Uncertainty, rumors after Arizona awards medical marijuana business licenses

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By John Schroyer

When Arizona completed a long-awaited second round of medical cannabis business licensing last week, the state’s MMJ industry was left with a host of unanswered questions.

Did the bulk of licenses go to entrepreneurs already running MMJ businesses in the state or newcomers to the industry? When will the latest crop of dispensaries actually open and compete with existing storefronts? Will lawsuits push back the timeline?

Most of the questions stem from the secretive nature of Arizona’s licensing process, given that the state does not reveal the actual names of winning applicants. As a result, rumors are swirling that former state employees rigged the licensing system and then walked away with a number of the 31 coveted licenses.

Some insiders now fear the uncertainty surrounding the identities of the winners could even play right into the hands of efforts to defeat a recreational marijuana measure on the Arizona ballot next month.

With this as the backdrop, the companies that won licenses are not only facing logistical issues tied to their business models, they’re also dealing with a potential backlash and trying to determine whether to publicly identify themselves.

So … who won?

Due to a confidentiality clause in Arizona law, the state Department of Health Services (DHS) is prohibited from releasing the identities of companies selected to receive MMJ business licenses.

So there’s no list of winners, and many of those that the state selected are not exactly shouting it from the rooftops.

The situation triggered a round of industry gossip last week after the state awarded licenses, with cannabis insiders trading rumors and innuendo.

“Everyone was calling each other the day after, going, ‘Hey, did you get one?’” said J.P. Holyoak, the founder of Arizona Natural Selections, a Scottsdale dispensary.

Holyoak, who doubles as chair of the campaign behind the recreational ballot measure (called Proposition 205), said he doubts many of the licenses went to the existing 99 medical cannabis licensees.

Others tapped into the industry heard differently, however.

“Most of them were won by people who are involved in existing dispensaries. There are very few new players to the market,” said Demitri Downing, a cannabis industry lobbyist.

Industry insiders gave Marijuana Business Daily the names of several applicants selected to receive licenses. Only one agreed to go on the record and be identified, while several others declined to comment.

Backlash fears

A handful of winners Marijuana Business Daily reached out to are already involved in the Arizona cannabis trade but did not want to announce it publicly. Some observers said it has to do with the political landscape and the upcoming adult-use marijuana vote.

“Because of the campaign. Because the prohibitionist side of ‘No on 205’ is saying ‘This is simply a money grab. This is all about making money for existing dispensary owners.’ That’s one of their overriding themes,” Holyoak said when asked why existing dispensaries would prefer anonymity if they won new licenses.

Jason Medar, who heads the anti-Prop 205 group Marijuana Consumers Against Fake Marijuana Legalization, alleged that existing business operators “don’t want to be called out.”

“This has been talked about a lot in the community, that MMJ dispensaries are getting this oligopoly on the marijuana market,” Medar said. “A lot of the people who won these licenses don’t want to catch any flak until we find out what happens with Prop 205.”

Under the provisions of Prop 205, existing medical cannabis licensees would have first crack at the new rec retail licenses, leaving very few for those outside the industry.

Lawsuits may be looming

There’s also the very real possibility that legal action by one or more applicants who didn’t win a license could delay the rollout of new MMJ businesses, several observers said.

Arizona attorney Jerry Chesler, who won a license and does not currently operate a permitted medical cannabis business in the state, said he’s already hearing “saber rattling” on potential litigation against the state over the licensing process. He also believes such lawsuits could hamper the debut of new MMJ businesses.

“There’s someone who’s allegedly a former DHS employee who got five (new MMJ licenses),” Chesler said. “And there’s concerns that guy must have somehow gamed the system.”

Others don’t think such lawsuits will be a major issue.

“Those lawsuits are incredibly hard, and they would have to show that DHS really abused their discretion … and that’s really hard to do,” said attorney Ryan Hurley, who helped a number of clients submit applications for the latest licensing round.

Downing, the industry lobbyist, added that any lawsuits would be immediately dismissed as “sour grapes.”

“The state of Arizona did such a good job, they’ll go before a judge … and the judge is going to say, ‘Are you kidding?’” Downing said.

Still, it’s impossible to predict how such moves may play out, and lawsuits in other states with a limited number of cannabis licenses have become commonplace.

What’s next for license holders

Although applicants for the latest round of permits had to include a physical address in their license bids to the DHS, they are permitted to change locations before opening. Chesler said figuring out where to locate a dispensary is going to be the number one priority for him and his partners in the coming months.

“We are scrambling to get open as quickly as humanly possible. We recognize that we’re not going to be able to start out with our dream scenario,” Chesler said.

His company’s decision on a location will depend on whether the local municipal regulators grant them a zoning variance.

“It’s all about real estate,” said Chesler, who won a permit in the Phoenix metro area. “If you don’t have zoning challenges, there’s no reason you couldn’t be open in 30-60 days.”

Another license winner, who asked that his name be withheld, said he and his partner are planning a $4 million dispensary and hope to eventually establish a grow operation, an edibles kitchen and even an extraction lab.

“It’s definitely a golden ticket for us, but at the same time it’s a golden ticket for everybody, because it’s allowing other businesses in Arizona to step their game up,” the license winner – who is new to the industry – said, adding that it will probably be “a few months” before the company begins serving patients.

Despite the challenges, Chesler is excited for the future.

“I’m like Linus sitting in the pumpkin patch, only it’s been for 45 years now, and as far as I’m concerned last week the Great Pumpkin showed up,” he said.

John Schroyer can be reached at johns@mjbizdaily.com

Clarification: The original version of this story referred to the organization Marijuana Consumers Against Fake Marijuana Legalization as “anti-legalization.” That was inaccurate. The group is in favor of legalizing adult use cannabis, but is opposed to Proposition 205 based on the policies it would enact.