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Lawsuit Seeks to Limit Federal Reach into State-legal Cannabis Industry

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Banking and Financial Services

A Matter of Survival

 

When asked what it takes to thrive in the cannabis business these days, Meg Sanders paused before noting that ‘thrive’ is the wrong word.

“I think thriving is part two. Right now, surviving is really the topic of the day. That’s what we need to be looking at,” said Sanders, CEO of Canna Provisions, which operates dispensaries in Holyoke and Lee.

And it’s not just because of the heightened competition that has arisen, both within Massachusetts and from across state lines, though that factor has caused some shops to close, with others likely to follow, as the market begins to settle, eventually determining how many dispensaries is too many.

No, that development has only exacerbated one of the key challenges for cannabis entrepreneurs: the fact that the drug is federally illegal, which makes financing thorny, normal business activities difficult, and the tax environment severe, to say the least.

“Our accounting bill is probably super elevated from a normal business. Our legal bill is probably way larger than a normal business because there are just so many T’s to cross and so many I’s to dot. And that’s just part of it,” Sanders said before detailing issues with access to financial services and lending. “What if we could get SBA loans? What if we could apply for federal grants? I mean, there’s so much money out there that a small business should be eligible for, but we can’t do any of that because we’re federally illegal.”

Meg Sanders

“What if we could get SBA loans? What if we could apply for federal grants? I mean, there’s so much money out there that a small business should be eligible for, but we can’t do any of that because we’re federally illegal.”

With that in mind, a coalition of U.S. cannabis operators and investors filed a lawsuit late last year against U.S. Attorney General Merrick Garland. The coalition asserts that the federal government has no basis for enforcing the Controlled Substances Act against intrastate, state-regulated cannabis operations. The plaintiffs include Canna Provisions; Gyasi Sellers, CEO and founder of Treevit; and Wiseacre Farm, all of which are independent operators in Massachusetts that claim to have suffered significant harm and business challenges due to federal prohibition.

Verano Holdings is also named as a plaintiff, while foundational supporters of the suit include Ascend Wellness Holdings, TerrAscend, and Green Thumb Industries, as well as Eminence Capital and Poseidon Investment Management.

The lawsuit seeks to confirm the rights of Massachusetts and other states to regulate cannabis within their borders, and to limit the federal government’s power to regulate commerce.

The Controlled Substance Act bars the production, distribution, and possession of marijuana, regardless of whether those activities cross state lines or, as in the case of the plaintiffs’ businesses, are intrastate. According to the lawsuit, “this unjustified and unconstitutional prohibition on intrastate cannabis harms plaintiffs and hinders the efforts of states to provide patients and adults with access to strictly regulated and tested cannabis.”

“The purpose of the lawsuit is to basically challenge the constitutionality of the Controlled Substance Act on intrastate activity. Basically, the suit alleges that the federal government has no say what happens within state borders,” Sanders told BusinessWest. “I wasn’t aware of this lawsuit until somebody recommended me to be part of it. So we had substantial meetings with our legal team and our board about this particular issue, and we all felt like there’s something here, and that this is an important way to approach it.”

 

Tough Environment

Cannabis banking has softened somewhat in Massachusetts, Sanders was quick to note. “I would say Massachusetts is probably one of the friendliest banking states in the United States as far as cannabis. We have a lot of very thoughtful, kind, smart bankers out there that are trying to service the industry. And that’s great; we have checking accounts, we have saving accounts, some of us are able to do debit-card acceptance. But we can’t take credit cards. I can’t get a business loan. Equipment loans are out there, but they’re at a really high interest rate. And also, I can’t get access to normal payroll services. So I can’t work with an ADP or a Paychex or some of the big guys that are really good at what they do.

“If you’re signing up to be in cannabis, you’re signing up for all of these headaches. This is the nature of the beast. And it’s not negotiable; those are the facts. This is what we have to deal with every single day. And it’s really, really hard.”

The lawsuit also takes aim at what’s known in the IRS tax code as Section 280E, which originated from a 1981 court case in which a convicted cocaine trafficker asserted his right under federal tax law to deduct ordinary business expenses. In 1982, Congress created 280E to prevent other drug dealers from following suit.

So, while state-legal cannabis businesses are allowed to deduct the cost of goods sold when paying taxes, they can not take other deductions normal to most non-cannabis businesses — salaries, health insurance, utilities, maintenance, and much more. “So I have an effective tax rate of 73%,” Sanders said.

In 2005, the U.S. Supreme Court rejected a challenge to the Controlled Substance Act’s cannabis prohibitions.

But, according to a press release announcing the new lawsuit, “a critical factor in that decision, Gonzales v. Raich, was that the federal government intended to ‘eradicate’ the market for cannabis nationwide. The court concluded that the federal goal of eliminating commerce in cannabis, combined with the assumption in 2005 that intrastate marijuana could not be differentiated from interstate cannabis, justified the Controlled Substances Act’s prohibitions on intrastate cannabis. Neither of those facts, however, are true today. In the 18 years since Gonzales, Congress and the executive branch have abandoned any intent to ‘eradicate’ cannabis, and numerous states have developed regulatory programs for legal marijuana that is not fungible with, and is readily distinguished from, illicit cannabis.”

Indeed, the plaintiffs note, today, 38 states and Washington D.C. have medical or adult-use cannabis programs with significant regulatory oversight, requiring compliance with stringent regulations aimed at protecting patients, customers, and the public, including video surveillance and seed-to-sale tracking.

“Absent the relief sought in this lawsuit, plaintiffs and other state-regulated cannabis operators will continue to suffer severe harms,” the release notes. “State-regulated cannabis businesses are deemed illegal under the CSA; their everyday activities are considered federal crimes. As a result, they are cut off from numerous federal programs and protections (including small-business loans), they are subject to discriminatory tax penalties, and many organizations — including banks and credit-card processors — refuse to do business with them, rather than risk being deemed conspirators, aiders and abettors, or money launderers.

“The result is that many cannabis businesses are suffering, people are losing their jobs, and individual wealth is being destroyed,” the statement continues. “In addition, social-equity licensees harmed by the war on drugs and who were supposed to have equal access to the industry do not have the same benefits as otherwise situated business owners to start a business and build their wealth.”

 

Appetite for Change?

Sanders sees this lawsuit as a kind of parallel track to other ongoing efforts to disentangle federal and state laws, thereby easing the cost of business in the cannabis industry, with many hoping Congress steps in at some point and removes cannabis from the Schedule 1 list of controlled substances.

“There are a lot of legislators that really support and see cannabis as an industry for their constituents and understand that jobs are being created and there’s a lot of revenue. And, bottom line, their voters want to buy weed from a regulated dispensary,” she told BusinessWest. “That’s what we see every single day. We still have more people coming in. And what voters are telling legislators is they want safe access to cannabis.”

At the same time, Sanders understands that Congress has many competing priorities, and that they struggle to come together in a bipartisan way on any issue.

“Until politicians see voters saying, ‘well, because you’re negative on cannabis, we’re not going to vote for you,’ I don’t think you’re going to see a change. I mean, that’s their business. Their business is to get votes. As voters, we want legalization, but there are so many other things that are separating us as a country, and those are way more important, probably, in the eyes of legislators.”

Federal Law Continues to Pose Problems for Cannabis Industry

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Cannabis Special Coverage

The Constant Disconnect

 

 

 

Scott Blumsack is a general manager of Society Cannabis Co., a licensed retailer, wholesaler, and producer of cannabis products in Massachusetts. He oversees 16 full-time employees and directly serves cannabis products to customers.

He filed for Chapter 13 bankruptcy, which enables individuals with regular income to develop a plan to repay all or part of their debts over time. But the U.S. Bankruptcy Court for the District of Massachusetts denied his repayment plan and dismissed his bankruptcy case.

Why? Because, while Massachusetts law permits the retail distribution of marijuana, it’s still a Schedule I controlled substance, illegal to manufacture, dispense, or possess under federal law. And when Blumsack petitioned for bankruptcy under Chapter 13, he sought to fund his plan with income from his $75,000-a-year job with Society.

Judge Elizabeth Katz agreed with the Bankruptcy Court that, because he is employed in a federally illegal activity, Blumsack could not access Chapter 13 to restructure his finances.

“This banking act has been proposed by bipartisan senators for the last six, seven, eight years, and this is the first year it made it through committee; it’s supposed to get a vote on the Senate floor.”

“There’s just an enormous disconnect between what’s allowed under Massachusetts law and what’s allowed under federal law, and the Blumsack case is a perfect example of this,” said attorney Steven Weiss, a shareholder with Shatz, Schwartz and Fentin in Springfield.

“He was dealing with a controlled substance; that’s where his income was coming from,” he went on. “This guy is doing something that’s perfectly legal in Massachusetts, and yet he’s barred from being entitled to federal bankruptcy relief.”

Steven Weiss

Steven Weiss says he’s surprised lawmakers haven’t moved more quickly toward decriminalizing cannabis on the federal level.

Weiss said Katz, who had taken an oath to uphold federal law, essentially found no way around this nagging disconnect between state and federal law. The case, which has made waves nationally, is being appealed.

This disconnect has thrown a number of wrenches into cannabis businesses, which, among other hurdles, grapple with an onerous tax burden since they can’t write off many of the costs other businesses can. Or, a driver with federal Department of Transportation certification could conceivably lose that license if he transports products across state lines. And attorneys have worried about taking on clients in the cannabis sector, as they are technically advising clients to break federal law.

“Even for me, as a bankruptcy trustee, what would happen if someone suggested I should be appointed trustee or receiver of a marijuana-based business? I don’t know if I could do that, even though it’s legal under Massachusetts law,” Weiss said. “If there’s a change in the presidential administration and someone decides they’re going to enforce the marijuana laws, and there’s a five-year statute of limitations on selling marijuana, am I now a dealer?”

Then there’s banking; most cannabis companies have been all-cash businesses because banks operate under federal statutes.

“The vast majority of Americans live in states with laws that depart from federal law on this issue and where thousands of regulated Main Street businesses are serving the legal cannabis market safely and responsibly.”

But that’s one area that could be changing.

Last month, the U.S. Senate Banking Committee approved the Safe and Secure Enforcement and Regulation (SAFER) Banking Act. The legislation (see story on page 40) would allow financial institutions to do business with the legal cannabis industry without fear of crossing federal banking regulations.

“This banking act has been proposed by bipartisan senators for the last six, seven, eight years, and this is the first year it made it through committee; it’s supposed to get a vote on the Senate floor,” said attorney Scott Foster, a partner with Bulkley Richardson in Springfield. “It’s not law yet, and it may not even get through the House, but you’re definitely seeing little steps moving this forward.”

