HOW THE UNEXPECTED MEDICAL MARIJUANA

COMPETITION CHANGED EVERYTHING

Key observations from cannabis industry power players at recent Brach Eichler Conference

ROSELAND, NJ, September 18, 2018—When Governor Murphy announced that six additional medical marijuana licenses would be issued, doubling the current number, nothing has been the same since.

            “The dialogue on adult use, or recreational marijuana has never been more important as a result of the new medical round,” says John Fanburg, co-chair of Brach Eichler’s cannabis practice and principal of Strategic Cannabis Solutions.  “Perhaps most extraordinary is that the original six Alternative Treatment Centers came from 37 applications in 2010 and this number grew to 147 applications for the same number of licenses.”

            Brach Eichler’s recent conference, “Cannabis Realities,” brought to the fore a number of critical observations by key industry players.

            Mr. Fanburg’s six key takeaways include:

• Growth of the marijuana industry has been extraordinary in every sense: volume and sophistication being the critical elements that led to such a massive response to six new New Jersey licenses.  One telling statistic is that only 106 independent organizations applied for a license, meaning each organization tried for 1.5 locations despite that they would be limited to winning just one.  A lot of hedging went on, especially among the large national players.
• The nature of the licenses themselves, which allow for-profit organizations to vertically integrate and distribute to other enterprises, is an enormous shift from the existing licenses, which are not-for-profit and can only supply themselves;
• As a law firm, we were approached by many would-be applicants and service companies, and when we attended the bidder’s conference with more than 770 others, we recognized that there would be a large applicant pool.  As we dug deeper into the needs or our prospective clients, there was no shortage of capital and no shortage of property owners willing to supply locations.  The problem was getting the real estate interests aligned with sophisticated cannabis operations, and even when that happened, other choke points emerged, including obtaining municipal endorsements and procuring authentic local civic engagement.
• Finally, the recreational landscape began taking shape as a result of this exercise, which forced the legislature to confront the power of the Administation to encourage a marijuana industry through medical, if it encountered significant obstruction among the legislators.

The conference itself revealed additional issues that are generally encountered by states undertaking cannabis programs, and some that are unique to New Jersey as it continues to shape policy and practice related to cannabis.  The assembly of some of New Jersey’s sharpest minds on the cannabis issue discussed creative solutions to these legal, economic, and practical issues:

1.      Charles X Gormally, Esq. at Brach Eichler observed that the Murphy Administration was using its control over the medical regime to push more volume as it waits for a recreational solution.  Mr. Gormally pointed to recent legal developments that suggest marijuana’s current classification as a Federal Schedule 1 drug might be vulnerable to a 10^th amendment challenge, but he and other speakers expressed confidence that State programs would not be pulled back and prosecutions would only occur in situations where truly criminal activity was taking place.  There are currently nine states that have legalized cannabis for adults and 36 that have legalized it for medicinal use.

2.      Colleen Mahr, First Vice President of the League of Municipalities, Mayor of Fanwood and Director of Business Development for DMR Architects shared that the League, which remains neutral on cannabis as policy, has convened five committees to study municipal implications from regulated cannabis as a means of advising its members.  For those who are considering accepting cannabis enterprises, the League is developing a tax revenue sharing system so that administrative costs are covered.

3.      Vikas Desai, Co-Founder and Partner at WelCan Capital pointed out that there were more dispensaries in Denver than Starbucks and CVS pharmacies combined, which has resulted in vastly reduced prices.  Meanwhile, New Jersey’s medical regime, even in its recently broadened state, offers prices that are at or above black market street product.

4.      George M. Stone, CEO of Kalyx Properties, Inc. had a unique take on the most common complaint of cannabis entrepreneurs: that Federal Law currently prohibits the creation of  marijuana-related businesses, so while state-level lawmakers can create environments where these businesses can exist, federally-funded banks and other institutions assiduously decline to participate in the market.  Mr. Stone noted that, as a result, pricing for real estate and other services can be far higher for cannabis enterprises than conventional businesses, but that even so, the returns might not be compelling enough in the long term to sustain the current flood of capital in the industry.  For example, even when real estate generates cash-on-cash returns of 19 percent when leased to cannabis operations, because it cannot be levered, it actually performs worse than conventional deals generating seven percent.  Adding in tax implications, there remains significant risks to investing in cannabis enterprises even with attractive comparative margins.

5.      Richard Shevak, Tax Principal – National Tax for CohnReznick said that accountants have developed some advantageous strategies for dealing with conflicting rules on the deductibility for expenses in cannabis enterprises, but that loading in capital expenses in real estate and paying them through rent is beneficial.

“This regime is not meant to legitimize the formerly illegal operations of basement growers and street corner dealers; we’re discussing the birth of an entire industry and an economic driver for the state,” said Fanburg.  “This is the first of many discussions that Brach Eichler will encourage as we navigate together the many permutations of the law to ensure that we’re successful once the Senate and Assembly provide the bills in their final form.”

            Brach Eichler issued a seminal white paper last fall when it launched its cannabis law practice—The Business, Regulatory and Legal Challenges—and Opportunity—of Legalized Cannabis in New Jersey—that discusses the hurdles New Jersey faces as it moves toward a regulated, adult-use marketplace compared to states with existing programs.

About Brach Eichler Cannabis Law

Brach Eichler, a full-service law firm based in Roseland, N.J., is uniquely situated to provide advice and guidance across a wide range of business groups that may be interested in diversifying into the emerging cannabusiness market opportunity. Over the past 50 years, the Firm’s practitioners have built trusted, personal relationships with their clients, rendering advice that is business-savvy and creative, yet practical. The firm’s attorneys are thought leaders in their industries, known for “getting the deal done” with their clients’ interests well represented and always top of mind. These qualities will be especially useful as New Jersey moves forward to develop a cannabis marketplace. This type of opportunity, while not for the faint of heart, will be advantaged by the strength of Brach Eichler’s resident health, corporate formation, regulatory, compliance, land use, employment, tax, and real estate capabilities.

Click here to read Brach Eichler’s most recent White Paper, “Ten Steps to a Billion-Dollar Marketplace: Facts, Observations, and Market Opportunity.”