By: Jason Hoffman
While New York Gov. Andrew Cuomo signed The Marijuana Regulation and Taxation Act into law March 31, 2021, to legalize the production, distribution, and adult use of marijuana in New York State, there are still more questions than answers at this point about what it means for businesses already operating in the space – and those looking to get into the industry.
There are still many questions as everyone awaits the final regulations to get a better idea of how many licenses will be available, where counties and localities can opt-out, what personal-use plants will look like, and how the application process will run.
However, what’s transpired since states such as California, Michigan and Massachusetts legalized marijuana may provide a glimpse of what’s to come for New York.
Is it Too Late to Get Into the Cannabis Business?
It’s not too late to get in on the game, but many provisions need to be considered. Businesses looking for new opportunities should take their time and research what they can do with this new law before jumping in. Final regulations may not come until the end of the year, with sales not beginning until early 2022, so it’s challenging to build an accurate business model yet.
Because the number of licenses available – assuming there is a cap – has not been released, businesses have time to plan, and here are a few things to begin the process:
- Start making connections in the cannabis industry, especially with regulators, bankers, attorneys, CPAs. Many professionals with cannabis industry experience in multiple states probably will only take on a limited number of applicants if the new Office of Cannabis Management limits the number of licenses to mitigate risk.
- Build a business model for at least the next five years, which includes understanding the actual demand for the product and what your tax bill will be.
- Understand where cannabis business can be (they cannot be close to a school or place of worship, among other restrictions). Talk to community leaders and find a place that would allow a cannabis operation. Local communities may limit how many there can be – assuming they don’t opt out – so become a good business neighbor and encourage them not to restrict these operations.
Businesses that want to get in, though, will have to be all in for the long-term because of the potential obstacles they’ll need to overcome to become profitable in the future.
The Cost Will be High
Potential high tax rates may scare many investors away. However, it’s expected New York will have some of the tightest regulations around the production, distribution, and use of recreational marijuana, which could mean slim profit margins in the short term.
Experience from other states shows getting into the cannabis industry may not produce a profit for the first five years. Meanwhile, cannabis businesses in states with high sales and use taxes, such as New York, have seen lower margins than states with lower rates.
There currently are ten New York license holders approaching or past the five-year mark and not showing much profit, so it may be years until the market truly matures. With high state taxes and expected heavy regulation, profits after income taxes (including 280E) may still be hard to come by.
The market may take more time to catch up than business owners have to become financially solvent. Businesses will need to be funded appropriately to get a license.
The Illegal Market Will Survive (at least for a bit)
As growing small quantities of cannabis becomes legal, will heavy adult users grow their own or allow for groups of people to grow together for personal use? Will this personal use and other legal changes assist the illicit markets to operate unabated?
Not everyone who is illegally selling or purchasing marijuana will move immediately or even in the short term. They’ll do a cost-benefit analysis and identify where they can get their product the cheapest. The new law also says police cannot use the smell of cannabis to justify searches. With adults now allowed to store up to 5 pounds of cannabis flower and cultivate up to 12 plants for personal use at their home, police monitoring for cannabis use will significantly subside. That doesn’t include the various product used cannabis production products already easily accessible even on Amazon.
Simply put, the illicit market isn’t going away. Regulated cannabis production and sales at approved licensed retailers may be cleaner, safer and higher quality. Still, it remains to be seen how many businesses will be licensed or allowed to grow for legal resale.
State vs. Federal Law
Once the new Office of Cannabis Management determines the number of licenses to be issued, the question becomes where businesses will set up shop. Because the sale and use of cannabis remains illegal on the federal level, businesses looking for real estate may run into issues for properties with loans from FDIC-insured banks. Most cannabis companies have to buy real estate for cash or for loans at higher interest rates. Remember that the Interest might not be tax-deductible either.
The line between state and federal approval will prove especially tricky in New York City, where many of the buildings have mortgages from major federally recognized banks that include language that prevents them from renting to anything that is federally illegal – including cannabis.
Will landlords be OK with a possible mortgage default? It’s just one of the many questions – and risks – cannabis business owners will need to consider. Those looking to find real estate may need to prepare to pay in cash to avoid loan or lease restrictions.
Vertically Integrated and Minority/Women-Owned Businesses
The law, as it stands now, shows the state wants to avoid vertically integrated companies. That means growers/producers will have to sell wholesale product to dispensaries limiting the opportunity to structure around IRC 280E. With the law allowing existing medical license holders (there are 10 now) to keep their vertical integration, this could be a disadvantage for nonmedical businesses as they can grow and sell to themselves.
The law also states half of the licenses available are to be distributed to minority or women-owned businesses. Questions remain on how the Office of Cannabis Management will define minority and women-owned businesses and if that will make an impact. For comparison, other states that have included this in their laws have so far found it hard to keep up with that standard.
While MRTA legalizes many components of the cannabis industry, there are still many challenges associated with direct involvement or investment in a cannabis-related business. It’s not impossible to break into the market, but it’ll take a savvy business operator to navigate the process and come out profitable.
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