Meanwhile, the U.S. Department of Health and Human Services (HHS) recently issued an official recommendation to the Drug Enforcement Administration calling for marijuana to be moved from Schedule I to Schedule III status in the federal Controlled Substances Act.

A Schedule I classification is reserved for substances with no accepted medical use and a high potential for abuse, while a Schedule III classification is reserved for substances having a legitimate medical use and a moderate to low potential for physical and psychological dependence.

Despite this difference, cannabis would still be considered a controlled substance, illegal without a valid prescription, so a reclassification wouldn’t change the law around adult-use cannabis — but it would be a small move in that direction.

Scott Foster

Scott Foster says the disconnect between federal and state laws have contributed to making cannabis “a challenging place to be. It’s not for the faint of heart.”

“Moving cannabis to Schedule III could have some limited benefit, but does nothing to align federal law with the 38 U.S. states which have already effectively regulated cannabis for medical or adult use,” said Aaron Smith, CEO of the National Cannabis Industry Assoc. “The only way to fully resolve the myriad issues stemming from the federal conflict with state law is to remove cannabis from the Controlled Substances Act and regulate the product in a manner similar to alcohol.”

Will the federal government ever do that? Stay tuned.

 

Green Wave

Laws to make cannabis legal for adults have passed in 23 states as well as the District of Columbia, and 38 states have laws regulating medical cannabis. Almost 80% of Americans live in a state where the substance is legal in some form.

“The vast majority of Americans live in states with laws that depart from federal law on this issue and where thousands of regulated Main Street businesses are serving the legal cannabis market safely and responsibly,” Smith said. “It’s long past time for Congress to truly harmonize federal policy with those states.”

And there has been some thawing around the edges of the state-federal disconnect. For one thing, more banks, and larger ones, are edging into the cannabis sector.

For example, calling it an underserved industry, Berkshire Bank recently launched a cannabis banking unit that provides tailored banking solutions for businesses. In a partnership with Green Check Verified, a cannabis compliance software company, Berkshire is promising clients a seamless integrated platform that includes an application process, transaction monitoring, compliance, and funds movement.

Foster said he spoke with an executive at Berkshire Bank only 18 months ago who doubted such a move could happen. “They went from ‘absolutely not’ to ‘our doors are open to cannabis.’ That’s a huge shift for a major bank in the region.”

And as more states come around to legalizing cannabis within their borders, there might eventually come a tipping point that lawmakers in Washington, D.C. can’t ignore.

Foster happened to be on a plane recently with a state senator from South Carolina, and they struck up a conversation about their respective jobs.

“He said, ‘we’re considering legalizing medical cannabis in January. Don’t you see a lot of crime?’ I said, ‘No.’ ‘Homelessness around dispensaries?’ ‘No. Quite the contrary.’

“I told him, ‘you’ve got people in your state right now who are growing cannabis. They’re very good at it. They know their stuff. They know the different strains. In my state, those people are employed at cannabis dispensaries. They have respectable jobs, they’re not underground, there’s no risk of them going to jail. In your state, they still can.’”

Weiss told BusinessWest he’s surprised at the lack of movement on decriminalizing cannabis at the federal level, if only because there’s so much money to be made by banks and other businesses that typically have the ear of lawmakers.

“It’s legal in 38 states. Even small banks are looking at opportunities to make loans or investments in the marijuana business,” he said. “And when Wall Street can make money on something, the law will change. That may be a cynical view of the world, but I’m sort of surprised that marijuana hasn’t become at least quasi-legal federally right now. Right now, the way the industry is operating, the government just turns a blind eye to it.”

Until someone like Blumsack gets caught in the crossfire, or until cannabis business struggle under the weight of much higher business costs and much greater challenges than other sectors when it comes to real estate, transportation, security, or any number of other factors.

“I don’t know all the ways that’s going to shake out,” Weiss said. “That inconsistency is a problem for everybody. If somebody wants to change the law, that’s up to Congress.”

A Congress that, if anyone hasn’t noticed, doesn’t like working in a bipartisan way on very much these days.

 

The Next Generation

The landscape on some of these matters may still shift. Foster cited a recent decision from the U.S. Bankruptcy Court for the Central District of California in which a cannabis business, the Hacienda Co. LLC, was able to obtain bankruptcy protection, but only after transferring its cannabis assets to a third party. “The decision by the court could be seen as a roadmap for other companies seeking bankruptcy protection,” he noted, “but only for a complete liquidation, not a restructuring.”

Meanwhile, Foster believes federal decriminalization is coming … eventually.

“We still have octogenarians running parts of the government, and they grew up with ‘drugs are bad,’ and that’s something that’s difficult to overcome,” he told BusinessWest. “Twenty, 25 years from now, it will probably be legal, and everyone will look back and say, ‘that was kind of silly.’ But right now, people have ideas deeply ingrained in them by their church, society, family, personal experience, and they’re not going to get over that. They’re just not.”

Until they are — or a new generation of leaders emerges — the juxtaposition between state and federal law will continue to cause problems in this still-nascent industry.

“It’s still a challenging place to be,” Foster said. “It’s not for the faint of heart.”

Retreating Cannabis Sector Changes Real-estate Landscape in Holyoke

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Trulieve will soon be leaving the Massachusetts market
Commercial Real Estate Special Coverage

Building Anxiety

Trulieve will soon be leaving the Massachusetts market

Trulieve will soon be leaving the Massachusetts market, and its property on Canal Street in Holyoke, leaving questions about the site’s future.

Aaron Vega calls it the ‘year of reckoning.’

And he’s not the only one who uses such language when talking about 2023 and the cannabis industry.

This has been a year when a confluence of forces has brought stern challenges to a sector that got off to a fast and hot start in this region. These forces, including mounting competition and falling prices, have prompted some players to exit the market — Truelieve was the latest to make that decision — and others to delay or cancel entry into it.

The impact of these rather sudden changes in the fortunes of the cannabis industry has changed the landscape in many different ways and in many different communities. But perhaps the greatest impact has been on the commercial real-estate market in the city that has most aggressively pursued this sector: Holyoke.

Indeed, a market that was once white-hot as Holyoke officials, led by former Mayor Alex Morse, rolled out the red carpet for cannabis has cooled off substantially, said Vega, director of the city’s Office of Planning and Economic Development, adding that this trend will likely continue as the cannabis sector continues adjusting and responding to the changing climate.

“We’re wondering … how does that property move? What does that company want to sell it for, and what is the acquisition cost going to be? It comes currently with a $300,000 tax bill; that’s a lot of money to keep a building empty. We’re hoping they’re able to move it or work with the city to find a public solution.”

A number of properties have been purchased or leased, and at prices that could not have imagined a decade ago. And as some cannabis businesses close or leave the market and others delay their plans to start, questions mount about all that real estate and what will happen with it.

“A lot of the buildings were locked up because they were purchased at a much higher price than they were probably worth, and now those companies are not going forward, or their timelines are stretched out,” he said. “Are they going to sell these buildings? Are they going to be able to maintain these buildings? They come with tax bills, and they come with maintenance; if you don’t have anything going on inside that you’re making money with, it becomes more of a struggle.”

The most visible manifestation of this changing landscape is the property at 56 Canal St., home (but not for much longer) to Trulieve’s 126,000-square-foot growing, processing, and testing facility, the former Conklin Office Furniture building. Truelieve poured tens of millions into purchasing, renovating, and retrofitting the former mill for cannabis-related uses, said Vega, who wondered out loud how the company could possibly recover that kind of investment given the current fortunes of the cannabis industry.

“We’re wondering … how does that property move? What does that company want to sell it for, and what is the acquisition cost going to be?” he asked. “It comes currently with a $300,000 tax bill; that’s a lot of money to keep a building empty. We’re hoping they’re able to move it or work with the city to find a public solution.”

While some ventures are slated to open in the coming weeks and months, Vega said, there are at least 20 properties for which special permits have been approved — for one or more of the several types of cannabis-related businesses — but where there has been little movement, if any, on site toward opening those businesses.

Vega said he was only half-kidding when he suggested that Trulieve donate its Canal Street property to the city and its redevelopment authority, which could then try to attract more and different kinds of indoor agriculture businesses. Among other things, the transformation of old mills across the city for cannabis-related uses has shown what can be done with those properties, he noted, adding that indoor agriculture could be a growth industry for the city — literally and figuratively — moving forward.

Meanwhile, another emerging model for these mills could be an incubator-like facility, such as the one taking shape at 1 Cabot St., another old mill, the former Riverside Paper Co. building, purchased by Tom and Karen Cusano in 2018.

1 Cabot St. will become an incubator of sorts

Tom Cusano says the property at 1 Cabot St. will become an incubator of sorts for several small, cannabis-related businesses, a model he believes has a great deal of promise.

There, several smaller companies, many of them social-equity ventures, are moving forward with plans, Tom said, adding that this is a different kind of model, and one he believes has some staying power.

“We have one operating tenant and four tenants who are in the licensing process, and we’re building out their space — they should be operational within 90 to 120 days,” he said, adding that this model calls for reasonable lease rates, most buildout handled by the owner, and opportunities to grow if and when the businesses do.

For this issue and its focus on commercial real estate, we take a look at what’s happening in Holyoke — and not happening, as the case may be — and what it all means moving forward.

 

Pot Luck

Vega told BusinessWest that the cannabis experience — and it is ongoing — has benefited Holyoke in a number of ways.

Beyond the hundreds of thousands of square feet of old mill space that has been absorbed and the jobs created, the arrival of this industry has given the city a tremendous amount of exposure locally, regionally, and even nationally and internationally, he said, adding that many people in business who didn’t know about the city’s assets and benefits, from available real estate to green, comparatively inexpensive energy, now do. And this bodes well moving forward.

For the immediate future, though, the relative strength and resilience of the local cannabis industry is the primary topic of conversation in this year of reckoning. At the very least, there are now real questions about whether this sector has already peaked, and if not, how much more it can grow.

To quantify and qualify the changes that have taken place, Vega talked about phone-call volume — as in calls from cannabis companies calling with questions about the city and opportunities to land there — and his overall workload when it comes to handling license applications and related matters.

“When I started in this job two and a half years ago, we were talking to companies once a week, and we had that peak of having 70 host agreements,” he noted. “Working with the City Council, we got 38 special permits approved; that’s a lot of work on a lot of people’s part.

“But now, I think we had two host-community agreements in the last three months, and two projects in front of the City Council and other departments for review,” he went on. “In two years, it’s changed quite a bit.”

Elaborating, he said many of the major players and ‘funders’ in this industry have already moved on to the next emerging markets in this industry, such as Connecticut and New York, with their attention also focused on federal legislation to legalize cannabis.

“With the cannabis industry, it was kind of predatory; everyone looked at it like it was the golden goose. If you had a building, you asked for four times what it was worth, and if you had space to lease, you asked the tenant to spend millions of dollars to fix up your run-down building.”

