.


That is, until the 21st century, when the medical use of cannabis was found by many to treat disease or improve the symptoms of diseases or medical conditions, and the compassionate care of those suffering has led to the legalization of medical marijuana in 36 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands – including Michigan, where 63 percent of voters approved the Michigan Medical Marihuana Act in 2008, which removed the penalties for registered patients to buy, grow and use small amounts of marijuana. It also created a category called caregivers, who can grow and dispense medical marijuana for up to five patients, and grow up to 12 plants per patient.


As residents of the state became more and more comfortable with their friends, neighbors and relatives utilizing medical marijuana, advocates for the legalization of recreational marijuana were able to put a proposal (Proposal 1) on the ballot in 2018, which was supported by 56 percent of Michigan voters, making Michigan the first state in the Midwest to legalize the possession and use of recreational marijuana for adults age 21 and older. (Illinois legalized cannabis in 2020.) The proposal also allows individuals to grow up to 12 plants in their residence; creates an excise tax of 10 percent in addition to the six percent state sales tax, to be levied on marijuana sales at retailers (dispensaries) and micro-businesses. Distribution of excise tax is mandated by the ballot proposal, including sending funds to the local county and municipal governments where the businesses are located, as well as to K-12 education and for road and bridge maintenance.


The Anderson Economic Group conducted a study for the Michigan Cannabis Manufacturer's Association in 2020, which showed cannabis retail stores sold $985 million in cannabis products. The commercial cannabis industry generated $129 million in taxes and fees. This includes sales and excise tax revenue; grower, processor, and retailer license fees; and registration fees for medical patients. In addition, the study found that one in five Michigan residents used cannabis in 2020 – two million people.


According to the Michigan Marijuana Regulatory Agency (MRA), 2021 sales were even better – preliminary legal adult use sales were about $1.3 billion, and legal medical sales were $483 million.


To preserve local control as well as to make sure cities, townships and villages don't have marijuana dispensaries thrust on them, municipalities are able to determine whether or not they want to have marijuana businesses within their boundaries, and are authorized to ban or limit marijuana establishments. The proposal does not provide a set number per municipality for retailers, allowing for total local control. A community that doesn't want cannabis businesses within their borders can opt out. One that wants to benefit from the residuals of taxation, property tax increases and other advantages can opt in, and decide whether they want to determine a certain number limit, or keep it limitless. Proposal 1 of 2018 also provided for initiative petitions to allow voters to override decisions by the local government at the ballot box.


Tax revenue for 2020 went to counties and municipalities with businesses in their boundaries – approximately $11,000 per municipality per business. While not an enormous amount, if a municipality only has one marijuana business – but there increasingly are municipalities with multiple dispensaries, such as Ann Arbor, which now has 37. That tax revenue can then add up.


The ballot initiative also legalized the cultivation, processing, distribution and sale of industrial hemp.


While Michigan has legalized medical and recreational adult use marijuana – as it is in 17 other states and the District of Columbia – it remains illegal nationwide, as a Schedule I drug. According to the National Cancer Institute, a Schedule I drug is a drug or other substance that has a high chance of being abused or of causing addiction and has no FDA-approved medical use in the United States. Examples of Schedule I drugs include heroin, LSD and ecstasy. They are also called Schedule I controlled substances.


“Although marijuana (cannabis) is classified as a Schedule I drug by the federal government, some states have passed laws that allow the medical and recreational use of marijuana,” the National Cancer Institute said.


That has changed the perception of marijuana as a dangerous drug, with the U.S. House of Representatives passing bipartisan legislation in December 2020 that would decriminalize marijuana and expunge nonviolent marijuana-related convictions. The bill, which is currently stalled, and unlikely to pass in the U.S. Senate, would also remove cannabis from the Controlled Substance Act and authorize a five percent tax on marijuana that would fund community and small business grant programs to help those most impacted by the criminalization of marijuana.


Following the passage of the Michigan Medical Marihuana Act in 2008, there was great confusion and a lack of follow up legislation in the state, at least until 2016, when there was the passage of the Michigan Regulation and Taxation of Marihuana Act, which allows persons age 21 and over to possess up to 2.5 ounces of cannabis in public, up to 10 ounces at home, and cultivate up to 12 plants at home. Among the package of bills then-Governor Rick Snyder signed into law in 2016, allowed for the operation and regulation of medical cannabis dispensaries; set a three percent taxation rate on medical cannabis; and permitted the use of non-smokable forms of pot, such as edibles, tinctures and topicals.


“In 2010, when I first began working in Lansing, I saw a big void in the education of what regulation could look like,” said Justin Dunaskiss, partner and COO, Dunaskiss Consulting and Development, a lobbying and consulting group in Oxford which got officially engaged in cannabis work in 2010. He said he saw illegal grows, basement grows, and illegal storefronts opening up around the state. He also traveled to Colorado and California, which had legalized cannabis, and saw what profitable operations could look like.


