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Thursday, October 6, 2022

The promise and reality of recreational cannabis

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Following the passage of the Michigan Medical Marihuana Act in 2008, there was great confusion and a lack of follow up legislation in the state, at least until 2016, when there was the passage of the Michigan Regulation and Taxation of Marihuana Act, which allows persons age 21 and over to possess up to 2.5 ounces of cannabis in public, up to 10 ounces at home, and cultivate up to 12 plants at home. Among the package of bills then-Governor Rick Snyder signed into law in 2016, allowed for the operation and regulation of medical cannabis dispensaries; set a three percent taxation rate on medical cannabis; and permitted the use of non-smokable forms of pot, such as edibles, tinctures and topicals.

“In 2010, when I first began working in Lansing, I saw a big void in the education of what regulation could look like,” said Justin Dunaskiss, partner and COO, Dunaskiss Consulting and Development, a lobbying and consulting group in Oxford which got officially engaged in cannabis work in 2010. He said he saw illegal grows, basement grows, and illegal storefronts opening up around the state. He also traveled to Colorado and California, which had legalized cannabis, and saw what profitable operations could look like.

“Once I learned what the future could look like – and saw how the other states were operating – I sought out more of a free market approach here, so that big corporate interests couldn’t come in here. There needed to be residency requirements, there needed to have provisions for Michigan entities to have residencies and for tax purposes.

“It took six years of education – until September of 2016, until we could get the legislation passed and Governor Snyder to sign a package for medical marijuana. Then we needed to turn to look at what a regulated store would look like. As the medical market took form, the will of the people drifted to the adult market,” Dunaskiss pointed out.

When it came time to mobilize for the adult use recreational market, Dunaskiss said many of the same stakeholders from the original medical use proposal came together for the 2018 initiative – but there were also many new players, and some had conflicting interests.

“There were those who wanted to treat it more holistically, like a farmers market, a very laissez-faire attitude, without any government intervention,” Dunaskiss said. “We knew the legislature would not approve it.”

Some were looking to simply prevent their clients from being charged as criminals, while others saw the model of some western states, with tax revenues going to offset road repairs and other needs, as well as simple free market capitalism – the opportunity to make money in a new lucrative business.

“I started my practice in criminal defense and marijuana was criminal. I had become very well known as defending people charged with marijuana and using medical marijuana as a defense,” explained Barton Morris Jr., of Law Offices of Barton Morris and Cannabis Legal Group in Royal Oak. He said he had issues with his clients being charged as criminals, “especially with growing a plant which is hurting no one. I was instrumental in getting it legalized.”

Douglas Mains, a partner at Honigman’s Lansing office, helped draft both the Medical Marihuana Facilities Licensing Act and the Michigan Regulation and Taxation of Marihuana Act, and served of counsel to the 2018 proposal legalizing recreational marijuana.

“The sophistication level of the people in the industry has really grown in the last five years or so,” Mains said. Nonetheless, “there’s a tension now between the ‘true believers’ and the ‘guys in the suits.’”

Rick Thompson, executive director of NORML Michigan, a non-profit public interest advocacy group representing the interests of those who consume marijuana responsibly, said, “We were interested in stopping people from being arrested. All of the tax revenue and stopping the black market weren’t really big factors for us.”

Now that the legislation has been enacted, “Michigan is really an excellent model. There is permissive growing and opportunities for ‘mom and pops’ to get started,” Thompson said.

Norml also likes that municipalities have been co-opted for involvement. “It’s important for buy-ins,” Thompson said. “If they’re forced to have them, it wouldn’t work.”

Stephen Linder, executive director of the Michigan Cannabis Manufacturer’s Association, said one of the key components in writing and passing the legislation was for cities, townships and villages, “We didn’t want to force it on them. We built in an opt-in so municipalities could opt-in, at the time for medical marijuana, for what kind of licensing they wanted and for how many licenses. There are no caps for the number of licenses by the state. That law passed, but it did not eliminate the caregivers, because for people there was a genuine concern that the recreational market – which is now a $3 billion industry – that people would want to buy from the commercial side of the market. Caregivers don’t have to report where they are located, nor do they have to test their product.