All of this is reflected in the commercial real-estate market, he said, referencing the large question marks now hanging over several of the properties acquired or leased — at high prices — with cannabis businesses in mind.

Cusano, who purchased his property not long after cannabis was legalized in this state, summed up the market frenzy, if that’s the right term, this way:

“With the cannabis industry, it was kind of predatory; everyone looked at it like it was the golden goose. If you had a building, you asked for four times what it was worth, and if you had space to lease, you asked the tenant to spend millions of dollars to fix up your run-down building. And, quite honestly, very few people could afford that.

“Some of the big, multi-state operators came in with deep pockets and dumped tons of money,” he went on. “And as we can see with Trulieve, that doesn’t seem to work.”

He’s taking a different approach, one he thinks will generate some long-term success.

Indeed, at the Cabot Street property, he’s drawing on 20 years of experience with renovating and then leasing out a former mill building to emerging small businesses in New Hampshire.

“We’re trying to help these small businesses get started; we’re doing the lion’s share of the renovation work and essentially giving them a turnkey operation except for fixtures and whatever they need to run their business, whether they’re doing cultivation, manufacturing, or processing,” he said. “We’ve talked with multiple tenants; we’ll have a retail dispensary in the front of the building that we’re working on.”

Elaborating, he said he and Karen purchased the building “for a song” and have invested far more than $1 million in it thus far. He said he’s had some experience with the cannabis industry in New Hampshire and Maine and understands its potential, both as a source of tenants and its importance to the community in question.

At present, there is one business operating at the property on Cabot Street, Mill Town, a cultivation and light-manufacturing operation, Cusano said, adding that several more are in the pipeline, ventures that will occupy 10,000- to 35,000-square-foot spaces.

He believes this model will fare better than some of the other strategies that have been tried — mostly companies overpaying to purchase or lease property, a situation that adds another layer of challenge to their ability to remain competitive in a rapidly changing market.

“People were overpaying, dumping a ton of money into these properties, and then the market collapsed because of oversupply, and they were upside-down,” he said. “We have a saying in the retail business — you can sell below cost and make up the difference with volume. But not for long.”

 

Bottom Line

Returning to his thoughts about indoor farming and how properties like the Trulieve facility might be turned over to such uses, Vega said such prospects represent just one of the ways the changing real-estate climate in Holyoke represents both challenge and opportunity.

“Let’s keep the cannabis industry, but let’s also help the local food economy,” he said. “Someone growing lettuce and micrograins can’t afford a $40 million building, but if the redevelopment authority can gain control of that building or sell it without needing to make a profit, and we can get a whole industry or a bunch of small businesses going, we can create a food economy, and that would be huge.”

He acknowledged, without actually saying so, that such plans represent a real long shot. The reality is that, rather than solutions, there might be more question marks for the buildings bought with designs on entering what looked at the time to be a lucrative cannabis sector.

And if things break the wrong way, Holyoke may wind up with what it had before it rolled out the red carpet for this industry — a large number of vacant and underutilized properties.

New Bay State Cannabis Entities Must Revisit Their Plans

By Contributor
Holyoke’s mill district
Cannabis

Beyond ‘If You Build It, They Will Come’

By Meg Sanders

 

The local cannabis industry is overflowing with weed.

The Massachusetts Cannabis Control Commission’s open data platform reports 95 cultivators were operational and licensed as of Dec. 8, 2022. Hot on those heels, another 180 provisional licensees are seeking approval that would bring the state up to somewhere around 3.6 million to 4.98 million square feet of canopy for flower cultivation within the Bay State cannabis market’s roughly 250 cannabis stores. 

If your operating and business plan is based on an outlook written for investors in the previous presidential administration, or during the halcyon days of the great green rush of the past, it’s time to face the truth: Massachusetts is well beyond the point of “if you build it, they will come.” 

So those Massachusetts cannabis businesses still in the queue or just getting open need to revisit their market overviews for investors and operators. They need to do so today. Not tomorrow, not if a market event happens — right now.

“Those Massachusetts cannabis businesses still in the queue or just getting open need to revisit their market overviews for investors and operators. They need to do so today. Not tomorrow, not if a market event happens — right now.”

Meg Sanders

Meg Sanders

Take a very hard look at what needs to be rethought, or what needs to be immediately addressed, in regard to budgeting, SOPs, and overall market impact strategies for launch — and for long-term survival. Roughly 37% of all cannabis operators in the U.S. are not profitable, and too many businesses are unaware they are launching only to be licensed to lose money and fail.

For Massachusetts, the danger zone is already here. 

 

New Markets = New Consumers

As more retailers and brands emerge online, operators just now getting their operational licenses are typically doing so using plans they wrote when originally fundraising months or years back, often without taking into account how business plans and projections need to be tweaked, updated, or overhauled in the realities of the Massachusetts cannabis industry in 2023.

Canna Provisions is the ninth-largest independent cannabis company in the Commonwealth, has won multiple ‘Best Dispensary’ awards for selection and customer service, and has been named one of the best companies to work for in the nationwide industry. And even we are reworking our plans. 

Surviving the current market constriction and correction from the imbalance of supply and demand — something that has happened in other markets that came online, though it arrived faster here in Massachusetts — is a challenge of smart maneuvering and business forecasting. Ultimately, those businesses with clear eyes, that are as responsible with every dollar moving in and out of the business, will be the ones that make it out. That’s also why, to me, 2023 isn’t all doom and gloom, despite the headlines. 

Price compression has been on the industry’s collective mind for the past year, which makes it all the more important to create new strategies at the retail level. Differentiation for brands will come down to matters of quality of product, a consistent and predictable retail experience, and the education level of the consumer. 

What we know for sure, as seen from my experience in cannabis stretching back to the dawn of the legalized market in Colorado more than a decade ago, is that, when new markets flanking legalized states come online, it helps everyone in the existing legal retail market. But ultimately, the ones that really come out ahead are those with a key differentiating advantage and a realistic, thoughtful approach to the business. Many small first-time operators do not have the forward-looking business modeling abilities needed in the current market, especially when their average day-to-day will be spent just trying to stay afloat. 

 

Smart Business Savvy Is the Key to Success

As experience has shown, the sky doesn’t fall in an existing market when competition is tight and the supply is in surplus, but businesses do need to be responsible. For those that need a reminder, thanks to IRS Code 280E, the effective tax rate for cannabis companies is roughly 70%. Meanwhile, cannabis companies cannot deduct normal business expenditures. Our three biggest line items, in order, are inventory, payroll, and taxes (the statewide total collected for 2022 was roughly $284 million, to paint the picture).

“Surviving the current market constriction and correction from the imbalance of supply and demand — something that has happened in other markets that came online, though it arrived faster here in Massachusetts — is a challenge of smart maneuvering and business forecasting.”

In some instances, the towns themselves are waking up to the runaway nature of the market glut. Last month, Northampton city councilors set a new limit on local cannabis dispensaries allowed to open (capped at 12 retail locations now) for a municipality noted for having the most licensed dispensaries in the state. 

Even with our collective experience in retail cannabis operations and strategy, it’s still a massive challenge to make it work with so many ways our hands are tied or restricted compared to traditional industries. When the revenue numbers generated by legal cannabis in the state seem to defy the crunch-time feeling of the market, all businesses and consumers need to remember the lion’s share goes directly to the government instead of back to the business. That’s another reason why it’s important to be more careful than ever about how and where dollars are spent, and how we are utilizing the investor capital we raise for our ongoing expansion and scaling plans.

 

Best by Definition

Competition is already at a fever pitch in the state, and in cannabis, getting there first sometimes just makes you best by definition in the market’s eyes. At the retail level, look at any new cannabis state — say, New York — and what happens when the first stores open: lines around the block and product (or what variety there is at first) flying off shelves at steep prices that make investors smile and consumers wince. But when the market becomes more savvy and educated about the products and value system of a brand-new industry, first is no longer best. 

As challenging as this time and sector is, it’s as important for the turbulent tenor of the day to subside as much as it is important for it to simply succeed at a functional level. In fact, it must succeed for the greater industry to thrive.

There is no shortage of stories about widespread layoffs and restructuring for asset consolidation on a large scale with bigger companies, primarily multi-state operators (MSOs). But in comparison to the trials of new, very small operators that found it a matter of survival just to get to the doors-open phase, MSOs have it much easier. They can bleed money in a way small independent shops cannot. If they have operational experience already, they may still not have the ability to see the forest through the trees if they are not actively responding to the business climate of an ever-changing, statewide industry.

You will need more money — from either increased sales or investor dollars for market expansion. There will continually be massive restrictive aspects to operating as long as no new banking reform measures or full-scale legalization measures are enacted. So plan on enduring such aspects as much as you should plan to be noble and focus on what is a differentiating aspect of your business.

And don’t plan on having a future in the business until you get your business plan reflective of the industry we have versus the one we want. For those new or inexperienced operators that don’t get those lessons under their belt, theirs will be a back aching for the lash of “don’t say you weren’t warned.”

 

Meg Sanders is the CEO of Canna Provisions, which operates cannabis dispensaries in Holyoke and Lee.

As Competition Depresses Profits, What’s Next for the Cannabis Industry?

By
Michael Kusek
Cannabis Special Coverage

After the Green Rush

The numbers are impressive, to be sure.

Adult-use cannabis shops in Massachusetts posted close to $1.5 billion in sales in 2022, up from $1.33 billion in 2021. Since recreational sales began in late 2018, the total figure is closing in on $4 billion.

That’s a big pie.

The problem, for the hundreds of dispensaries already open and many more at various stages of planning and development, is that each slice of that pie is getting smaller. As a result, prices are crashing, with some products selling for half of what they did a year or two ago.

That’s great for cannabis consumers. For businesses? Not so much.

But it’s not an unexpected development, not is it any sort of crisis, said Michael Kusek, publisher of Different Leaf magazine and one of the nation’s leading experts on the cannabis industry. But it’s certainly a challenge, one that promises to weed out some of the current players.

“You can’t solve the overabundance of product in the marketplace by transferring it to another market,” Kusek told BusinessWest. “You can’t make the product go away, so the price bottoms out. This has happened in every other market, so it’s not a shock.”

It will, however, require business owners to think smarter, focusing on quality, the customer experience, and other ways of differentiating themselves in an increasingly crowded marketplace. And the situation already has municipalities revisiting old concerns about a saturated market.

Northampton, where one of the city’s 12 dispensaries, the Source on Pleasant Street, recently closed, is the most notable case, as its City Council voted 6-3 last month to cap the number of retail cannabis shops at 12 going forward.

At press time, Northampton Mayor Gina-Louise Sciarra said she would not sign off on the cap, but with a two-thirds vote of the City Council needed to overcome any veto, the measure will likely still become law.

