Washington state rule change expands business options for marijuana cultivators

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By Bart Schaneman

Washington state recently eased restrictions on how many producer licenses marijuana businesses can own, a move that could lead to more competition, an uptick in mergers and acquisitions and possibly increased supply.

Under the state’s revised policy, business owners can up their licenses from one to three, effective immediately.

But they must draw from the current pool of 1,154 producer licenses; no new permits have been created.

The Washington Liquor and Cannabis Board (LCB) originally planned to allow businesses up to three licenses to cultivate marijuana but tabled that scenario in the legal market’s early stages.

When regulators wrote the rules for producer licenses, it separated growers into three tiers based on the square footage of their canopies:

  • Tier 1: 2,000 square feet or less
  • Tier 2: 2,000-10,000 square feet
  • Tier 3: 10,000-30,000 square feet

License holders that have been producing to the limit of their allotted square footage have been eagerly awaiting the LCB’s change, eyeing production facilities that are either operating under capacity or not at all.

The rules alteration also offers another option to struggling business owners seeking to exit the industry or those simply looking to partner up.

“One of the reasons why this conversation was needed is that some producers who were operating at capacity wanted to grow, and they’re looking at other licenses that aren’t being used or used minimally,”  said Aaron Pickus, spokesman for the Washington CannaBusiness Association.

‘Flurry of mergers’

“I think we’re going to see a flurry of mergers,” said Daniel Shortt, a Seattle-based cannabis attorney with the Harris Bricken law firm.

Shortt projects the licensing change will allow “producers who are currently at capacity to acquire other licenses either by merging or purchasing the businesses that hold licenses, allowing them to expand and have that canopy space.”

Based on the state’s original regulations, many business owners built into their plans the potential for holding multiple licenses, said Jerry Derevyanny, an executive with Tumwater, Washington-based Northwest Cannabis Solutions.

“I think a fair number of business owners have been waiting for this,” he added. “We’re happy that the LCB listened to the industry.”

Derevyanny has modest expectations for changes to the state’s business landscape.

“You are going to see a little blip of (M&As) initially because so many people have been waiting for so long,” he said. “But I don’t know if we’re going to see a wave of consolidation. I don’t want to downplay it or overplay it.”

More options

The licensing change also opens possibilities for producers who aren’t bursting at the seams with their crop.

“From the perspective of a license holder who isn’t using the full canopy space, is limited financially or isn’t able to support that large of a crop, those license holders now have another option and can work with successful licensees who are at full capacity,” Shortt said. “It gives these businesses that might be struggling another option – an option out if they want it or an option to partner up and get the full return on their allotted canopy space.”

Pickus sees this as a way to level the playing field.

For example, he said, by obtaining additional licenses, a company that started with a Tier 1 permit will soon be able to compete with the larger producers in the state.

Before the change, a boutique producer who enjoyed success and product growth eventually might hit a ceiling.

“They’re being artificially held back by the license,” Pickus said.

Derevyanny envisions businesses eventually possessing a combination of different tiered licenses.

“The more flexibility you give to people in how they set up their operations – assuming they stay compliant and they work well with the LCB – it’s just better for the industry and better for the business owner,” he said.

The mergers and acquisitions of Washington state cannabis businesses must go through the LCB.

According to board spokesman Mikhail Carpenter, after a licensed business acquires another, it will file with the state an assumption of the additional company. Once that’s complete, the LCB will investigate the assumption.

“They would remain separate licenses,” Carpenter said. “You’re not consolidating all into one license.”

A business going through the process must submit to a routine background check.

“Some (will) go faster and some slower depending on the preparedness of the applicant,” Carpenter said.

Impact on supply

Some cannabis producers might worry the licensing change will cause wholesale prices to drop.

But that shouldn’t be a concern, according to Derevyanny.

“I don’t think it’s a foregone conclusion that you’re going to have a lot more marijuana,” he said. “A lot of this canopy is already being used. People are just going to sell this canopy to another business owner or they’re going to merge.”

Fears regarding overproduction are “overblown,” Derevyanny added. “It’s safer to wait and see.”

Pickus agrees with that approach.

“Price points may be affected,” he said. “But that’s just kind of the nature of a competitive marketplace.”

But an increase in supply is probably in the cards.

“I do think it’s likely that the amount of cannabis grown is going to increase in Washington because there will be the opportunity for these more efficient licensees to expand,” Shortt said.

If the new landscape does drive down the cost of cannabis, it could increase the amount of customers buying from licensed producers.

“I don’t know if it’s as simple as the supply goes up and the demand stays the same,” Shortt added. “The demand might increase if there is more supply and the prices go down.”

Bart Schaneman can be reached at barts@mjbizdaily.com