“Fast forward, the regulated market, the one that has to buy the licenses, do the build-outs, pass inspections and test product – they’re the ones creating all the jobs and providing all the revenue, all the tax revenue and are competing against the people who do none of those.”

Like others involved with getting the recreational market up and going, Thompson and his colleagues looked at other states who had walked the walk before them, such as California, Oregon, Washington and Colorado

“Here we see the American dream being realized every day,” Thompson said.

Asked whether the legislation has been an empty promise or a golden ticket, Mains said, “It’s somewhere in between. In terms of the revenues and the black market, it’s still too early to tell. The market isn’t mature yet.”

For many others, their golden ticket is already being claimed, and faster than expected, with purchasers clamoring for products.

However, Thompson does have concerns that the natural evolution of the market is that “small businesses will get gobbled up. We like to think of cannabis as being unique, but it’s true as in any other business.”

Many in the business believe the new cannabis business is a highly-competitive business, “as cut-throat as you can find,” said one

Michelle R. E. Donovan, senior counsel at Clark Hill in Detroit and San Antonio, Texas, said, “I do cannabis nationwide, and Michigan has a model program, from a legislative, regulatory and distribution standpoint. Michigan set the standard. There is no limit on licenses, while other states do put limits on municipalities, like in New Jersey, which has ridiculous restrictions.

“Michigan is very cutting edge, and Michigan sets the standard for regulatory and compliance,” she said.

Donovan said the Michigan Marijuana Regulatory Agency (MRA), which works to establish Michigan as “the national model for a regulatory program that stimulates business growth while promoting safe consumer access to marijuana, it has come a long way since the board was first established. We (the industry) is in the process of compiling a set of statutes so there is cohesiveness between the medical and recreational industries. Right now, we have two sets of licensing, regulatory and compliances.”

While some are concerned the medical marijuana market will get squeezed out of the picture, others understand it will stay, notably because it is the only legal way for minors to acquire the product for medical means. Yet currently the medical market and its caregivers do not require the strict testing of product which the recreational market enforces.

“The only difference right now from the medical market and the recreational is there are higher standards for contaminants in recreational – heavy metals, mold, and pesticides can be in medical. They’re both from the same plant,” noted Linder.

Andrew Brisbo, executive director of MRA, said the intentions of the people, both voters and those seeking legalization, have been upheld.

“Both medical and recreational were based on voters initiatives. With legalization, there are less people utilizing the gray market and are accessing better product that they can now trust,” he said. “The local intent has been respected for municipalities. It’s created an efficient systems which has done well to protect the consumer as well as to allow businesses to grow and thrive. As for tax revenue projections, I think the industry has ramped up more quickly than expected, and we as an agency work to facilitate that. Businesses were prepared. There was a lot of skill all ready to move into the market. I think we’re in a period where there’s a lot of growth.”

While on its face, the lack of statewide limits for municipalities appears to give locals the ability to control their cannabis destiny, it also means that as communities become more comfortable with the legislation and business models and give out more dispensary licenses, it could lead to a region as a whole having more licenses than the market can bear – although Michigan is far from being saturated. An example would be if Royal Oak, Hazel Park, Madison Heights, Berkley, Ferndale, and nearby Warren all give out dozens of licenses in total – all appealing to the same customers.

Those in the business believe one of two things will happen: there will either be consolidation of businesses, or some of the dispensaries will fail.

“We all sell the same product,” noted Howard Luckoff, CEO of New Standard, with four dispensaries around the state, including in Hazel Park. “How do we differentiate ourselves? New Standard does it through our customer experience, selling both to the soccer mom and to the stoner. We have tried to distinguish ourselves. We don’t have salespeople – we have team members and educators. We ask people what they are looking for out of this experience. When you walk into a store, there’s a nice vibe, a nice feel, a nice smell.”