“We are not anti-business,” Councilor Marianne LaBarge said before the vote, as reported by the Shoestring. “We have a job, and we have heard from so many people to place a cap.”

Some residents at a hearing days before the vote expressed concerns about the impact of so many cannabis shops on the city’s youth, while councilors like LaBarge said they want to protect existing businesses from being crowded out.

Council President Jim Nash, one of the dissenters, said he favored a cap when recreational cannabis first became legal, but now believes the maturing marketplace is providing a natural cap, as evidenced by the Source’s closing and declining sales at other shops. He argues as much in a recent column in the Daily Hampshire Gazette, co-written with former City Councilor Dennis Bidwell.

“Since when does local government step in to protect the bottom line of existing businesses by excluding the entry of competition?” they wrote. “We don’t do that for beauty salons or pharmacies or anything else. It’s one thing to put a cap in place in the early stages of an industry’s development, before anyone has opened their doors. It’s another thing entirely to enact a cap that would freeze the market where it is, prohibiting further competition.”

What isn’t up for debate is that it’s getting tougher to turn a profit in an industry that’s already taxed about 70% and can’t claim many normal deductions. That reality, plus an ever-more-competitive marketplace, both inside Massachusetts and from surrounding states, is creating an environment that’s not unexpected for those who have followed the industry’s maturation in other states.

“So many people think, ‘if I get a license, I’m going to be a kajillionaire.’ Sorry, that’s not the case. If you’re in it because of the money, it’s going to be a tough road for you.”

People like Meg Sanders, CEO of Canna Provisions in Holyoke and Lee, who was in Colorado when that state, one of two, along with Washington, to pioneer legal adult-use cannabis in 2012, experienced its own ‘green rush,’ with a quickly saturated market causing prices to plummet. What Massachusetts cannabis businesses need to do, she said, is to focus on differentiating themselves in the right ways (see story on page 35).

“I think it’s going to be a painful year, but a necessary year. Honestly, it’s important,” she said. “So many people think, ‘if I get a license, I’m going to be a kajillionaire.’ Sorry, that’s not the case. If you’re in it because of the money, it’s going to be a tough road for you. We believe money is a byproduct, not a goal. We believe in running a good business, a responsible business, serving customers thoughtfully and respectfully and providing an amazing experience with lots of options on the menu. A cannabis purchase should be fun.”

Certainly more fun than selling the product at a time when economic realities in the industry are dramatically shifting.

 

Growth Potential

There’s no doubt that legal cannabis has been a boon to not only sellers, growers, and manufacturers, but to state and local coffers. Massachusetts imposes a 10.75% excise tax on purchases, while recreational cannabis purchases are also subject to the state’s 6.25% sales tax, and most municipalities levy 3% more.

David O’Brien, the president of the Massachusetts Cannabis Business Assoc., recently told the Boston Globe that the industry will remain strong despite its current challenges.

“Legalization has brought about change people can see. You can see it in the tax revenue, in the jobs that have been filled, in the dispensary storefronts that used to be empty, in the old warehouses that now host manufacturing companies — it’s all growth, it’s all progress, and the sky did not fall.”

Michael Kusek

Michael Kusek says the cannabis industry’s tightening profits are a natural evolution that has occurred in other states.

As for those jobs, about 22,000 workers were authorized by the state to work at licensed cannabis facilities as of December, making it an attractive field to enter, Kusek said. “Once they get a little experience under their belt, they’re infinitely more marketable. Head growers are making $100,000 to $120,000 a year.”

The problem, he noted, is that players coming into the market now are dealing with product prices that are much different than when they established their first business plans. And the regulatory hoops remain challenging in many cases, as is the decision of where to locate: in a community with limited licenses that are difficult to secure, or a community with a more laissez-faire approach, but also, as a result, much higher competition?

“I just talked to a couple of lawyers, and they’re not working as many licenses as they were two years ago,” Kusek said, and there could be several reasons for this, foremost being access to capital, which is still limited because most banks won’t lend for cannabis enterprises.

“If they can’t access capital, they’re forced to shoulder the ups and downs of the industry by daily revenues,” he added. “If you open a successful restaurant and want to open a second location, you can go back and get a loan to do that. If you want to open a second cannabis location to sell all this product you have, you can’t easily do it.”

“Regular businesses still get normal deductions, but we can’t deduct anything except the cost of goods. That creates a real challenge for overall profitability and cash flow.”

Meanwhile, cannabis investors in the Northeast are increasingly looking to what Kusek calls “the shiny new object” — New York, where shops started selling legal recreational cannabis just a few weeks ago. “That’s where the capital is going, which starves out the businesses we have here.”

And when capital dries up, it’s the mom-and-pop entrepreneurs that suffer, as well as social-equity candidates.

“The companies that operate in multiple states have more of a cushion; they can continue to roll forward,” Kusek said. “Who’s going to get hurt by this [competition]? People who have been trying to get a license for a long time. This just makes it harder for them if they didn’t get more of a leg up in the beginning.”

Sanders said the businesses that survive, both those currently operating and those just setting up shop, will be those that “hunker down a little bit and are super thoughtful with every dollar.”

“This is a business that has zero deductibility, except the cost of goods,” she added. “We have to be way more careful than any other business going through this recession. Those regular businesses still get normal deductions, but we can’t deduct anything except the cost of goods. That creates a real challenge for overall profitability and cash flow.”

Without examples from other states to consult, Sanders recalled, Colorado was immediately saturated, prices cratered, and the market became what she called “a race to the bottom,” with price trumping everything. “But as things got more sophisticated in Colorado, a lot of good operators started telling compelling stories about why you should spend money with this dispensary rather than that dispensary.”

That’s why she focuses on the stories behind Canna’s products and also on giving back to the communities in which she operates.

“Businesses need to be as lean as possible and as thoughtful as possible, and make sure you’re telling a compelling story about why people should buy your brand.”

 

Legitimate Concerns

In their recent column, Nash and Bidwell argued that public-safety and public-health concerns that motivated discussion about a cap on dispensaries in Northampton five years ago have not come to pass.

“There is, and always will be, an underground market for unregulated, uninspected marijuana. This black market is fraught with crime and suspect product,” they wrote. “The availability of legal marijuana puts a dent in this market, tilting the share of sales toward legal purchase rather than black-market ones. To the extent the market allows, additional regulated cannabis retail outlets will further reduce the use of unregulated, dangerous cannabis.”

And falling prices in legal shops may entice many long-time black-market customers to try different types of strains and products, Kusek said. “As prices come down, people will try and buy more. This is great for consumers; in some circumstances, it costs half of what it did. For consumers, that’s great.”

That’s even more true for medical users, he added, as they tend to be more price-sensitive than recreational users, since they often have to maintain regular usage with finite resources, since insurance won’t cover the product.

“This is still a young market, and consumers are still developing their preferences. It’s only been a couple of years, and people will develop brand loyalty and particular consumption methods, and they will spend their money to get those particular brands or products.”

Kusek agreed with Sanders that product quality is important, especially as consumers are still discovering what they like.

“This is still a young market, and consumers are still developing their preferences,” he told BusinessWest. “It’s only been a couple of years, and people will develop brand loyalty and particular consumption methods, and they will spend their money to get those particular brands or products. That will come over time.”

Kusek also believes the consumer base has room to broaden.

“People become cannabis consumers for a wide variety of reasons. We have a medical market and people for whom cannabis is a significant part of their medical treatment, and you have more people coming into the market and exploring cannabis for treating pain and sleeplessness. Those people are always going to be coming into the market, as well as people who are curious about it.

“I think one of the challenges in cannabis is connecting and finding consumers; with each new market that comes online, you get the people who are curious, or who are coming back to cannabis after not using it for a long time, people whose life circumstances have changed. There will always be new consumers.”

In other words, it may be a tougher business to navigate than when there were only a few dozen shops open in Massachusetts, but it’s still a dynamic field.

As Kusek put it, “it’s never dull, that’s for sure.”

Recent Case Displays Threats Facing Those in the Cannabis Industry

By Contributor
Law

Risky Business

By Michael Roundy and Scott Foster

 

Michael Roundy

Scott Foster

Scott Foster

Running a business in the legalized cannabis space is something in which hundreds of owners around the Commonwealth are now engaged. On most days, the fact that cannabis remains illegal federally is not on the top of the minds of these owners. However, a recent decision by the First Circuit Court of Appeals reminds us that the cannabis industry is not entirely free of the risks of federal prosecution and provides useful guidance on how best to avoid those risks.

Maine legalized medical marijuana in 2009, subject to stringent conditions and governed by detailed regulations. While state law permitted the medical use of marijuana, the federal Controlled Substances Act does not. However, each year since 2015, Congress has attached a rider to its annual appropriations bill that prohibits the Department of Justice from using appropriated federal funds to prevent any of the states “from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

In United States v. Bilodeau and two related cases, the two individual defendants and the companies they owned operated sites in Auburn, Maine, where they grew marijuana purportedly for use as medical marijuana. The operations were carried out under the color of facially valid paperwork as a Maine Medical Marijuana operation, and state inspectors found the site to be in compliance with Maine’s law.

Following an investigation by federal law enforcement, the defendants were indicted for knowing and intentional violation of the Controlled Substances Act. The government asserts that the illegal marijuana-distribution operation merely used the Maine Medical Marijuana program as a cover for its illegal, black-market marijuana operations, which included distribution of marijuana to individuals in several other states who were not qualifying medical-marijuana patients under Maine’s law.

“On most days, the fact that cannabis remains illegal federally is not on the top of the minds of these owners. However, a recent decision by the First Circuit Court of Appeals reminds us that the cannabis industry is not entirely free of the risks of federal prosecution and provides useful guidance on how best to avoid those risks.”

The defendants challenged the prosecution on the grounds that the government was prohibited from using federal funds to prosecute them, because of Congress’s appropriations rider, and sought an injunction from the District Court. The court denied the request because the Maine medical-marijuana law did not authorize the sort of conduct alleged. The defendants appealed.

The Court of Appeals considered the arguments raised by both parties. The government advocated for a view of the appropriations rider that would permit any prosecutions unless the defendants were in full, strict compliance with the state’s medical-marijuana laws. Any minor non-compliance would bring the case outside the rider and permit the Department of Justice to prosecute.

The court rejected this approach, finding that federal prosecution would hang as a sword of Damocles over participants in Maine’s medical-marijuana market, ready to drop at the occurrence of any minor, “even tiny” non-compliance or unintentional violations, and would likely deter market participation, which might also lead the state to water down its regulatory scheme and otherwise serve to thwart the state’s implementation of its laws relating to medical marijuana.

