Cannabis & Hemp Licensing. Issues, Rarity, and Value

    Cannabis & Hemp Licensing. Issues, Rarity, and Value

    Though marijuana and hemp both come from the cannabis family, they are completely different plants. They look different, are cultivated differently and have vastly different uses. Most notably, marijuana contains levels of tetrahydrocannabinol (THC) higher than 3% — typically between 5%-10%, but it can be higher. This chemical is what delivers the psychoactive “high” effect. Hemp contains 0%-3% THC levels and is not psychoactive.

    Unfortunately, the federal government has a history of grouping marijuana and hemp plants together under a general Cannabis species. However, recent changes are impacting this approach. And the legalities and licensing for production and sale of these “crops” vary greatly throughout the United States.

    As of April 2019, marijuana is still completely illegal in 16 states. In 10 states and the District of Colombia, it’s fully legal. The remaining 24 states have legalized medicinal marijuana, but decriminalization of recreational use varies. These differing laws greatly impact licensing requirements, rules, and regulations in the states where some form of marijuana use is permitted.

    Industrial Hemp is a different story and one that has changed with the passage of the 2018 Farm Bill. Hemp is now legally categorized as an agricultural product. But specific restrictions apply, requiring a great deal of oversight in its cultivation and sale. Individual states must submit plans to the federal government detailing how they plan to regulate its production and compliance with federal law. This includes licensure for growers.

    Fledgling Hemp Licensure Across the U.S.

    In 2018, 38 states considered, or proposed laws related to industrial hemp. The following states passed new legislation:

    1. Alaska
    2. Arizona
    3. Kansas
    4. Missouri
    5. New Jersey
    6. Oklahoma

    Several states already had programs in place under the previous Farm Bill that allowed specific research and pilot programs for industrial hemp. Only a few states are still lacking legislation allowing hemp cultivation. But it’s still early days yet with respect to the new Farm Bill, and most state legislators are moving forward with laws to govern the new crop. For example, Connecticut just introduced two bills designed to allow commercial hemp farming in the state. Texas and Idaho are making similar legislative moves.

    The Varied State of Cannabis Marijuana Licensing in the U.S.

    For marijuana licensing, the landscape is even more confusing and varied. As mentioned previously, this is because of the lack of a federal or universal law regulating marijuana cultivation and sale. And, in fact, federal law still treats marijuana as an uncontrolled substance. But most individual states do not. So currently, state, county, and city level licensing are controlling law in each jurisdiction.

    General Requirements

    Getting a license for a cannabis-related business is difficult in any state where it’s legal. In addition to jurisdictional variances, requirements differ based on the type of marijuana business being licensed – be it for cultivation, retail sales, medical dispensary, or other uses.

    At the ground level, general business licensing basics must be addressed. These typically include the following:

    • Forming an LLC or incorporating the business
    • Creating a Business Plan
    • Requesting a federal Tax ID number / employer identification number (EID)
    • Obtaining a general city or county business license (does not take the place of a cannabis operating license)
    • For retailers – getting a Sales Tax Permit
    • Obtaining Permits, as required by law

    To operate a business that deals with marijuana, there are several additional hoops to jump through. And the licensing entity for these businesses also varies. A few examples follow:

    • Secretary of State’s Office
    • Department of Taxation (Nevada)
    • Department of Revenue, Marijuana Licensing Authority (Colorado)
    • Bureau of Cannabis Control (California)
    • CalCannabis Cultivation Licensing (California)
    • Manufactured Cannabis Safety Branch (California)
    • Department of Health, Office of Medical Marijuana Use (Florida)
    • State Liquor and Cannabis Board – LCB (Washington)
    • Medical Marijuana Commission (Arkansas)
    • Department of Consumer Protection (Connecticut)

    Specific marijuana-related business licensure requirements are onerous. Regardless of where the marijuana business is meant to operate, getting a license is a long, involved, expensive process. There are timeframes and deadlines to abide by. Most states require residency for a set minimum of time before applying for a marijuana license. In some states, like California, operators must obtain both a local and state license.

    Entrepreneurs must review the laws in the state and county where they hope to obtain a license to learn whether they need to follow “seed-to-sale” rules or if they’ll only be permitted to operate one type of marijuana business. And everyone involved will likely be subjected to background checks. These are just a small sampling of the obstacles hopeful marijuana business owners will run into.

    Fees

    Licensing fees are another area of great inconsistency. For example, in Alaska, a limited cultivation facility license for smaller than 500 feet combined with a new application fee only runs $2,000. Yet, in Arkansas, a cultivation licensure fee is $100,000 and requires a $500,000 performance bond. Some states have steep annual renewal fees — $75,000 cultivation renewal fee in Connecticut and a $100,000 annual cultivation fee in Illinois. Detailed state comparisons are needed to establish the most favorable investment for each individual entrepreneur.

    Rarity

    Costly fees and complex legal requirements aren’t the only challenges in getting a marijuana business license. It’s also a very competitive field. Despite high consumer demand for marijuana, the supply side is heavily suppressed. Even in states with legal medical and/or recreational marijuana, there are numerous in-state jurisdictions that don’t allow the commercial sale of marijuana and edibles.

    In California, only 118 of the state’s 481 cities permit recreational marijuana retail stores. Caps on the number of licenses allowed in applicable jurisdictions further complicate the supply and demand issue. Florida’s medical marijuana businesses have been in flux over this capping issue. The state currently permits medical marijuana (though there are legislative proposals in the State House to also allow recreational use and sales) but initially severely limited the number of medical marijuana dispensaries. An August 2018 court ruling successfully challenged the cap. The number of licenses is expected to grow in the future. However, gridlock is still a big problem due to the ongoing litigation. Regulations banning smokable medical marijuana and undetermined laws overseeing edibles are even further complicating things.

    Value

    Since demand is greater than supply in the legal marijuana market, the value of these licenses has been skyrocketing. San Diego, California, marijuana retail licenses are reselling between $5 and $17 million. In Florida, the statewide number of medical marijuana dispensaries grew from 24 to 78 in 2018. But high demand boosted their value, and licenses for these businesses have resold for as much as $50 million.

    In Washington, the purchase of a cannabis business doesn’t include the license, since the Washington State LCB doesn’t categorize these licenses as transferable assets. These types of issues naturally impact the value of cannabis business licenses in other jurisdictions.

    Overall, the complications involved in obtaining a cannabis business license make them a rare commodity and drive up the value. This trend isn’t expected to change anytime soon. The number of states with legal marijuana use may increase, but the demand is still much greater than the projected supply. The value of these licenses will likely only continue to grow.

    April 30, 2019 / by / in ,
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