“Once I learned what the future could look like – and saw how the other states were operating – I sought out more of a free market approach here, so that big corporate interests couldn't come in here. There needed to be residency requirements, there needed to have provisions for Michigan entities to have residencies and for tax purposes.


“It took six years of education – until September of 2016, until we could get the legislation passed and Governor Snyder to sign a package for medical marijuana. Then we needed to turn to look at what a regulated store would look like. As the medical market took form, the will of the people drifted to the adult market,” Dunaskiss pointed out.


When it came time to mobilize for the adult use recreational market, Dunaskiss said many of the same stakeholders from the original medical use proposal came together for the 2018 initiative – but there were also many new players, and some had conflicting interests.


“There were those who wanted to treat it more holistically, like a farmers market, a very laissez-faire attitude, without any government intervention,” Dunaskiss said. “We knew the legislature would not approve it.”


Some were looking to simply prevent their clients from being charged as criminals, while others saw the model of some western states, with tax revenues going to offset road repairs and other needs, as well as simple free market capitalism – the opportunity to make money in a new lucrative business.


“I started my practice in criminal defense and marijuana was criminal. I had become very well known as defending people charged with marijuana and using medical marijuana as a defense,” explained Barton Morris Jr., of Law Offices of Barton Morris and Cannabis Legal Group in Royal Oak. He said he had issues with his clients being charged as criminals, “especially with growing a plant which is hurting no one. I was instrumental in getting it legalized.”


Douglas Mains, a partner at Honigman's Lansing office, helped draft both the Medical Marihuana Facilities Licensing Act and the Michigan Regulation and Taxation of Marihuana Act, and served of counsel to the 2018 proposal legalizing recreational marijuana.


“The sophistication level of the people in the industry has really grown in the last five years or so,” Mains said. Nonetheless, “there's a tension now between the 'true believers' and the 'guys in the suits.'”

Rick Thompson, executive director of NORML Michigan, a non-profit public interest advocacy group representing the interests of those who consume marijuana responsibly, said, “We were interested in stopping people from being arrested. All of the tax revenue and stopping the black market weren't really big factors for us.”


Now that the legislation has been enacted, “Michigan is really an excellent model. There is permissive growing and opportunities for 'mom and pops' to get started,” Thompson said.


Norml also likes that municipalities have been co-opted for involvement. “It's important for buy-ins,” Thompson said. “If they're forced to have them, it wouldn't work.”


Stephen Linder, executive director of the Michigan Cannabis Manufacturer's Association, said one of the key components in writing and passing the legislation was for cities, townships and villages, “We didn't want to force it on them. We built in an opt-in so municipalities could opt-in, at the time for medical marijuana, for what kind of licensing they wanted and for how many licenses. There are no caps for the number of licenses by the state. That law passed, but it did not eliminate the caregivers, because for people there was a genuine concern that the recreational market – which is now a $3 billion industry – that people would want to buy from the commercial side of the market. Caregivers don't have to report where they are located, nor do they have to test their product.


“Fast forward, the regulated market, the one that has to buy the licenses, do the build-outs, pass inspections and test product – they're the ones creating all the jobs and providing all the revenue, all the tax revenue and are competing against the people who do none of those.”


Like others involved with getting the recreational market up and going, Thompson and his colleagues looked at other states who had walked the walk before them, such as California, Oregon, Washington and Colorado.


“Here we see the American dream being realized every day,” Thompson said.


Asked whether the legislation has been an empty promise or a golden ticket, Mains said, “It's somewhere in between. In terms of the revenues and the black market, it's still too early to tell. The market isn't mature yet.”


For many others, their golden ticket is already being claimed, and faster than expected, with purchasers clamoring for products.


However, Thompson does have concerns that the natural evolution of the market is that “small businesses will get gobbled up. We like to think of cannabis as being unique, but it's true as in any other business.”


Many in the business believe the new cannabis business is a highly-competitive business, “as cut-throat as you can find,” said one.


Michelle R. E. Donovan, senior counsel at Clark Hill in Detroit and San Antonio, Texas, said, “I do cannabis nationwide, and Michigan has a model program, from a legislative, regulatory and distribution standpoint. Michigan set the standard. There is no limit on licenses, while other states do put limits on municipalities, like in New Jersey, which has ridiculous restrictions.


“Michigan is very cutting edge, and Michigan sets the standard for regulatory and compliance,” she said.


Donovan said the Michigan Marijuana Regulatory Agency (MRA), which works to establish Michigan as “the national model for a regulatory program that stimulates business growth while promoting safe consumer access to marijuana, it has come a long way since the board was first established. We (the industry) is in the process of compiling a set of statutes so there is cohesiveness between the medical and recreational industries. Right now, we have two sets of licensing, regulatory and compliances.”


While some are concerned the medical marijuana market will get squeezed out of the picture, others understand it will stay, notably because it is the only legal way for minors to acquire the product for medical means. Yet currently the medical market and its caregivers do not require the strict testing of product which the recreational market enforces.