The defendants argued that the rider should prevent prosecutions of those who have valid state licenses to participate in the state’s medical-marijuana industry. The court rejected this other extreme as well, concluding that Congress did not intend the rider to create a safe harbor for blatantly illegitimate activity outside the scope of the state’s own medical-marijuana laws, merely because the defendants possess facially valid documents.

The court thus rejected the approach advocated by both the government and the defendants. The court adopted a middle-ground approach and declined to define its precise boundaries. It found that the conduct in the case at hand was clearly aimed at supplying marijuana to persons “whom no defendant ever thought were qualifying patients under Maine law” and that the medical-marijuana licenses were façades for such unauthorized sales.

The court also noted that Maine’s own medical-marijuana law expressly criminalized distribution to those not authorized to possess marijuana (medical patients) under the law. As such, federal prosecution for such conduct was considered unlikely to have any unwelcome effect on Maine’s implementation of its medical-marijuana laws. The Appeals Court therefore affirmed the District Court’s denial of an injunction, and the prosecution is permitted to proceed.

What this decision does not do is provide sufficient clarity for Massachusetts operators or regulators, especially around the question of what degree of non-compliance with the Massachusetts regulatory scheme may expose Massachusetts operators to federal prosecution.

While it seems unlikely that mere technical violations would lead to federal prosecution, could an operator faced with a summary suspension order (which occurs when there is “an immediate threat to public health, safety, and welfare”) find that not only is their license suspended, but they now face federal prosecution as well? Hopefully the Cannabis Control Commission will take this potentially serious threat into consideration as they weigh future enforcement actions in Massachusetts.

 

Michael Roundy and Scott Foster are both partners at Bulkley Richardson and members of the firm’s cannabis practice.

Cannabis Industry Promises Workforce Opportunities

By Contributor
Jeff Hayden
The Cannabis Industry

Growing a Job Market

By Mark Morris

Jeff Hayden

Jeff Hayden says the Cannabis Education Center was developed to train people for the hundreds of jobs being created in the industry locally.

When a new industry in Massachusetts reaches $1 billion in sales in only four years, it certainly gets people’s attention.

The Cannabis Control Commission (CCC) recently announced that, four years after legalizing cannabis for adult recreational use, and only two years after the first retail shops opened, this relatively new industry surpassed that $1 billion mark on Oct. 30.

“There are a lot of jobs that go along with a billion dollars in industry activity,” said Jeff Hayden, vice president for Business and Community Services at the Kittredge Center for Business and Workforce Development at Holyoke Community College (HCC).

Shortly after cannabis was legalized in the state, Hayden spoke with advocacy groups and business leaders in the industry, which led to establishing the Cannabis Education Center at HCC to provide training for in-demand occupations in the burgeoning industry.

“Our focus wasn’t on the product itself; we wanted to identify the occupations that make the most sense so we can train people for those jobs,” Hayden said.

After completing a core course to familiarize students with the cannabis industry, more concentrated training is available in four career tracks:

• Patient-service associates work behind the counter at a cannabis dispensary, interact with the public, answer technical questions, and provide information to registered cannabis patients, as well as recreational customers;

• Culinary assistants prepare cannabis-infused products such as gummy candies and baked goods infused with cannabis;

• Extraction technicians work in a lab assisting production managers in extraction, purging, oil manipulation, and quality control of cannabis products; and

• Cultivation assistants provide daily care of the crops from seed to harvest.

“Because HCC offers courses in business and customer service, culinary, chemistry, and agriculture, the career tracks for cannabis training line up well with the expertise the college already has,” said Michele Cabral, executive director of Professional Education and Corporate Learning at HCC, who worked with instructors to set up the cannabis course offerings.

As a community college, HCC doesn’t allow cannabis or associated products on campus. That means classroom instruction might involve using computer simulations to show chemical reactions, for example. When a physical demonstration is needed, legally approved items like hemp plants are used in class.

“While we will not have cannabis or related products on campus, we will still do the job education has always done: share with our students the best knowledge we can provide and the best examples,” Hayden said, noting that students can get actual hands-on experience when they land internships or get placed in a job.

He added that the courses are designed to provide an entry-level workforce for the cannabis industry. Wages are usually comparable and sometimes slightly higher than other industries at entry level.

“Even more important than landing that first job is the ability to make a career out of cannabis, because the levels of compensation can be significant,” he told BusinessWest.

Whether a person is looking for an entry-level job or a second career, Cabral said cannabis can be a “phenomenal career track” for people who have never considered it before.

For example, someone with a sales background could train as a patient-services associate training to build on the skills they already have. Or someone with a science background and wants to work in a lab could train as an extraction technician to learn about cannabis-infused products such as skin creams and shampoos.

“This person with science and lab training would find an entire industry that is exploding, where they could have an amazing career,” she said. “Who knows? They could come in at entry level and work their way up to be the head of the lab.”

There’s much more to the industry than rolling a joint, Cabral continued, noting that cannabis-infused shampoos and skin creams are only two examples of the many different items that appeal to the general public. “These products are extremely clean, closely regulated, and environmentally sustainable. It’s not just about getting high.”

 

Elevating an Industry

Elevate Northeast, a nonprofit workforce-training and cannabis-advocacy group has partnered with HCC on career-training programs at the Cannabis Education Center.

Beth Waterfall, founder and executive director of Elevate Northeast, said the program at HCC is designed to help people become familiar and comfortable with the industry. “The coursework helps people see that this is real. There’s a place for their interests and their skills.”

Elevate Northeast’s main mission is to provide opportunities for people who have been marginalized or were disproportionately harmed by previous marijuana prohibitions. The CCC administers a Social Equity Program to provide assistance and training to encourage those impacted by the ‘war on drugs’ to pursue careers as workers or entrepreneurs in the cannabis field.

Waterfall said righting past wrongs is one of the mandates of the CCC. The Certified Economic Empowerment application process is a way to encourage people from neighborhoods and communities that suffered from the impact of the war on drugs to seek licenses to open cannabis microbusinesses. She added that establishing microbusinesses also prevents larger companies from dominating the cannabis market.

“I’m excited about the cannabis industry because, through programs like social equity and economic empowerment, Massachusetts has an opportunity to be a leader in business ownership by people of color and women,” she said.

Waterfall called HCC’s Cannabis Education Center a “wonderful” way to provide people with both an initial exposure and a deep dive into the cannabis industry, as well as helping people understand how they may fit into it. “Who knows? This exposure may encourage them to someday own their own business.”

While retail cannabis operations have launched in many Western Mass. communities, the city of Holyoke has been most active, currently boasting four dispensaries, with at least two more scheduled to open in 2021. Based on workplace needs identified by these companies, the job market for cannabis looks to be healthy through 2021.

“By rough estimate, I anticipate, within the coming year, we will have 400 to 500 workers in the cannabis industry, just in Holyoke,” Hayden said.

Because Western Mass. offers both skilled workers and cheaper land compared to the eastern part of the state, Waterfall sees real growth potential and cited Holyoke as quickly becoming a center of cannabis commerce. “The city needed innovation and needed jobs. Cannabis is doing that very effectively in Holyoke.”

Such strong demand for talent would normally be an opportunity for career centers like MassHire to be involved. That’s not the case, however; David Cruise, president of MassHire Hampden County Workforce Board, noted that his organization receives most of its funding from the federal government, which has not recognized cannabis as a legal substance.

“Until laws change at the federal level, we cannot be actively engaged in getting involved with job seekers in the cannabis industry,” Cruise said. While he is aware of the increase in local job opportunities in the industry, MassHire will be taking a hands-off approach to cannabis employment.

That presents a stark opportunity for HCC’s programs. In her conversations with cannabis-industry employers, Cabral found they are looking for workers who represent the diversity of their customers. One dispensary owner said clients can range from a 40-year-old woman craving a good night’s sleep to a younger person looking for a recreational product.

“The people who use the products are as diverse as the population in general, so that’s who we want to train, and that’s who the employers want to hire,” she said.

During training, Cabral reminds her students that success means following basics like showing up on time with a good attitude, effectively communicating with the management team, and putting their cell phones away. “These are real careers in real businesses that are trying to make money, so come ready to work.”

Hayden echoes that point and noted that, while it’s not surprising for someone who has an interest in cannabis to work in the industry, employers will expect them to put in an honest effort and have an open mind to learn more and grow. He also advised they pay attention to the little things that can make a big difference.

“One employer told me, he chooses his customer-service people by whether or not they walk into the room with a smile.”

 

Cultivating an Ecosystem

While the cannabis industry offers many career pathways, Hayden said it’s easy to forget about all the traditional back-of-house functions such as accounting, marketing, and data analytics that companies need on top of the industry-specific positions.

While it’s called the cannabis industry, Waterfall added, it’s really more of an ecosystem that encourages people to bring their diverse skills to it.

“While I run a nonprofit, I pay my bills by consulting with cannabis companies on marketing communications and business development,” she said, noting that she started out doing similar work, except her clients were lawyers and accounting firms.

While COVID-19 has made it difficult to get a clear sense of job growth, Hayden said the industry is just getting off the ground and still promises a strong growth trajectory.

“Like any industry, there will be ups and downs,” he added, “but the projections post-COVID are suggesting we could hit a billion dollars a year in a short period of time.”

That kind of success helps overcome some of the stigma of cannabis use, which Waterfall admits can be very strong, whether coming from family or community. While she has been educating her own family, some are still not comfortable with cannabis use.

“Then I hear from someone who tried an infused gummy and has never slept so well, or the person who told me she drinks a CBD tincture in the morning, and it makes her a better mom.”

Anecdotes like those help debunk the stereotypes and stigmas about who uses cannabis, and why. Cabral hopes more people come to understand this is a serious industry with products that can be helpful to a wide range of customers. As such, cannabis needs a committed workforce that also takes itself seriously and moves past old stereotypes.

“Jobs in this field can be extremely technical,” she said. “It’s not just go listen to Bob Marley and have a party.”

Growth of Cannabis Industry Offers Promise of Revenue, Jobs

By
Economic Outlook

Higher Ground

Scott Foster says small cannabis businesses are being assailed with offers from large, out-of-state players.

The cannabis industry is in full swing in Massachusetts, with about three dozen dispensaries currently selling products for recreational and medicinal use — about a third of them in Western Mass. — not to mention cultivators, product developers, and a host of other related enterprises.

With 17% of cannabis sales going back to the state as taxes, and communities collecting at least 3% more — usually higher — it’s easy to recognize the financial impact.

But Scott Foster says said it’s important to remember the jobs being generated.

“You can get good employment in this field. A shop might have 20-plus employees working there,” said Foster, a partner at Bulkley Richardson, the Springfield-based law firm that launched a specialty cannabis practice last year to provide guidance for individuals, companies, and municipalities entering this very young industry. “These aren’t small businesses in the sense of 200 or 300 employees, but it’s not just four or five people working, either. It’s a pretty steady base of employment.”

