This is the first column in a three-part series.
On Jan. 24, 1848, when James W. Marshall found gold in Coloma, California, word spread throughout the broader United States about mining opportunities. The news attracted hundreds of thousands of gold-seekers enticed by the idea of cultivating endless fortunes and establishing a new prosperous livelihood in the Golden State.
The sequence of events is what is commonly referred to as the “Gold Rush.” A similar trend was sparked, albeit unintentionally, in October 2009 when David Ogden, the former deputy attorney general, sent a memo advising U.S. attorneys to “not focus federal resources” on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”
This created what is commonly referred to as the “Green Rush,” where myriad businesses are looking to cash in on the seemingly endless opportunities within the medical marijuana industry.
However, like most of the gold-miners left with only the “rush” rather than the gold, an extremely high majority of businesses that decide to chase after the MMJ industry don’t make any money at all, especially when considering this industry’s unique risk-to-reward factor.
But, if you’re like many people seduced by the buzz of the marijuana industry, no lawyer, family member or angel-on-your shoulder is going to convince you otherwise. And you can indeed make money in this industry – if you approach it the right way.
For those fearless entrepreneurs interested in wholesale marijuana cultivation and/or retail distribution, I’d like to guide you through the process of monetizing marijuana opportunities.
In this column I’ll focus on the first step, which is mitigating risk.
While all investment opportunities carry risk, wholesale marijuana cultivation and retail distribution have a very unique one: criminal prosecution.No entrepreneur should ever begin discussing any medical marijuana opportunity without considering the legal risks at the very beginning of the process.
Even if you’re already determined to enter the medical marijuana business no matter the risks, you must understand the discrepancies between state and federal laws and be aware that all preparations of the cannabis plant (whether recreational or medicinal) are classified under Schedule 1 of the Controlled Substances Act.
Furthermore, you must be cognizant of various risk mitigation methods.
Here are five ways to lower your chances of running into trouble with local, state or federal officials by mitigating risk:
#1. Choose the Right Location – This is probably the most important decision you will make. At any given time there are only a few states even issuing medical marijuana dispensary permits. Obviously you should never open a medical marijuana dispensary, delivery service or grow in a nonmedical marijuana state.
In states where there has traditionally been less risk of opening a medical marijuana business, such as California and Colorado, there has been increasing pressure from the federal government. In those two states, U.S. attorneys are targeting dispensaries within 1,000 feet of where children gather, such as public schools, so stay away from these areas even if your state allows you to be closer (in California, for instance, you can set up shop within 600 feet of a school, while in Washington DC it’s 400 feet).
And give preference to states with clearer and less ambiguous (if such a thing exists) state-regulated medical marijuana programs, such as Arizona or New Jersey, rather than states with a very weak centralized structure, such as California. I would suggest choosing a state that has passed medical marijuana through the legislature rather than through a voter referendum.
#2. Focus on Transparency – The federal government also has been targeting businesses that operate under the guise of a non-profit organization but are really multi-million dollar back-door operations. It should go without saying that you should be as above board and as transparent as possible. Don’t blatantly lie on your zoning and business application (“patient care” or “plant nursery” may be acceptable descriptions, but don’t use anything egregious ).
Be honest with your landlord about your intentions. Even though it will make the real estate selection process much more difficult and escalate your rent, it’s much better than investing hundreds of thousands of dollars into a building only to see the landlord try to evict you. Have a tight inventory control system to track all products, whether starter plants or finished cannabis, to prevent diversion. Develop a comprehensive business plan and patient handbook. Track patient purchases and perform constant inventory. Use an experienced security company. Always follow best business practices.
#3. Track Pending Cases and Comply With All Laws – Look into whether there are any significant pending legal cases that can alter medical marijuana policy, such as in Michigan, where the Court of Appeals in August 2011 ruled that the state’s MMJ law does not legalize the sale of marijuana for profit. That court decision left 100,000 patients without medicine and forced hundreds of businesses to shut down overnight.
If in an election year, consider if there are any front-runners that are strongly for or against medical marijuana that can affect your marijuana business. And then weigh how the situation would change if each candidate was elected. At the same time, even if inevitably you will be breaking federal law, make sure you are 100% compliant with every local and state MMJ law and regulation.
#4. Pay Your Taxes – As if DEA raids, smash-and-grab operations and criminal prosecutions aren’t enough, the federal government is unleashing a new attack dog on medical cannabis: the IRS. California-based Harborside Health Center – the largest medical marijuana dispensary in the nation with an estimated 100,000 patients, 85 full-time employees and $22 million in annual sales – was hit with a $2.4 million tax bill following an audit by the Internet Revenue Service.
The interesting part is that the dispensary actually paid federal, state and municipal taxes. But due to a 1982 tax code prohibiting cost deductions for businesses that traffic in illegal drugs, medical marijuana included, Harborside was not able to write off standard operating costs such as rent, payroll, employee health insurance and licensing fees.
Various medical marijuana advocacy groups are focusing efforts on repealing this law. But for now, you won’t be able to claim these standard business deductions.
Finally, you can learn a thing or two from the experience of Berkeley Patients Group, whose bank accounts were seized by the federal government. You might want to avoid having large bank balances and try to pay your taxes on a more frequent basis – such as monthly – rather than quarterly or annually.
#5. Understand Local Culture & Politics – Having community support can make a big difference not only for the performance of your investment but for criminal liability as well. Join your local industry groups and get to know the policymakers that deal with medical cannabis in your area. Educating policymakers is perhaps the most important step in changing opinions and eliminating stereotypes surrounding medical cannabis.
Now that all of the gory aspects of opening a medical marijuana business have been covered, we’ll focus in next month’s article on how you can identify the right medical marijuana opportunity for you and – just as importantly – how you can earn a return on your investment given the complex legal and financial structure of medical marijuana.
Dhar Mann is a business owner, entrepreneur and CEO of weGrow Store, a full-service retail franchise selling supplies for the cultivation of medical marijuana.
