The State of Massachusetts Cannabis - 6 Years Later

Welcome, Max.
Max Borg:Thanks. I'm really happy to be here.

EA:Max. What were some of the concerns of Massachusetts residents about the legalization of recreational cannabis, which is now about six years later, and have any of those concerns been proven true or proven false?MB:Yeah. In terms of concerns, there were many. Ever since the cannabis prohibition almost 100 years ago, there have been many stigmas surrounding the dangers of the plant, as well as its potential dangers to society. When cannabis was originally legalized in Massachusetts, particularly for adult use or recreational use, opponents of legalization were very concerned that society would somehow fall apart and that introducing medical, and ultimately adult use dispensaries into the communities would cause a drastic spike in crime rate or health issues. There's no data at this point to suggest there's been any correlation between cannabis legalization and increased crime rates.

And to the contrary, the cannabis industry here in Massachusetts has been a major economic driver. To date, there has been 226 million in total adult use sales, as well as 2.7 billion in total adult use sales since commencement of operations. There's also been over 700 million in medical sales since March of 2019, which is to say that this has been a major driver of revenue here in the state, and driver of tax revenue. And that's in addition to the tremendous job creation here in the state.

So to that point, I think folks here in the state are very happy with the results of legalization and its propensity to generate revenue and jobs for the state.
EA:So Max, what were some of the issues the first licensees encountered?
MB:There were a number of issues the first licensees encountered. First, just finding properties that fit within the regulatory and zoning requirements within towns that did not opt out of the cannabis licensing regime was a challenge for the early licensees. Here in Massachusetts, towns and cities have the choice whether to opt out of the cannabis program, effectively prohibiting licensees from entering their markets. And what this did was limit the number of locations in which licensees were able to operate, just creating the practical reality of a limited number of real estate options. A limited number of parts of towns as a result of the regulations limitations on where licenses could be specifically located within towns. So I think at the outset, one of the challenges was just finding the right place to open.

Then once folks were able to find the right town or potentially the right location within a town, another issue that licensees had was dealing with the local governments. One of the unique facets of the Massachusetts program is the requirement to enter into what's known as a Host Community Agreement with the towns and municipalities. What this is, is a contract between the license holder and the town that specifies the economic terms by which the license holder must abide in order to operate in the town.

And so the terms of these Host Community Agreements can vary pretty significantly across municipalities. And so that created an issue where it was taking a lot of time, potentially, to negotiate these agreements. And sometimes the terms of those agreements actually made it quite challenging for these licensees to maintain profitability. And there has been discussion within the Massachusetts legislature about the idea of putting the Host Community Agreement process under the purview of the Cannabis Control Commission, or the CCC to give them a little bit more oversight over this process.

Another difficulty initially and frankly, it remains a challenge today. Has been the ability of license holders to gain access to the capital markets, or raising capital to fund their projects. And this is not necessarily unique to Massachusetts, but there's a few critical issues that licensees faced. One of which was finding banks that were willing to hold and bank cannabis funds. That has certainly improved over the years as the program has developed. And now we're seeing banks that are increasingly active in the space and even beginning to lend within cannabis.

But really finding investors that were comfortable investing in cannabis businesses was a challenge at the outset when there was a lot more uncertainty as to investing in a business that is illegal on a federal level, but legal on the state level. A lot of investors had concerns about how that might impact their investment, and also what some of the risks associated with those investments were. But we're beginning to see an increased level of comfort in the capital markets as this market continues to develop, and investors are able to see that there's tremendous upside and potential in this marketplace. The reality though is, until the federal government passes safe banking or another type of legislation that's going to ease the process by which banks can become involved and really bank cannabis companies, it's going to continue to be a challenge for cannabis companies to raise capital.

Another challenge at the outset and this, in my view, the CCC has really improved upon. Is it just took a while for licenses to be processed and finalized and approved, to enable companies to actually commence operations. And that's the reality of a new program, learning what the efficiencies and inefficiencies may be when there might not be enough funding for these regulators. It just took longer, I think, than some had hoped at the outset. But what is a positive development is, I think many people here in the state are viewing the CCC as moving really efficiently right now. And it's been really helpful for the industry.
EA:Are landlords in the state more open to renting facilities or space to dispensaries or cultivators than they were six years ago?
MB:There's issues on both sides, it cuts both ways. On the one hand, landlords here in the state have seen the success of cannabis licensees here in the state. And so while some may have been more hesitant in the past to involve themselves in the cannabis industry, I think a lot of these landlords are seeing the upside in being a landlord to cannabis tenants. On the other hand, as I mentioned earlier, given the fact that there are a number of towns and municipalities that have opted out of cannabis, there's a limited number of available properties to become a tenant as a license holder. And so the reality there is it creates the conditions for potentially expensive real estate if you're a tenant.

And as a result, I always try to advise my clients when they're in the capital raising stage or structuring stage, that to the extent that they can, if at all possible, it's a truly valuable asset to hold your own real estate as an operator. It just creates a great level of optionality moving forward when you are in control of the property and not subject to the terms of these leases, which may be restrictive on build outs and economic terms. It's a major advantage when operators are able to hold their own real estate.
EA:How long after the state legalization was the first sale of cannabis to a consumer?
MB:Adult use was legalized in late 2016. And the first adult use sale was in late 2018.
EA:That's a very interesting answer, because in New York and New Jersey, we're going through that right now, where it's been legalized, but we haven't gotten to the point of sale yet. So I was curious of the answer in Massachusetts' experience.