And it adds up, said Jeff Hayden, vice president of Business and Community Services at Holyoke Community College (HCC), which recently launched a Cannabis Education Center to provide needed training and resources for people who want to enter this burgeoning industry.

“In Holyoke, 13 companies have applied for 21 different licenses,” Hayden told BusinessWest. “At present, 50 to 75 people are employed in cannabis-related businesses in Holyoke, but the anticipation is, within a year or two, that will be in the range of 400 to 500 people. It’s potentially a significant occupational opportunity for people. And if Holyoke is looking at 400 to 500, what is Springfield looking at? What about Northampton, Easthampton, Chicopee?”

This career potential is what inspired HCC to partner with the Worcester-based Cannabis Community Care and Research Network (C3RN) on the Cannabis Education Center.

“In Holyoke, 13 companies have applied for 21 different licenses. At present, 50 to 75 people are employed in cannabis-related businesses in Holyoke, but the anticipation is, within a year or two, that will be in the range of 400 to 500 people.”

“At HCC, we focus on what kinds of job skills people need in order to get jobs, whether entry-level or skills to do their job better. The fact that there is so much potential in this new industry in Massachusetts piqued my interest.”

No economic outlook is complete without touching on the early expansion of the cannabis industry in Massachusetts — and its immense promise for further growth, especially as dozens more shops plan to open their doors in 2020. Whether they’ll be able to maintain the sector’s early momentum remains to be seen — but most analysts agree the potential is certainly there.

On Fire

Foster recently came across an article that listed cannabis among the top four new legal practice areas, among heavyweights like cybersecurity.

“It’s interesting that cannabis has become a front-and-center legal issue across all the U.S., not just Massachusetts,” he said. “It’s becoming more recognized as a legitimate industry. Even though federal law hasn’t changed, it seems to be moving in that direction.”

Indeed, with Illinois joining the list this month, 11 states have now legalized recreational marijuana, and 19 others allow medicinal marijuana. With others set to follow this year, it’s not hard to imagine an eventual shift at the federal level, even if that doesn’t appear imminent.

As one step in that direction, the U.S. House of Representatives passed a bill in 2019 allowing banks to handle marijuana accounts; currently, most cannabis businesses are all-cash enterprises since they can’t use banks.

“Will banks ever start lending to the industry?” Foster asked. “I think yes, but most people in the industry think it probably won’t be in 2020. Maybe, but probably not. They’re expecting it to stall in the Senate, and Washington is occupied at the moment with lots of other stuff.”

For now, communities that have embraced this new world — like Holyoke, which is starting to fill its former mills along the canals with a mix of cannabis-related businesses — appreciate the additional tax revenue and retail traffic in town, but also, as Hayden notes, those jobs.

“Will cannabis provide thousands of jobs, like the state has predicted? Who knows, but 300, 400, 500 new jobs is significant,” he said. “More than 90% of the businesses in the Valley are small businesses — not by the definition of the Small Business Association, with 500 employees or fewer, but with 50 or fewer.”

Collectively, that’s a lot of positions to fill, especially as more of those small businesses come online.

“This is like any other business in the sense that they need people ready to work and have some skills to do the jobs they want to hire for,” Hayden said. “The more we can work as a community college on skills training that gets people ready for work, the better.”

In many cases, shops are hiring people who may face skill barriers to other types of employment; it’s a relatively even playing field in that, because the industry is so new, almost everyone needs training. HCC’s Cannabis Education Center is doing its part, both through courses and one-day programs like an upcoming workshop series on planning and starting a cannabis business, as well as getting into medical marijuana.

“Our goal is to get people into jobs, but in the context of a career,” Hayden said. “A job is a great thing, but if it’s just a 15- or 20-hour job, that’s not going to support you or your family for long. We want to get people on a career pathway through skills training.”

For example, he went on, “in cultivation, someone might come in trimming plants, working with growers, learning what the process is, and might become a cultivation technician, an assistant grower, even a master grower. There are definitely steps along the way to get not just a job, but a career in cannabis.”

Maturing Industry

Foster said he doesn’t have a crystal ball when it comes to the cannabis industry, but he does have his eye on some intriguing trends.

“We’re already seeing consolidation. Many of our clients are receiving unsolicited offers to buy them out. They’re not actively soliciting offers; people are contacting them. It’s mostly out-of-state money — and it’s not small money. That will be interesting to see, if the industry changes from being completely locally owned to being owned by out-of-state players, creating national cannabis businesses.”

Another murky area right now is the effectiveness of the state’s social-equity piece, which aims to provide priority access, training, and technical assistance to individuals and communities negatively affected by the drug war — a key target audience for HCC’s training efforts. “That’s another big unknown which may get some clarity in 2020,” Foster said.

What is clear is that the market, as it stands now, is humming along — and creating those jobs.

“All the folks I’m seeing are still trying to keep up with customer demand. At least from what I’m hearing, competition hasn’t slowed business. Will that change if New York and Connecticut were to legalize? Possibly,” he noted, citing casinos as a case study; there’s no doubt Foxwoods and Mohegan Sun have lost some business to their northern neighbor since the Bay State got into that business. “But for the moment, Massachusetts is the only game in town when it comes to cannabis.”

It’s a game with lofty goals and an uncertain — but undoubtedly promising — future.

“It’s a maturing industry,” Foster said. “So it’s going to have maturing-industry challenges.”

Joseph Bednar can be reached at [email protected]

Cannabis Buzz

By Kayla Ebner
Economic Outlook

Springfield Regional Chamber to Host Marijuana Professionals, Officials

There’s still a lot of confusion surrounding the cannabis industry.

Despite the fact that medical marijuana was legalized in Massachusetts in 2012, and recreational marijuana in 2016, the business community is juggling countless regulations and laws, whether looking to get into the cannabis industry themselves or just dealing with this new economy in general.

On Tuesday, Jan. 28, many of these questions will be answered.

From 12:30 to 5 p.m. at the Springfield Sheraton, the Springfield Regional Chamber will host “The Buzz About Cannabis: Marijuana in the Marketplace and the Workplace,” a collection of business, legal, and medical marijuana professionals, distributors, and entrepreneurs, as well as state cannabis officials, who will give attendees all the information they need to know about cannabis.

Nancy Creed describes retail cannabis sales as just one spur on the wheel of an industry that has pushed its way to the forefront over the last several years, and the president of the Springfield Regional Chamber is making plans to prepare business folks for this rising economic driver.

“The cannabis industry is clearly a, no pun intended, budding industry,” Creed said. “When you look at the revenue associated with it and the taxes, it really is the next economic engine of its time.”

It was a meeting with Cannabis Control Commissioner Kay Doyle that inspired Creed to begin researching this topic.

Nancy Creed describes retail cannabis sales as just one spur on the wheel of an industry that has pushed its way to the forefront over the last several years

“This, to me, was kind of a no-brainer,” Creed said. “We need to make sure that we are at the front of the industry and we are helping businesses either get into the industry or, on the flip side, deal with this new economy.”

The conference itself features an opening keynote from Doyle, breakout sessions focused on topics like “Business Structure and Banking in the Cannabis Industry” and “Cannabis in the Workplace,” and a closing keynote by Beth Waterfall, founder of Elevate Northeast, titled “Cannabis: What’s Next?”

Budding Goals

Chamber leaders thought carefully about what their goals were for the cannabis conference — the first time a chamber in the region has hosted an event of its kind.

Creed said this first conference will take a general focus, building a solid foundation on the basics of the industry — and leaving room for a potential focus on hemp, CBD, or other spokes on the wheel, as she calls them, next year.

The main goal of the conference is to educate attendees on what cannabis is, what they need to know when getting into the industry, and how it affects the economy.

“It’s a place for business people to come and get educated,” she noted. “I think it’s also an opportunity to recognize the growth of the cannabis industry and how that will positively impact our economy and be able to shine a light on it, so people see it as the future of our region.”

In order to accomplish this, she knew they needed to bring in several experts and professionals from different parts of the industry — including someone from the commission, Doyle, to talk about the landscape of the industry and the regulations entrepreneurs need to grapple with.

Next, Creed wanted to ensure the conference featured someone who could help businesses figure out what they needed to know about not only getting into the industry, but also what type of business they would be classified as.

Perhaps most importantly, they needed an expert in the banking industry. Because marijuana is still federally illegal, almost no bank will deal with marijuana businesses — although that could eventually change. Tina Sbrega, CEO of GFA Credit Union, will accompany Scott Foster, partner at Bulkley Richardson, to talk about banking and business structure.

“I want to make sure that businesses understand that, so they are successful when they start out, and aren’t just starting out not thinking through all of the things you need to think through to be a successful business,” Creed said.

She added that this conference is not just for people looking to get into the business, but also for people who just need to understand how it works.

Joanne Berwald, vice president of HR at Mestek; Erica Flores, attorney at Skoler Abbott; and Pam Thornton, director of Strategic HR Services at the Employers Assoc. of the NorthEast, will lead a breakout session about recruitment, retention, and employment law.

“There are a lot of complex laws that come into play,” Creed said. “We wanted to make sure, for the rest of the business world that isn’t interested in getting into the cannabis industry, that we had information about what is it like for the other folks working and hiring in a cannabis world.”

For the final breakout session, Creed explained that she wanted to bring in a panel comprised of a marijuana grower, a user, and a distributor, but did not have the internal resources to find people who fit the description. That’s when she reached out to Michael Kusek, cannabis journalist and publisher of Different Leaf magazine. He crafted a team — Noni Goldman, Leslie Laurie, Ezra Parzybok, Karima Rizk, and Payton Shubrick — to talk about their individual niches and how they navigate the cannabis industry in different ways.

Sowing Seeds

Overall, Creed hopes to help as many people as possible navigate a still new and quickly growing industry.

Because it is the first event of its kind, she is unsure just how many people will register, but believes that, once people learn more about the event, they will see the benefits of attending.

“I really don’t know how much the business community is going to understand the conference and embrace the conference,” she said. “Our hope is that they will, but it’s new.”

What she does know is that the cannabis industry is evolving at a rapid rate, and keeping up with the high demand is a must for the chamber.

“It’s a place for business people to come and get educated,” she said. “I think it’s also an opportunity to recognize the growth of the cannabis industry and how that will positively impact our economy, and be able to shine a light on it so people see it as the future of our region — because it’s here.”

Kayla Ebner can be reached at [email protected]

Cannabis Industry Puts Down Roots in Holyoke

By
GTI’s cultivation facility in Holyoke
Community Spotlight

Community Spotlight

GTI’s cultivation facility in Holyoke

GTI’s cultivation facility in Holyoke has been operating since last summer, and many new ventures could be opening in the years ahead.

Alex Morse says his phone was already ringing — quite frequently, in fact — before he was interviewed on CBS This Morning late last June.