He likens their environment to a Shinola store or a Starbucks.

“They’re our customers, they’re like guests in our home. We’re guiding them to find the right mix for them,” expanded Mary Turon, New Standard COO, a cannabis expert who previously operated dispensaries in California and Illinois. “It’s a lifestyle. It’s not just about smoking, it’s about edibles, oils, topicals and tinctures, which you put under your tongue. As new products come on the market, our team members need to be retrained.”

Aric Klar, CEO of Quality Roots, has 10 recreational dispensary licenses in different stages, including for Berkley and Waterford, which will open in 2022. Quality Roots currently is operating in Battle Creek and Hamtramck. Klar grew up as the son and grandson of pharmacists, managing drug stores in high school and college and then started the toy chain Toyology.

“I grew up in this family regulatory environment, and saw where large conglomerates came in,” he said. His grandfather’s store, Sherman Drugs, at Maple and Lahser in Bloomfield Township later became Perry Drugs before Rite Aid took it over; his father and mother owned Warren Drugs in Farmington Hills which was eventually sold to Sav-Mor Prescriptions.

When he was 12, his parents gave him four-feet of the store to put in a Beanie Babies area at the height of its craze – “I turned it into a 7,000 square foot toy area,” he said, and Toyology was born.

As to the possibility that large cannabis conglomerates could come in and attempt to gobble up smaller players, Klar answered, “If I can compete with Amazon in the toy business, I feel I can compete with the cannabis competitors in Michigan. The approach we take is going back to what I learned in the pharmacy business – knowing everyone’s name and being a specialty business. We’re not a cannabis brand – we’re a community brand that sells cannabis.”

Klar believes larger out-of-state players will take time to learn the Michigan market. “This industry changes so fast that it’s very important to follow the changes,” he noted. “We’re operating a family owned-and-operated business, not a conglomerate.”

Rick Thompson of NORML Michigan thinks the downward spiral of cannabis pricing has made companies less profitable, so they could be more likely to sell out, “similar to what can happen in any other industry. The cost of financing is a big deal, and some market forces can force you into a sale mode. But there are a lot of successes in mom-and-pops opening two, three, four franchises. But that is more attractive to a California company who wants to buy a bunch of franchises so they can get their name in the marketplace rather than creeping into the marketplace,” Thompson said.

Others, like Luckoff of New Standard, believe there will be room for both chains and the independents, just like for pharmacies. “There will always be room for both.”

Dunaskiss likens it to the Michigan craft brewery business. “There are a lot of parallels. No one thought anyone could compete with Molson’s or Budweiser, but now it’s the opposite. The same thing is happening on the cannabis front,” he said. “The large publicly traded Canadian cannabis companies grew too fast, and the customer now wants smaller craft growers. The customer base is drifting to smaller, more niche product.”

Attorney Michelle Donovan concurs. “There’s enough demand that you can have a craft product or something that is a nationwide product. It’s a consumer’s preference.”

There are a little over 1,700 cities, townships and villages in Michigan, but according to Dunaskiss, only about 160 of those municipalities allow any sort of adult use facility in their community. About 175 municipalities permit medical marijuana dispensaries, including Detroit, which permits medical facilities but has not yet allowed adult use licensing to move forward.

Dunaskiss noted, “It’s still a slow process (working with the municipalities), and it will be a slow trickle over the next few years because we have not seen the process moving forward. It’s about a 12 to 18 month process for a municipality from ‘maybe we’ll do it,’ to drafting ordinances to pulling permits and opening doors.”

He pointed out it recently took Royal Oak 10 months just to create their ordinance to permit dispensaries.

“More and more are seeing the benefits to having facilities and creating ordinances as to where to put them, from rural to urban,” Dunaskiss said. “A retail cannabis shop opening up in a town can help restaurants and shops by revitalizing interest in a town.”

