By Rey Mashayekhi
January 11, 2019

It took two years, numerous delays, and myriad revisions to the written law, but on November 20, Massachusetts made history as the first state east of the Mississippi River where adults can legally purchase marijuana for recreational use.

The grand opening of the state’s first two marijuana retailers—New England Treatment Access (NETA), in the cozy western city of Northampton, and Cultivate, in the small central town of Leicester—were an instant hit, for better and worse. Thousands of people from all over the Northeast flocked to the stores in the first few weeks, causing hours-long queues for customers as well as traffic and congestion issues that perturbed local residents. The retailers, overwhelmed by the demand, were forced to ration their product, be it “flower” (the recognizable green bud most popularly smoked by users), vape-able cannabis concentrate oils, or ingestible “edibles” that take the form of gummies, baked goods, and more.

But opening kinks aside, the Bay State’s legal pot business has been raking it in thus far. In just six weeks, customers spent nearly $15 million at the two locations and three others that opened their doors in 2018, according to Massachusetts’ Cannabis Control Commission (CCC), the independent regulatory body that oversees the state’s recreational and medical marijuana industries. With dozens of applications for additional stores in works, CCC chairman Steven Hoffman recently said he expects to see between four to eight new marijuana retailers come online per month moving forward.

The robust demand is sweet validation for Massachusetts’ cannabis advocates, who have endured a protracted rollout since the passage of the statewide referendum to legalize recreational marijuana in November 2016. Delays aren’t the only issue plaguing the industry. Sources tell Fortune that cannabis companies face an array of obstacles, from financial hurdles to regulatory barriers, that have made life more difficult than the booming business might otherwise suggest.

For instance, some retailers have confronted a sort of “pay-to-play” dynamic that some state legislators and marijuana industry players say is against the law. In striking deals known as host community agreements with the municipalities where they’ve looked to set up shop, retailers found themselves strong-armed into providing financial considerations beyond what’s permissible under state guidelines.

What’s more, Massachusetts marijuana businesses have been rebuffed by major financial institutions that are wary of falling afoul of federal regulations on what remains a Schedule I substance. With major banks refusing to provide the most elementary of financial services, retailers are forced to either rely on a limited number of state-chartered institutions or simply function as cash businesses.

“The stigma of cannabis is the umbrella under which all of this falls,” according to James E. Smith, a founding partner at Boston-based public policy law Smith, Costello & Crawford, which counts around two dozen recreational and medicinal marijuana companies among its clientele. “This is a very parochial, puritanical state—I know we’re very blue, but we have this long history of local control.”

The result, Smith added, has been an outsized level of regulatory scrutiny that has made it “very tough” for those who wish to sell cannabis products legally in Massachusetts.

HCA or No Way

The most contentious of the various obstacles facing marijuana retailers in the state has been the nature of the host community agreements (HCAs) struck between businesses and the municipalities in which they seek to operate. Retailers must have an HCA signed and ready in advance of seeking the CCC’s permission to open their business, putting cities and towns in an advantageous position to dictate the terms.

Under state guidelines, municipalities are able to command from retailers a “community impact fee” of up to 3% of gross sales, which are meant to offset “costs imposed upon the municipality by the operation of the marijuana establishment” on public services and infrastructure.

Yet numerous cities and towns across the state have succeeded in demanding and extracting more than that from cannabis businesses—either in the form of larger cut of sales or via a lump sum payment to the municipality or, in many cases, a local organization and charity that can cost tens of thousands of dollars.

Pro-marijuana lawmakers have already taken issue with this state of affairs. Massachusetts State Sen. Patricia Jehlen, who chairs the state legislature’s Joint Committee on Marijuana Policy, describes such arrangements as “illegal” in an interview with Fortune. Along with her committee co-chair, Rep. Mark Cusack, Jehlen wrote to the CCC in August and urged the regulatory body to review HCAs to ensure they were in compliance with the law. The five-member CCC subsequently voted against doing so, with chairman Hoffman expressing concerns over whether the body has the legal authority to review municipal agreements.