But then, it really started ringing. And his e-mail box became even more crowded.

That’s because, with that report, Holyoke’s efforts to roll out the welcome mat for the cannabis industry, pun intended, became a national story rather than a local story — although it was already well-known.

Yes, this was the detailed report where Morse told CBS that the city once known as the ‘Paper City’ might soon be known as the ‘Rolling Paper City.’ His tongue wasn’t in his cheek, and there was a broad smile on his face as he said it.

Getting serious, or more serious, because he was already serious, he told CBS, “it’s legal … people need to wake up; the days of the past are moving forward. Holyoke has embraced the industry, and we acknowledge that this is an economic-development driver for us.”

Morse, and Holyoke, woke up long ago, meaning just after (or maybe even before) recreational marijuana became legal in Massachusetts in the fall of 2016, and today it is making giant strides toward creating what officials are calling a ‘cannabis cluster.’

And they’re comparing it, in some ways, to the cluster that put this city on the map — figuratively and quite literally (this was a planned industrial city) — the paper and textiles cluster.

As they used that word ‘cluster,’ both Morse and Marcos Marrero, the city’s director of Economic Development, said it means more than the creation of a number a number of businesses and jobs in a specific sector, although that’s a big part of it. It also means establishment of an infrastructure of support services that can have a large multiplier effect, if you will.

“With a cluster, it’s more than the sum of its parts,” Marrero explained. “Once you have a cluster, then you have an expertise, just like Holyoke did when it was the Paper City. Just as you have an expertise with paper, you can have an expertise with all the expects of this [cannabis] business.”

Elaborating, he said cannabis-cultivation facilities require highly specialized construction, lighting, anti-contamination, air-movement, and security systems, and all this adds up to opportunities for companies in this area that can handle such work.

In many ways, Holyoke is well on its way to seeing this cannabis cluster become reality, said Morse, noting that one large cultivation facility, Green Thumb Industries (GTI), is currently operating in a former textile mill on Appleton Street. And there are several other businesses across the wide spectrum of this business — from cultivation to retail — moving their way through the involved process of getting permitted to operate and eventually absorbing some of the vast amounts of commercial real estate that are vacant or underperforming.

Holyoke at a Glance

Year Incorporated: 1786
Population: 40,341
Area: 22.8 square miles
County: Hampden
Residential Tax Rate: $19.29
Commercial Tax Rate: $39.87
Median Household Income: $36,608
Median family Income: $41,194
Type of Government: Mayor, City Council
Largest Employers: Holyoke Medical Center, Holyoke Community College, ISO New England Inc., PeoplesBank, Universal Plastics, Marox Corp.
* Latest information available

“For us, cannabis is another form of manufacturing that’s bringing buildings back to life, being a revenue generator and job creator,” said the mayor.

And as they say in the agriculture business, Holyoke is certainly fertile ground for the cannabis industry. Indeed, it boasts, by the mayor’s estimate, 1.5 million square feet of vacant or underutilized former mill properties. Meanwhile, it has, again, by Morse’s calculations, the lowest electricity rates in the state (Holyoke has its own municipal utility), and it has something just as important as those ingredients — a giant, figurative ‘welcome’ sign when it comes to this business, as will become clear later.

But cannabis isn’t the only positive development in this city. Holyoke is also making great strides in ongoing efforts to attract entrepreneurs and arts-related businesses. It is also convincing more people, especially the younger generations, that this is a place to live as well as work and operate a business. And it’s seeing many of those aforementioned mills being put to creative and momentum-building uses.

Mayor Alex Morse

Mayor Alex Morse, an early supporter of the cannabis industry, says its many components collectively form an economic driver in Holyoke.

All of the above can be seen in one high-profile project known as the Cubit Building, the structure on Race Street that takes that shape. The first two floors are now occupied by the Holyoke Community College MGM Culinary Arts Institute, a story that embodies education, workforce development, and economic development, and in the floors above are apartments that were leased out even quicker than the optimistic owners thought they would.

“You drive by at night, and it’s all lit up,” said the mayor. “People are living on the top two floors, and on the first two floors you see students in the chefs’ hats cooking and doing classes; there’s a lot of vibrancy on Race Street.”

Lights are coming on all over Holyoke, and for this, the latest installment of its Community Spotlight series, BusinessWest examines how this has come about and why Holyoke is creating a buzz — in all kinds of ways.

Budding Ventures

As noted, this cannabis cluster is a solid work in progress, with GTI now approaching a full year in business and several other projects in various stages of development.

Conducting one of those ‘if-all-goes-well’ exercises, Morse said he can envision a cluster that generates perhaps 300 to 400 jobs and many types of businesses, from cultivation facilities to cannabis cafés like those in Amsterdam. If that picture comes to fruition, marijuana-related businesses would constitute economic development in many different ways, from jobs to tax dollars; from revving up the real-estate market (aspiring ventures have acquired options on a number of properties) to giving tourism a boost; from creation of support businesses to helping give Holyoke a new brand.

As Morse told CBS — and BusinessWest — cannabis has become an economic driver. And city officials have had a lot to do with this by being so aggressive, welcoming, and accommodating.

As one example, Morse and Marrero cited the host-community agreements that such businesses traditionally sign in order to set up shop. Some communities have been excessive in their requests (or demands), while Holyoke has taken a different tack.

“These agreements have become another choking point for the industry,” said Marrero. “Communities try to negotiate, they go back and forth, and hold you down for a bunch of criteria. We’ve been very transparent and said, ‘we’re going to go for the maximum allowable benefits for the community by law in terms of impact fee, and if you sign here, you have a host-community agreement; we don’t become an impediment in the process.”

Morse agreed. “There have been communities that have tried to go above the state law in terms of percentage of annual revenues or have tried to negotiate for various line items such as a new fire truck,” he explained. “They say, ‘in addition to the percentage, you need to give ‘X’ amount to this nonprofit every year.’ We have a standard document, so it’s not intimidating in that sense; the burden is really on the companies to get through the state regulatory process — the local process shouldn’t be an additional burden to bear.”

Holyoke’s willingness not to push for every dollar or every concession, on top of its many other selling points, including available mill space and lower utility costs, have certainly caught the attention of the cannabis industry.

“There is political openness and stability to the industry, which is very valuable,” said Marrero. “We were, if not the first, one of the first handful of communities that had a permissive ordinance in place, so we were first to market on the government side to say, ‘we’re open to this business.’

“They saw the mayor’s advocacy, and they saw that the operational costs would be lower, and that is very, very significant,” he went on. “The energy savings alone … you can save 40% on your energy costs.”

This attractive package has attracted a number of interested parties, said Marrero, noting that two additional cultivators, East Coast Farms and Solurge, are working their way through the permitting process. Overall, a total of 15 host-community agreements have been executed, and seven special permits have been issued. Within a year, it is expected that another two or three cultivation facilities could be doing business in the city, and other types of cannabis-related businesses as well.

And as the cluster grows, it gains momentum and recognition, which fuels additional opportunities. Marrero drew some comparisons to Detroit (the car industry) and Silicon Valley (IT).

“The industry has to train a workforce on how to grow these plants and clip these plants, and as that workforce develops locally, other companies know they can locate in Holyoke and they will have an accessible workforce,” he explained. “They will have access to other vendors that know how to provide services or provide goods to cannabis companies.”

Marcos Marrero

Marcos Marrero says a cannabis cluster is bigger than the sum of its parts.

Building Momentum

As noted earlier, though, cannabis is just one of many intriguing economic-development-themed stories being written in what is still called the Paper City.

Others include everything from the culinary arts center and the sum of the Cubit Building’s many parts to ongoing evolution of the Holyoke Mall — one of the city’s main draws and largest employers — in response to a changing retail landscape; from redevelopment of two municipal properties — the former Lynch Middle School and the Holyoke Geriatric Authority building — to entrepreneurial-ecosystem-building efforts that are bringing new businesses, and jobs, to the city.

At the mall, as stores large and small shrink or disappear from the landscape (longtime anchor Sears closed its Holyoke store a few months back) and those that remain operate with a smaller footprint, the facility is changing its look and adding more entertainment-related businesses, said Marrero.

These includes more restaurants, a bowling alley, and a planned movie-theater complex, he said, adding that, overall, the mall is responding proactively to a changing retail scene.

“They’ve been very resilient … retail is changing, and the mall is putting a much greater emphasis on entertainment and making it more of an experience rather than just shopping,” said the mayor. “Whether it’s the escape rooms or the kids’ center or the laser tag and bowling alley, it’s about creating experiences.”

Meanwhile, additional retail will be coming to the city with redevelopment of the former Lynch School, located just off I-91, by the Colvest Group. The property is slated for demolition later this year, and the expectation is that it will become home to several retail outlets.

Reuse of a different kind is slated for the Geriatric Authority property, which closed several years ago. Indeed, Baystate Health and US HealthVest have chosen the site for its planned 70,000-square-foot behavioral-health hospital.

Plans calls for 120 beds in a facility that would represent consolidation of some of the existing beds in the region and creation of new beds as well.

“This is a great story of reactivating a site that had once been a money pit for the city, one that was draining almost $1 million of taxpayer funds,” Morse said of the days when the Geriatric Authority was operating was site. “Overall, we have two large, city-owned properties that are being developed, and that represents real progress.”

There is progress on many different levels in the downtown area and especially the city’s Innovation District, the area around the Massachusetts Green High Performance Computing Center, which opened in 2012.

On the municipal side, there will be several infrastructure projects undertaken in the area over the next several years, said Marrero, including street work, reconstruction of one of the canal bridges, and other initiatives.

Meanwhile, the city continues to add jobs and vibrancy organically through entrepreneurship-ecosytem-building initiatives such as SPARK, which recently joined forces with the Massachusetts-based program Entrepreneurship for All, or EforAll, to form SPARK EforAll Holyoke.

The new organization offers a number of programs, including a business accelerator, pitch contests, and co-working space currently being built out on High Street that will be available to program members.

Launched four years ago, SPARK has helped a number of ventures get off the ground or to the next stage, and most of them have settled in Holyoke, said Morse, adding that these startups, in addition to some others started organically, are bringing more vibrancy to the downtown.

He listed a catering venture, a salon now under construction, and a microbrewery on Race Street, among others.

“There are things that are happening organically, and I think these businesses are tapping into the momentum happening in the downtown and the ecosystem they feel here and the support they see,” said Morse. “They feel they can be viable here opening up a catering business or a salon or a brewery in downtown Holyoke.”

Marrero agreed. “We’re tilling our own soils, and stuff grows,” he said, referring to organic growth of the business community. “Every now and then, a business moves here, but a lot of this is organic.”

And these businesses are helping to fill more of those vacant or underutilized properties.