He pointed out that Orion Township, which was an early adopter of first medical marijuana, and then recreational marijuana, provisioning centers, “were very strategic of where they wanted them. They knew they could entice developers and businesses to areas where it makes sense for the area. Through those endeavors, they were able to raise hundreds of thousands of direct fees for licensure in addition to hundreds of thousands in property and other revenue taxes. Over 100 new jobs have been created as well.

“The new cannabis revenue, combined with the tipping fees from the local waste management facility, paid for the new township hall,” Dunaskiss said.

There are five different kinds of adult use recreational or medical marijuana licenses that can be attained in Michigan – cultivation and growing; processing; provisional centers; safety and compliance laboratories; and transportation.

In order to hold a license, there no longer is a residency requirement, which was in effect for the first two years of the law. What can be an issue is banking – which, because of the federal prohibition against marijuana, can create obstacles both from the lending side to the deposit end. But things are beginning to change as banks recognize the opportunity for profit.

“It’s up to each state to set up banking regulations. In Michigan, it’s come a long way,” Donovan said. “When this first began, it was one thing. Now, some are working with them, as long as they are not federally-insured, like FDIC, so a credit union or a state-chartered bank.”

Luckoff said they have never had an issue with banking.

“The issue with banking was fees, because they had to deal with compliance,” he said. “The fees have come down. We can now use retail and national banks. The national banks are even soliciting cannabis businesses. The national banks are offering commercial financing. Banking has come a long way.

“Day one, when we started, we started with a credit union, and then moved to a bank,” Luckoff continued. “We have great relationships. It makes it a little safer, because it’s a cash business for customers. MasterCard and Visa still don’t allow purchases at cannabis locations. This way we have a safe place to put our cash every day. It also helps to change the stigma of cannabis, as businesses like banks are working to catch up with the cannabis business.”

A marijuana processor is licensed to possess, process, package, and store marijuana. Processors purchase the marijuana from growers, then extract resin from it, and create marijuana-infused products. Processors are also licensed to sell, transfer, and purchase marijuana from other state licensed entities.

Also known as a dispensary in most other states, a provisioning center for marijuana is a state operating license that authorizes the purchase or transfer of marijuana only from a grower or processor, and sells it to the public, over the age of 21.

A micro-business is an entity that is licensed to cultivate, process, and sell products from up to 150 marijuana plants, as long as they do it completely in-house. The plants are processed, packaged and sold to individuals who are at least 21 years of age. They are not authorized to sell or transfer products to marijuana establishments. These micro-businesses cultivate, process and sell the marijuana out of their own storefront. These dispensary business owners are not allowed to have more than one storefront, and are not able to obtain more than one license type.

While businesses can hold more than one kind of license, they cannot have a testing or transportation license if they have a retail, processing or cultivation license. That was purposefully done to prevent fraud or the appearance of impropriety.

“We own a processing, cultivation and have nine retail operations all over the state,” Luckoff said, “but we cannot transport our product and we cannot own a lab.”

A key difference to purchasing legal recreational cannabis from a licensed purveyor is the requirement by the state that all product be tested. It’s called seed-to-flower testing, designed to provide a pure and quality product for the consumer, without mold, toxins, heavy metals and other hazards. Most believe it is a system that is successful – as evidenced by a recall issued in November 2021 by the Michigan Marijuana Regulatory Agency after unreliable and inaccurate results were discovered in products tested by Viridis Laboratories.

“All of our flowers are tested, and we do not sell any remediated product,” said Brittany Yaffa, chief marketing director for Pure Roots, with offices in Birmingham, stores in Ann Arbor and Centerline, and 13 licenses on their way. “When you go to test to get it on the market, if the flower does not pass the state regulators’ testing, cultivators are given the option to retest to save their crops. So cultivators have to do something different to pass, and that process is called remediation.”

Yaffa described the result as similar to having a partially eaten container of ice cream that eventually gets freezer burned. “You scrape that off, and it tastes good. That’s similar to the process,” she said.

Common remediations, she said, are using ozone gas, hydrogen peroxide baths and other processes on the weed. “It’s like thinking you have a moldy loaf of bread, and you put it in an ozone gas machine and it takes it away,” she said, noting the mold, mildew and other toxins are still there.

