It appears that the old-school pioneers of Michigan’s cannabis industry could be left out of the wagon train as the industry prepares to open its first adult-use recreational marijuana stores by the end of 2019. Michigan’s Marijuana Regulatory Agency (MRA), which oversees both the medical and upcoming adult-use retail industries, released new rules in July. While some regulations were applauded, other, more restrictive medical regulations, such as capitalization requirements, will remain unchanged until late 2021 for many applicants.
Although one of Governor Gretchen Whitmer’s first cannabis-related acts, when her term began in January 2019, was to dissolve the Medical Marijuana Facilities Licensing Act (MMFLA) board, the discriminatory reputation of the MMFLA lingers and casts a shadow over the recreational side of the industry.
Under the MMFLA, application fees could reach $10,000, and obtaining a grow license could add another $50,000 in fees on top of that, while also requiring applicants to prove they had access to $150,000 – $300,000 in financing — a tough benchmark to hit without the lending and banking access afforded to other agricultural operations. Because of that climate, smaller businesses were left out of the game, and bigger businesses dominated the medical marijuana marketplace.
Moving forward, the MRA anticipates they will be ready to start accepting recreational license applications on November 1, and they plan to begin issuing licenses within the same month. From license types to the cash reserves required to operate in today’s cannabis climate, it remains to be seen how the licensing process will play out. Will the big dogs nudge out the smaller craft cannabis farmers? Let’s break down some of the recent developments in Michigan’s cannabis industry.
Consolidated Operations
Three classes of licenses are available to medical cannabis farmers with letter designations A, B, and C. Class A licenses are denoted for small growers with 500 plants or less. Nine Class A licenses have been issued so far. Class B are for mid-level commercial farmers growing 1,000 plants or less, and only one license in this category has been obtained as of this writing.
The Class C licenses are designated for large-scale farmers and allow up to 1,500 plants. So far, 67 Class C licenses have been issued — and those 67 licenses are held by 29 different growers, such as the 12 Class C licenses held by Green Peak, Michigan’s fastest-growing cannabis company.
The infrastructure (land, electrical, buildings and related equipment) required to operate farms on the Class C scale requires considerable funding in order to start up, maintain and continue operations, which is oftentimes not an option for smaller operations wanting to enter the marketplace.
In another move for consolidation, Governor Gretchen Whitmer and the MRA effectively banned provisioning centers from buying marijuana from any of the 41,000-plus state-approved caregivers in May. They explained their intention was related to public health and safety involving testing for contaminants, and that the inventory of marijuana from caregivers was not intended as a permanent supplier.
MMFLA Aftershocks
The power players who managed to get through the tedious MMFLA licensing process (before the group was dissolved) are now in a position to take over more of the market share by buying independent licenses. This mirrors what’s happening across the industry, where smaller dispensaries are being bought out by large retailers.
Green Peak, mentioned earlier as one of the groups holding multiple Class C growing licenses, bought White River Wellness and Emerald City Wellness, taking away one of Michigan’s independent provisioning centers (aka dispensary) that was operating under caregiver laws before the MMFLA’s regulatory system began. The scenario is attractive to investors and larger cannabis-related companies; the owners, unable to obtain a license, are sitting on the property — and the value of the real estate makes selling it the most practical option.
In August, Innovative Industrial Properties, a San Diego real estate investment trust (REIT) that’s traded on the New York Stock Exchange, invested in several Michigan properties designated for marijuana production. The REIT recently spent $13 million to purchase and lease out the property in Michigan intended for use as a medical marijuana cultivation and processing facility. Innovative Industrial Properties also entered into a lease and development agreement with Green Peak Industries — the large scale medical cannabis licenses were pre-qualified by Michigan regulators for cultivation, processing, and provisioning (sales).
With this move, all of Michigan’s marijuana products must be bought from approximately 20 state-licensed corporate growers and processors, at prices higher than what medical marijuana caregivers could charge for their products. Caregivers may still sell their products to the state-licensed growers and processors, but the end result is higher prices for medical patients. Because the supply of medical marijuana has been dramatically cut back, many worry that the end result will be a booming black market.
Long story short, the medical marijuana side of the industry continues to feel the sting of the MMFLA. Even though it’s no longer functional, remnants of the group’s policies continue to affect their operations and ability to secure a spot in the medical side of the cannabis industry. For example, to get a state license, the owner of a medical dispensary is required to complete forensic auditing, an intense process that essentially requires huge amounts of funding to pay attorneys, accountants and consultants. The smaller-scale medical marijuana caregivers worry that those with deep pockets will flourish; those already pinching pennies will not. But it’s not as simple as it that. Cash and plenty of it is still king.
Show me the money
There’s still plenty of hurdles to jump, at least until late 2021. While the MRA’s new rules for applicants seeking licenses to operate adult-use recreational marijuana facilities don’t include high financial equity requirements per se, the law requires adult-use license applicants to meet existing medical marijuana requirements for two full years after the adult-use regulatory system is functioning. In essence, licensees will have to meet two sets of financial and regulatory requirements for several years if they want to do business in Michigan’s cannabis industry.