“We’re seeing this dynamic where more square footage is coming online,” said Marrero. “It’s being rehabilitated and filled by these businesses.”

As for the culinary arts center and the Cubit Building on the whole, it is bringing many different constituencies to the Innovation District area, adding to this vibrancy there. These include college students, their professors, those attending functions, and, yes, Morse himself, who has signed up for two night classes, one on how to make macaroons, the other involving a chiffon layer cake.

After those, he’ll be even better suited to answer the question, ‘what’s cooking in Holyoke?”

That’s a Wrap

As he was wrapping up his walk through the city with CBS, Morse told the reporter that it would be a good problem to have if the cannabis industry so embraced Holyoke that it found itself running out of commercial space for additional ventures.

That’s not likely to happen anytime soon (1.5 million square feet is a considerable amount of inventory), but a cannabis cluster appears to be no longer a goal but a reality. How quickly and profoundly it develops remains to be seen, but Holyoke appears to be well on its way to having history repeat itself on a certain scale.

A name change probably isn’t in the cards — ‘Paper City’ will stick — but a new era in the city’s history is certainly underway.

George O’Brien can be reached at [email protected]

MGM Effect, Cannabis Industry Are Heating Up Springfield Real-estate Market

By
Commercial Real Estate

Warming Trend

A confluence of factors — from the opening of MGM Springfield to the dawn of the cannabis era in Massachusetts — have fueled heightened interest in real estate in downtown Springfield. Brokers report that the level of activity — inquiries, showings, leases, and sales — is the highest they’ve seen in recent memory.

Freddy Lopez Jr. says there’s a rather complex algorithm, as he called it, when it comes to locating a cannabis dispensary in Springfield.

Such a facility can’t be within 500 feet of a school, he noted. Or within 300 of another dispensary. Or within 50 feet of a Class A residence. And there are many other restrictions, as well as a host of hurdles to clear locally and with the state, just to get the doors open.

But this rather high degree of difficulty doesn’t seem to be stopping many people from trying to get in the game in downtown Springfield — and at other locations within the city, said Lopez, a broker with Springfield-based NAI Plotkin.

He said he’s lost count when it comes to how many properties he’s shown to various parties, and noted that the interest is constant and only increasing, as desire to be part of the cannabis wave, if you will, intensifies.

“There’s a lot of interest across the area, but the hot spots are downtown, and especially locations near the casino,” said Lopez, who recently brokered the sale of 1665 Main St., once the headquarters of Hampden Bank, to a party (RLTY Development Springfield LLC) interested in converting it into a dispensary. “There’s a lot of competition for good sites.”

1665 Main St., recently sold to a party interested in converting it into a cannabis dispensary. Evan Plotkin, left, and Freddy Lopez Jr. of NAI Plotkin, which brokered the sale.

The Main Street property, located across from the Hippodrome and a block from Union Station, was most recently assessed at $127,600, but sold for $285,000, a clear sign of the times and an indicator of how hot the race to secure locations for cannabis facilities can, and probably will, become.

“People are jockeying for position right now,” said Lopez, adding that some parties are securing options, some are leasing, and others, like RLTY, are going ahead and buying properties in anticipation of winning a coveted license.

But the cannabis industry is only part of the story when it comes to growing interest in Springfield and especially its downtown, said Mitch Bolotin, a principal with Colebook Realty, based in the heart of downtown.

MGM Springfield has certainly had an impact as well, spurring interest in various forms of development, from retail to housing. But there have been many other positive developments as well, from the relocation of the Community Foundation of Western Mass. to a location on Bridge Street, to the renovation of Stearns Square, to an improved outlook on the part of many when it comes to public safety.

“There are a number of factors driving this,” said Bolotin late on a Friday afternoon after a day of showing various properties, referring to a surge in interest and activity in Springfield and its downtown. “I’ve been doing this for more than 30 years now, and this is the strongest I’ve ever seen it.”

Mitch Bolotin says MGM Springfield is just one of many factors stimulating the most activity seen in the downtown Springfield market in recent memory.

Mitch Bolotin says MGM Springfield is just one of many factors stimulating the most activity seen in the downtown Springfield market in recent memory.

Demetrius Panteleakis expressed similar sentiments. The president of Macmillan Group LLC, now based in Tower Square, said the last quarter of this year has been extremely busy, and he expects that pattern to continue.

“I haven’t seen an October-November-December period as busy as this one — this is usually a slower time,” he noted. “There is a lot of movement; things are very robust right now.”

For this issue and its focus on commercial real estate, BusinessWest looks at why things are heating up in the downtown market and what this warming trend means for 2019 and beyond.

Where There’s Smoke…

Lopez said he has a number of anecdotes that capture the soaring level of interest in Springfield and its impact on the real-estate market.

One of his favorites concerns a party calling to inquire about securing a luxury apartment in downtown Springfield. Lopez explained that the city doesn’t really have any of those, much to the disappointment of the caller.

“This person was looking to do some investing in Springfield, and I think he wanted to use this apartment as a base — he could meet people there,” Lopez explained, adding that this phone call, all by itself, speaks volumes about how the commercial real-estate market is heating up in the city, and also how widespread the interest is.

Indeed, while there are many local parties interested in investment and/or development opportunities, the callers and visitors are also coming from well outside the 413.

“We’re getting calls from developers and investors in Boston, Rhode Island, New York City, and beyond,” he said, noting that many of these calls involve potential housing developments. “People who have never set foot in Springfield now have an interest in the city, and that’s very encouraging.”

That interest comes in many flavors, said those we spoke with, adding that the cannabis industry, and a strong desire to join it, are sparking many of the inquiries.

But these robust times are manifesting themselves in many ways.

Bolotin noted that he recently secured a lease for a new food-service business on Bridge Street. He couldn’t give specifics, but said the deal involved one of the vacant storefronts on that street, damaged first by the natural-gas blast and later by explosions triggered by a water-main break.

It’s an example of the strong interest in the market that he noted earlier, arguably the most activity he’s seen in recent memory.

“We’re seeing a lot of positive signs in the marketplace in terms of activity and interest, leases, and sales,” he said, adding that this vibrancy is reflected in everything from higher occupancy rates in the buildings managed by Colebrook — and there are many in the downtown, including the TD Bank Center and the Fuller Block — to how many showings of properties he’s conducted in recent months.

Overall, Bolotin, like others we spoke with about this, said there is considerably more positive energy concerning the downtown than there has been in some time. MGM deserves some credit for this, he noted, but there are many other factors as well, from the developments on and around Bridge Street to the renovation of the Fuller Block, to less apprehension about public safety. “The attitude is much more positive than it’s ever been.”

He noted that Patricia Canavan, president of United Personnel, who moved her business onto Bridge Street, Katie Alan Zobel, who relocated the Community Foundation to that same area, Tom Dennis, owner of the Dennis Group, who purchased and renovated the Fuller Block, among other buildings downtown, and Martin Miller, general manager of WFCR, who moved his operation from Amherst into the Fuller Block, are all examples of people investing in the downtown, and through, their actions, inspiring others to do so.

Panteleakis has also seen considerable optimism and less apprehension about public safety. “You don’t hear as many concerns about safety,” he said. “Before, safety was a real issue — it kept some people from coming downtown. But you don’t hear that much anymore.”

Meanwhile, housing has become a huge area of interest, in part because of MGM and the needs of its huge workforce, but also because of rising activity levels in general and growing anticipation that the city will soon become, if it isn’t already, a landing spot for younger people and empty-nesters alike.

Evan Plotkin, a principal with NAI Plotkin and long-time champion of downtown Springfield, noted the purchase of the former Willys-Overland building in the so-called ‘blast zone’ by Boston-based Davenport Advisors LLC, and that company’s acquisition of the old Registry of Motor Vehicles site, possibly for the same use, as harbingers of things to come.

“I’m seeing a lot of developers coming in looking to develop residential,” he said. “I see tremendous potential for new developments in parts of our city that have been stagnant for a long time, including areas on the fringes of downtown and in the downtown itself.”

Joint Ventures

While interest in potential housing development grows, the cannabis industry is the source of much of the activity downtown.

The brokers we spoke with said they’ve been showing multiple sites to groups interested in all facets of this business, from cultivation to retail. And while sites across the city are being explored — as many as 15 sites might become licensed in Springfield — the downtown is becoming the focal point.

“Things have been crazy for the past two years when it comes to this business,” he said, adding that he’s brokered the sale of sites for marijuana-related businesses in Holyoke and Easthampton. “Now, the focus is shifting to Springfield and the downtown area; people are trying to line up sites.”

Lopez concurred, noting that there is a broad mix of local, national, and even international companies looking to start a cannabis dispensary or cultivation site in this region, with many focused on Springfield and an initiative known as the Opportunity Zone Program.

Created as part of the U.S. Tax Cut and Jobs Act of 2017, the program provides incentives for investment in low-income communities, like Springfield. Individuals and groups looking to develop in these designated geographic areas can gain favorable tax treatment on their capital gains, said Lopez, adding that he has worked with several owners and investors in the city’s Opportunity Zone.

The purchase of 1665 Main St. falls into this category, he said, noting that the acquisition is a good example of investors jockeying for position through options, leases, or outright purchases.

And the race for cannabis locations should provide a substantial boost for owners of properties downtown, said Plotkin, noting that prices are moving higher as interest grows, in a movement that echoes what happened when MGM Springfield and other casino-industry players jockeyed to enter this market.

“When you were dealing with a casino developer, like MGM or the other parties interested in Springfield, there was what we all referred to as the ‘casino rate,’” he explained. “They’ll pay more for real estate than the average buyer will.

“In the case of a marijuana dispensary, because the business is so lucrative, they will pay a lot more rent per square foot,” he went on, noting that a ‘marijuana rate’ is taking shape. “Rents that may have been $15 a square foot a year ago … for a marijuana shop, we’re taking about $20 to $25 per square foot, and in some cases more, depending on where it is.”

As for what the cannabis industry might mean for Springfield, Plotkin, who has traveled extensively, expressed some hope that the city might someday become somewhat like Amsterdam, a city famous for its culture, nightlife, and countless shops selling marijuana, other drugs, and related paraphernalia.

“I think Amsterdam is a great example of just how the very liberal nature of that city has led to incredible street life in that town that’s very safe,” he said. “Amsterdam is a great city, one of the most vibrant cities in the world, and maybe we can learn from its example.”

Bottom Line

Whether Springfield can become anything approaching Amsterdam — as a tourist destination or cannabis hotspot — remains to be seen.

For the time being, it is a hotspot when it comes to its commercial real-estate market.

There is interest and activity unlike anything that’s been seen in decades, and the consensus is that this pattern will likely continue and perhaps even intensify.

Springfield and its downtown have become the right place at the right time.

George O’Brien can be reached at [email protected]

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