“The only difference right now from the medical market and the recreational is there are higher standards for contaminants in recreational – heavy metals, mold, and pesticides can be in medical. They're both from the same plant,” noted Linder.


Andrew Brisbo, executive director of MRA, said the intentions of the people, both voters and those seeking legalization, have been upheld.


“Both medical and recreational were based on voters initiatives. With legalization, there are less people utilizing the gray market and are accessing better product that they can now trust,” he said. “The local intent has been respected for municipalities. It's created an efficient systems which has done well to protect the consumer as well as to allow businesses to grow and thrive. As for tax revenue projections, I think the industry has ramped up more quickly than expected, and we as an agency work to facilitate that. Businesses were prepared. There was a lot of skill all ready to move into the market. I think we're in a period where there's a lot of growth.”


While on its face, the lack of statewide limits for municipalities appears to give locals the ability to control their cannabis destiny, it also means that as communities become more comfortable with the legislation and business models and give out more dispensary licenses, it could lead to a region as a whole having more licenses than the market can bear – although Michigan is far from being saturated. An example would be if Royal Oak, Hazel Park, Madison Heights, Berkley, Ferndale, and nearby Warren all give out dozens of licenses in total – all appealing to the same customers.


Those in the business believe one of two things will happen: there will either be consolidation of businesses, or some of the dispensaries will fail.


“We all sell the same product,” noted Howard Luckoff, CEO of New Standard, with nine dispensaries around the state, including in Hazel Park. “How do we differentiate ourselves? New Standard does it through our customer experience, selling both to the soccer mom and to the stoner. We have tried to distinguish ourselves. We don't have salespeople – we have team members and educators. We ask people what they are looking for out of this experience. When you walk into a store, there's a nice vibe, a nice feel, a nice smell.”


He likens their environment to a Shinola store or a Starbucks.


“They're our customers, they're like guests in our home. We're guiding them to find the right mix for them,” expanded Mary Turon, New Standard COO, a cannabis expert who previously operated dispensaries in California and Illinois. “It's a lifestyle. It's not just about smoking, it's about edibles, oils, topicals and tinctures, which you put under your tongue. As new products come on the market, our team members need to be retrained.”


Aric Klar, CEO of Quality Roots, has 10 recreational dispensary licenses in different stages, including for Berkley and Waterford, which will open in 2022. Quality Roots currently is operating in Battle Creek and Hamtramck. Klar grew up as the son and grandson of pharmacists, managing drug stores in high school and college and then started the toy chain Toyology.


“I grew up in this family regulatory environment, and saw where large conglomerates came in,” he said. His grandfather's store, Sherman Drugs, at Maple and Lahser in Bloomfield Township later became Perry Drugs before Rite Aid took it over; his father and mother owned Warren Drugs in Farmington Hills which was eventually sold to Sav-Mor Prescriptions.


When he was 12, his parents gave him four-feet of the store to put in a Beanie Babies area at the height of its craze – “I turned it into a 7,000 square foot toy area,” he said, and Toyology was born.


As to the possibility that large cannabis conglomerates could come in and attempt to gobble up smaller players, Klar answered, “If I can compete with Amazon in the toy business, I feel I can compete with the cannabis competitors in Michigan. The approach we take is going back to what I learned in the pharmacy business – knowing everyone's name and being a specialty business. We're not a cannabis brand – we're a community brand that sells cannabis.”


Klar believes larger out-of-state players will take time to learn the Michigan market. “This industry changes so fast that it's very important to follow the changes,” he noted. “We're operating a family owned-and-operated business, not a conglomerate.”


Rick Thompson of NORML Michigan thinks the downward spiral of cannabis pricing has made companies less profitable, so they could be more likely to sell out, “similar to what can happen in any other industry. The cost of financing is a big deal, and some market forces can force you into a sale mode. But there are a lot of successes in mom-and-pops opening two, three, four franchises. But that is more attractive to a California company who wants to buy a bunch of franchises so they can get their name in the marketplace rather than creeping into the marketplace,” Thompson said.


Others, like Luckoff of New Standard, believe there will be room for both chains and the independents, just like for pharmacies. “There will always be room for both.”


Dunaskiss likens it to the Michigan craft brewery business. “There are a lot of parallels. No one thought anyone could compete with Molson's or Budweiser, but now it's the opposite. The same thing is happening on the cannabis front,” he said. “The large publicly traded Canadian cannabis companies grew too fast, and the customer now wants smaller craft growers. The customer base is drifting to smaller, more niche product.”


Attorney Michelle Donovan concurs. “There's enough demand that you can have a craft product or something that is a nationwide product. It's a consumer's preference.”


There are a little over 1,700 cities, townships and villages in Michigan, but according to Dunaskiss, only about 160 of those municipalities allow any sort of adult use facility in their community. About 175 municipalities permit medical marijuana dispensaries, including Detroit, which permits medical facilities but has not yet allowed adult use licensing to move forward.


Dunaskiss noted, “It's still a slow process (working with the municipalities), and it will be a slow trickle over the next few years because we have not seen the process moving forward. It'