Hawaii Medical Cannabis Businesses Will Face High Startup Costs, Real Estate Crunch

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By Tony C. Dreibus

Hawaii is poised to become the latest state to move forward with a medical marijuana dispensary program, but it won’t be paradise for cannabis entrepreneurs.

The state plans on erecting some stiff barriers to enter the market, including a requirement that license applicants have $1 million dollars in the bank. If that doesn’t deter many entrepreneurs from throwing their hats in the ring, the high cost of real estate just might.

The island of Oahu – home to Honolulu, the state’s largest city – has the lowest vacancy rates in the nation for urban industrial properties, according to real estate market researcher Colliers International. In the first quarter of 2015, tenants had a hard time relocating or expanding thanks to the “severe island-wide shortage of warehouse space,” Colliers said in a report.

The emergence of a medical marijuana industry would likely exacerbate the real estate crunch, meaning cannabis companies seeking buildings for cultivation sites and dispensaries might have to pay sky-high prices.

The costs could be substantially higher for dispensaries that want to locate in tourist-heavy areas where real estate is even more pricey. Given that Hawaii’s program allows sales to medical marijuana cardholders from out of state starting in 2018, many dispensaries will likely target these popular areas.

“Real estate and buildings in Hawaii are very expensive,” said Stephen Pingree, a Hawaii-based lawyer and consultant who works with cannabis companies. “Nobody wants to be in the boonies so everybody is going to try to have a dispensary in a popular area. If you’re looking to the future, you’re going to want something accessible to tourists.”

Hawaii legalized medical marijuana in 2000 but never approved a distribution system. State lawmakers sent a bill on to the governor that establishes a regulatory system for the cultivation and sale of MMJ via up to 16 dispensaries across the Hawaiian islands.

Gov. David Ige indicated he would not veto the measure, which means it’s on track to become law on July 14 even if he doesn’t technically sign it.

If it becomes law as expected, eight licenses will be issued in the state – three in Honolulu County, which encompasses the island of Oahu, two each for the islands of Hawaii and Maui, and one for Kauai, according to the bill. Up to two dispensaries and two cultivation centers will be allowed per license, and the business owner must have lived in the state for a minimum of five consecutive years.

Would-be cannabis business owners will then have from Jan. 12 through Jan. 29 to apply for licenses.

In general, Hawaii could be one of the more expensive MMJ markets in the country to start a business in.

Applicants must pay a non-refundable $5,000 application fee. If approved, a dispensary license fee of $75,000 must be submitted to the state within seven days or the license goes to the next qualified applicant.

License winners then must pay $50,000 annually in renewal fees.

Overall startup costs would likely range from $3 million to $5 million, observers say.

Hawaii will require licensed companies to grow, process and sell their own cannabis, but the law mandates that each division of an operation be separate.

Cultivation facilities – which could grow up to 3,000 plants – therefore can’t be housed in the same building as a company’s dispensary. So businesses will need to purchase or rent at least two separate facilities.

The high cost of housing also could present challenges, deterring potential experienced employees such as master growers, processors and laboratory scientists from moving to Hawaii.

While the obstacles are considerable, there are plenty of positives.

The high number of existing medical marijuana cardholders – more than 13,000 – indicates that businesses awarded licenses could be quite profitable and cross into the black fairly quickly. That number of patients could double once people realize they have a place to legally buy medical marijuana, Pingree said.

The state’s reciprocity rule that will allow tourists with out-of-state MMJ permits to purchase medical cannabis will be a boon to companies that are up and running at the time, he said. About 5 million visitors from the continental U.S. and Alaska visited Hawaii in 2013, according to the state.

Entrepreneurs who aren’t afraid of Hawaii’s start-up or high real-estate costs and think they can successfully capitalize on the state’s nascent industry need to begin getting their applications together sooner than later.

Though the laws are still six months from being crafted, waiting would probably mean they’d be behind the 8-ball, Pingree said.

“The applicant groups need to begin to start moving immediately,” he said. “I’m working with a group in Oahu right now and I know the general elements involved. Whether the language in the application meets the language (state lawmakers) craft remains to be seen, but we can start writing the application starting now.”

Tony C. Dreibus can be reached at tonyd@mjbizmedia.com