What trend are you seeing develop in the market, and how might the state's regulatory framework have caused these trends?
MB:Yeah, there's a few. One interesting trend that I'm seeing is here in Massachusetts, while we have what's known as a license cap, or the Rule of Threes, where on the adult use side, as a license holder, you're limited to 100,000 square feet of canopy, or of cultivation space, three dispensary licenses. While it's limited on a license-by-license basis, there is not a limit on the total number of licenses within the state. And so what's happening here in the state is there are a large number of dispensaries coming online, growers and processors coming online. And it's beginning to saturate the marketplace, to an extent. And what we're seeing is a number of license holders that may have anticipated profit margins at a higher level, are beginning to see the pricing come down.

And so what's happening is the relative values of these companies that are operating in the state is beginning to go down. And that is just a reality of a regulatory framework, where there's no limit on the number of stores that can open. There's no limit on the number of growers and processors. And that is contrary to the conditions when the state originally went adult use, where there was a major limit on products, particularly on the wholesale side. When you have a limitation on 100,000 square feet at the outset, combine that with the fact that the CCC may not have been moving as quickly in the beginning, there was just less product on the market. And so what that did was it created the conditions for the highest wholesale cannabis pricing in the country. And so that drew a number of potential operators to the state, seeing it as a tremendous opportunity. But like I said, now, what we're seeing is a number of new operators coming online.

Now, to step back a little bit to the point about the license cap, and what we refer to here in Massachusetts as the Rule of Threes. Another thing that has happened is a lot of these multi-state operators, or known in the industry as MSOs, were able to enter the Massachusetts market a few years ago, and they relatively quickly were able to max out their cultivation, manufacturing, and dispensary ownership. And I think the effect that has had is it has somewhat reduced the M&A activity here in the state.

Just because when you have these groups that are really well capitalized and have a lot of access to capital, when they're all maxed out on the number of licenses that they can hold, the result is just a somewhat limited number of potential buyers. When some of these local and smaller operators had thought that they might be able to sell their businesses, the practical reality is a lot of these potential buyers were already capped out. So it definitely has had an effect on M&A activity here in the state.
EA:Max, I recently read that in Massachusetts, tax revenues from cannabis now exceeds that of alcohol. Was it expected to happen so soon?
MB:This really depends on who you ask. When you make a previously illegal substance legal, there's going to be a huge demand. And the results have been great for the state. There's currently over 20,000 active marijuana established agents or jobs. So it's just been tremendous job creation, and that's not including ancillary businesses, which is another major catalyst for job creation. But whether it was expected, some would say yes, some would say no, but at a minimum, everyone is thrilled that this new industry has brought such tremendous tax revenue here to the state.
EA:There is a discussion about social consumption sites, or cannabis cafes becoming a reality. What will it take for this to happen, and is public opinion in favor of this or against this?
MB:Well, the CCC recently requested legislative action on this front, and the state legislature does have a bill before the state Senate. So everyone here in the cannabis community is keeping a close eye on the progress of this, but it remains to be seen whether this will actually become a reality in the near term. The issue here in Massachusetts is that you can't consume cannabis in public in Massachusetts.

And this creates a problematic situation where people can legally buy the plant and possess the plant. But if they rent in a housing community that prohibits cannabis consumption as most landlords do, you have residents stuck in this gray area without anywhere to consume it. And so hopefully this will move forward, and quickly, but it's difficult to predict the speed with which the legislature may act.
EA:Max, our last question for today is, do you see federal legalization in the near term or long term?
MB:In my view, when you talk about federal legalization, I would not predict it to occur within the next three years. It could, but I do not see a strong likelihood of that being the case. It's important to keep in mind as we talk about cannabis and I think many folks who are listening to this podcast and people within the cannabis industry, we view cannabis as an incredibly important issue. But the reality is at the federal level, it's just not the top priority at the moment. You look at the war in Ukraine, folks in Congress are focused on other issues than cannabis. And to bring forward legislation that would legalize cannabis at the federal level is just not on the table at this very moment in time.

It's possible in the next three years, I think three to five years is a realistic timeframe, but it's impossible to predict when Congress will act, if at all. There is a possibility that Congress might move forward with the Safe Banking Act in the next year or so, which would really ease the process by which banks would be able to transact in cannabis. Safe banking would effectively harmonize federal and state law by prohibiting federal regulators from taking punitive measures against depository institutions that provide banking services to legitimate cannabis related businesses and ancillary businesses. But it's very difficult to predict how Congress is going to act.

The one other piece to keep in mind when talking about predicting federal legalization or predicting how Congress might act is there's so much momentum on a state-by-state basis. When you continue to see more states coming online each year, the result is that you're going to see more and more federal legislators that have constituents back home seeking for them to push forward and legalize cannabis. But as I said, right now, Congress has more pressing issues to deal with.
EA:Yeah, I would agree with you 100% there, Max. And thanks for joining me here today, Max. Thanks for listening to CannaCast, as part of the EisnerAmper podcast series. Visit eisneramper.com/cannabis for more information and podcasts. Join us for our next CannaCast podcast, where we'll discuss other budding issues.

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