WORKWEEK

Cannabis is one of the fastest growing industries in the world.

But, running a cannabis company is extremely expensive, especially in the United States where cannabis is still federally illegal. 

Plant-Touching Companies

For the purpose of today’s deep dive we will be focusing on plant-touching cannabis companies, such as Cookies’ cultivation operations and dispensaries.

As things stand in the U.S, these companies are forced to pay out high fees to obtain licenses on an annual basis, while having to pay their fair share of taxes — without the means to write off business expenses.

Licensing and Application Fees

Licensing and application fees alone can be hundreds of thousands of dollars, which puts all too many cannabis producers into the red, sometimes before ever having had the opportunity to produce a single gram of cannabis.

• Arkansas’ annual cultivation license fee is $100,000

Thankfully, not every region seeks to extract such high fees from cannabis companies, with a number of regions charging less than $10,000.

• Colorado’s annual fee for between 10,201 and 13,800 plants is $5,300.

Keep in mind, application fees are non-refundable, so many hopeful operators are forced to eat these fees even if they don’t receive the required approval.

In some states, there’s just one opportunity to apply for a license.

This often puts larger producers and well-capitalized startups at a distinct advantage, as the successful completion of one of these forms often required outside consultants who specialize in competing these application forms. Consultants are not inexpensive to work with. 

Real Estate Costs

Leasing or owning a commercial property is already expensive, but cannabis operations are often charged more for the property than traditional industries.

Landlords are often encouraged, in fact, to charge cannabis businesses more due to the “risks associated” with cannabis businesses. 

Cannabis facilities also can’t be located near schools or daycares, and in some cases, drug treatment facilities and churches.

This is another opportunity for landlords to charge higher rent, as cannabis businesses have a limited scope of permissible space to occupy.

On average, cannabis businesses pay between $128 and $393 per square foot. These numbers reflect all facilities, from cultivation to dispensaries. In large cities like Los Angeles, cannabis dispensaries can expect to pay between up to $9,000 per month. 

The cost of rent also depends on the current market, rent for cannabis businesses skyrocketed in California when adult sales began. 

You can’t forget about maintaining the real estate, which includes things like utilities and renovations to the building.

Security Costs

The cost of security depends on your state and the size of your business.

The cost to install security, and in some cases employ armed guards or local law enforcement, can amount to hundreds of thousands of dollars each year.

Many security regulations are similar from state to state, like requiring badged access for employees to enter the locked facility or having locks where cannabis products are stored.

In Illinois’ medical cannabis program, cannabis retailers require the following.

• A panic alarm that will indirectly or directly notify local law enforcement.
• Must establish a locked door or barrier between the dispensary’s entrance and the dispensary itself, beyond where patients check-in.
• Must maintain an electronic daily log of dispensary agents who have access to the reinforced vault room and knowledge of the access code or combination.
• Keeping the interior and exterior of the storefront “sufficiently lit” so proper surveillance can take place, which includes making sure bushes, trees, and other foliage won’t block people from sight.
• Must have a perimeter alarm on all entry points and glass break protection on the perimeter’s windows, including security shatterproof tinted film on the exterior of the windows.

Operators must cover these costs before selling a single gram of medical cannabis in the state.

Additional Costs

The above costs are by no means the only costs companies have to absorb to stand any chance of succeeding.

For cannabis producers;

Your facility needs a team of talented growers to tend to your plants, a marketing budget, a sales team to ensure there’s demand for the products you produce, alongside the electricity to power your facility.

Cultivation operations in Missouri reach $150,000 in monthly electric bills with ease, as the environment in the Midwest isn’t suitable for outdoor growing like some cultivators in California are able to do. 

For cannabis retail stores;

Your store needs a team of knowledge budtenders & store managers, a budget to purchase inventory, a marketing budget to bring customers to your locations, point of sale software to remain compliant and many more costs.

Looking Forward

Since cannabis businesses can’t deduct traditional business expenses from their taxes, the cost to operate a cannabis company in 2022 is exponentially higher than it would be in a traditional industry.

These barriers to entry in the cannabis industry have many downstream consequences, such as making it needlessly difficult for people without access to networks of investors to succeed in this budding industry.

Unless we are to believe that the only people capable of building a successful cannabis company are the people who are well connected to capital locators — then it’s abundantly clear that such high barriers to entry into this industry will result in many of the best cannabis companies never being built.

Our Take

Sourcing capital in cannabis remains all too difficult, and the unfortunate reality is that it’s borderline impossible to succeed in the legal cannabis industry if you don’t have access to capital to cover the above costs.

The good news, nonetheless, is that it will become many multiples easier to access capital following the federal legalization of cannabis, however, this is little consolation to the companies struggling to source capital in 2022.

Seemingly, we will likely see many companies going under between now and the time it takes for the U.S federal government to enact this legislative change, however, long term we remain very optimistic that these issues will be resolved.