“It’s a barrier for businesses to get into operation,” says Jehlen, bemoaning the impact that additional monetary demands from municipalities can have on “small entrepreneurs without a lot of capital,” in particular. “It’s very expensive to set up these facilities; to add to that additional payments?” And as far as retailers donating money to local organizations and charities as part of their HCAs, she adds: “So-called voluntary contributions written into a contract are not voluntary.”

A CCC spokesperson tells Fortune that the body “continues to gather data on this issue” and had issued a guidance “to help municipalities and applicants work cooperatively to structure host community agreements in compliance with state law.”

But for many pot advocates in the state, that stance is far from adequate. Jim Borghesani, a pro-cannabis consultant who served as a spokesman for the 2016 legalization campaign, says that without real oversight, “communities can drag their feet on these agreements and there’s nothing the applicant can do about it except wait and hope that they eventually get one signed.”

“We’re seeing it in practically every host community agreement,” Borghesani says of the financial “sweeteners” that retailers have found themselves agreeing to in order to set up shop in Massachusetts. “[Municipalities] are playing this shell game of, ‘It’s voluntary, they don’t have to sign this agreement.’ But if they don’t make this contribution, they’re not going to have an agreement. [Retailers] know they have to give the town almost anything they ask for.”

One industry advocacy group, the Massachusetts Grower Advocacy Council, has said it is considering legal action that would force the CCC to review HCAs. Sources say there is talk that the state legislature could consider taking action that would explicitly ban the practice of municipalities demanding more than 3% of retailers’ gross sales.

For now, the status quo remains. As cannabis industry advocates claim that marijuana businesses are being unfairly squeezed, local politicians argue that they’re within their rights to bargain for more from retailers seeking to set up shop in their towns and cities.

“To be honest with you, we’ve got more interest [from retailers] than [recreational marijuana] licenses available,” according to Salem mayor Kim Driscoll, whose city saw its first recreational dispensary open in December. “I don’t think it’s gotten to a point where we’ve stopping anyone from doing business in our community.”

Driscoll says that while Salem used the state law “as a basis” in its HCA negotiations with dispensary Alternative Therapies Group, the city was able procure an additional 1% from the retailer for “transit enhancement funds” that will go toward funding shuttle buses and other transportation infrastructure improvements.

“We’re trying to be fair to our operators but also fair to the citizens in our communities,” Driscoll says.

Don’t bank on it

Walk into a dispensary in Massachusetts—or any other state where recreational marijuana is legal, for that matter—to try to buy cannabis products and you’ll soon discover that you can’t pay for the transaction with a credit card. All of the major credit card companies, and indeed most of the major national consumer banks and financial institutions, want nothing to do with the industry lest they fall afoul of federal laws prohibiting the purchase and use of marijuana.

It’s not just a consumer inconvenience. The commercial taboo around cannabis also hurts marijuana growers, cultivators, and retailers. Without institutions willing to accommodate them, the kinds of financial services that most businesses take for granted—checking accounts, payroll services, wire transfers, electronic bill payments—are unavailable to many in the marijuana industry.

“The challenge is that we have a legitimate industry at the state level but we have this dichotomy between federal and state regulations,” according to Tina Sbrega, the CEO of the Massachusetts-based GFA Federal Credit Union. “That’s why you see a host of financial institutions that are wary of getting into the business, because we still have this cloud of federal illegality hanging over our heads.”

GFA is one of only two state-chartered financial institutions in Massachusetts that are currently doing business with the recreational cannabis industry. (Representatives for the other, BayCoast Bank, could not be reached for comment.) Sbrega describes the credit union as “agnostic” to the passage of the state’s recreational marijuana laws—“We’re not condoning the use of marijuana,” she noted—and said GFA’s venture into serving the industry is actually motivated by the matter of “public safety” above all.

“We took a look at what it was like in Colorado when the cannabis industry did not have banking solutions, and it was the Wild West,” Sbrega says. “Imagine a growing industry that deals primarily in cash, without any banking solutions. Instead, they were taking their cash and were having to bring it home, bury it, put it in vaults. People in Colorado were walking around with backpacks full of cash, trying to turn that cash into money orders.”

With the goal of preventing “safety risk” inherent to having quantities of cash moving around Massachusetts’ communities, GFA announced in September that it would work with the recreational marijuana industry in the state. The credit union already has client relationships with five different cannabis businesses in the state and has more applications in the queue. While Sbrega is noncommittal on the possibility of GFA lending to the marijuana industry—“You’re always concerned if your collateral is going to be seized,” she says—the credit union plans to look into the matter this year.

The entry of financial institutions like GFA into the recreational marijuana business may seem like a matter of course, but it’s far from a formality given the stigma that still exists around the industry. Major national financial institutions have been known to take a hard stance toward individuals with even the loosest of associations to cannabis, going as far as to close the personal bank accounts of the spouses and family members of those who work in the industry.

AmeriCann CEO Tim Keogh’s company is building a 1-million-square-foot marijuana cultivation facility is Freetown, Mass. When his company was founded, he says, it was an ancillary consulting firm that “didn’t even touch the plant” or its supply chain. But that wouldn’t stop financial institutions from getting spooked at the slightest hint of marijuana-related activity.

“You run a charge on your card for a [cannabis industry] business conference, and that gets flagged and there go your airline miles,” Keogh says. He added that the relatively limited size of the cannabis market means that potentially running afoul of federal regulations “is not worth it” for major financial institutions. By contrast, state-chartered banks and credit unions like GFA have it “built into their DNA” to service the communities they operate in.

(On the topic of financial hardships endured by the marijuana businesses, Keogh, like others interviewed for this story, also cited Section 280E of the IRS tax code, which prohibits business dealing in Schedule I controlled substances from being able to receiving tax deductions or credits on their business expenses. Keogh described it as the “single greatest limitation” on the cannabis industry from a financial perspective, citing an “effective tax rate of 72% on all of [AmeriCann’s] revenues” as a result of the code.)

Meanwhile, former U.S. attorney general Jeff Sessions’ decision last year to rescind the Cole Memorandum—the Obama-era memo signaling that the Department of Justice would not enforce federal marijuana laws in states that had legalized the substance “in some form”—has only further heightened anxieties around doing business with the cannabis industry.

The STATES Act, a bill introduced in Congress last June by Sen. Elizabeth Warren (D-Mass.) and Sen. Cory Gardner (R-Co.), has sought to shift the pendulum of power back away from the federal government and toward the states. Sbrega says that while the passage of the STATES Act would “certainly reduce the cause for concern” for financial institutions wary of dealing with the industry, many would still be wary of regulatory requirements such as those mandated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). “There’s a lot of monitoring and it’s very labor-intensive,” she notes. “For every dollar that comes in, we need to know where that money came from.”

But as the state’s fledging recreational cannabis market matures, Sbrega says she expects to see more banks and credit unions enter the fray as they have in other states across the country. “In Colorado, there’s a handful of financial institutions serving the industry, but it took five years to get to that point,” she says. “In the first year, they had virtually no financial institutions. Now, it’s safe to say that any [cannabis] operator in Colorado can easily find a banking institution.”

That optimism is shared by the likes of Norton Arbelaez, a Colorado-based cannabis entrepreneur who now serves as director of government affairs for NETA, the retailer that opened one of Massachusetts’ first recreational stores in Northampton. Despite its obstacles, Arbelaez believes marijuana business has too much potential not to overcome them.

Consider Colorado, he says, a state with roughly 1 million less inhabitants than Massachusetts. It saw more than $1.5 billion in recreational marijuana sales in 2017—which means the cannabis industry could be sitting on “very conservatively, a $2 billion to $2.5 billion market in Massachusetts,” he says.

That’s good news for the community. “In a matter of two to three years,” Arbelaez says, “we’re going to see a fairly mature, healthy and diverse industry in the commonwealth.”

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