She said some states will not permit remediated products to be sold in licensed dispensaries, “and that is where we would like the state to be headed. It protects our customers from smoking or inhaling microbial particles.”

Every dispensary is given information about the cultivator by the MRA, and is notified if the marijuana has been remediated by putting a triangle next to the product, so the buyer is notified. “At that point you can decide to buy or not, or to negotiate a better price,” Yaffa said.

“The giant stain on the Michigan cannabis program is remediation because it can hide bad gardening processing and remediation can hide cannabis that has failed testing,” pointed out Thompson of NORML MI. “As a consumer advocate first, consumers do not want cannabis that has been X-rayed or sprayed to kill the creepy crawlies to make it palatable.

“Our system allows remediation at multiple points in the cannabis lifecycle because it’s financially devastating if your cannabis fails and you have to throw it all away,” he said. “Remediation is a way for businessmen to save their losses.”

“Right now there’s a lot of guessing in testing. It’s just a fact we have to accept. The industry is so new and we don’t know what is safe or not because the federal government hasn’t permitted studies to determine what chemicals and heavy metals levels are safe,” noted attorney Barton Morris. “It’s going to take time – decades – and federal legalization – to understand the chemical impact.”

Whether due to the COVID-19 pandemic, or to the increasing level of comfort and acceptance towards cannabis, as of 2020, the first year recreational marijuana was legal in Michigan, it was estimated to be a $3.2 billion industry, according to a study done by Anderson Economic Group for the Michigan Cannabis Manufacturer’s Association. According to Executive Director Stephen Linder, one third of the marketplace was the legally licensed marketplace; one third of the marketplace was product from caregivers, sold in excess of their medical patients in what is called a “gray” market; and one third is the illegal black market.

“Two-thirds of all cannabis identified was sold outside of the licensed marketplace,” Linder said. “That’s not creating jobs, not providing tax revenue, it’s not tested product. It’s an underground economy.”

So one promise of the legislation – to rid the state of a black market – has not occurred.

“It’s a bad thing and it’s only going to get worse because the statute did not lay out penalties, so it’s not prosecutable,” said Oakland County Sheriff Michael Bouchard. “Two things in a marijuana business is cash and drugs. The product is valuable and there’s the cash. In other states, we’ve seen where they kill the salesperson, steal the product and take the cash.”

Bouchard said they have had multiple houses blow up because of hash oil extraction in residential neighborhoods.

“The pot is grown from the basement to the attic. They’re illegal grow operations. There’s no testing. They smell, there’s black mold and they’re hazard scenes,” he said. “They’re kicking sand in the faces of anyone who is doing it correctly.”

A major reason, according to numerous sources, is due to excess supply by medical caregivers. Currently, medical marijuana does not need to be tested, as recreational cannabis does, so there potentially could be pesticide or other metals or toxins in it. However, it’s also not taxed – meaning it’s cheaper for some consumers.

Bouchard echoes that a major area of crime in the marijuana black market is caregivers with “tremendous amounts of pot who are undercutting people. The legislators have done nothing. We have seen this problem across the country. Pre-legalization, our attention was focused on traffickers, not users. The legislature needs to write a comprehensive law that protects businesses, pushes out illegal use and grow operators out of residential neighborhoods.”

“There are about 25,000 to 35,000 caregivers in this state who are growing tremendous amounts of medical marijuana, and some of it is going into the black market, although I prefer to refer to it as the unlicensed and unregulated market versus the black market because marijuana is legal,” said attorney Barton Morris. He noted that more than half of the state’s caregivers are providing an excess for people other than their patients “so by law they’re not caregivers. It’s no different than a doctor operating a fraudulent pill mill, who is not acting as a licensed doctor. A majority of registered caregivers are funneling unlicensed, unregulated product to consumers. Marijuana has been an illegal, controlled substance since 1970. Some people say it has always been untested. But it may have pesticides, mold, heavy metals – these are things that can hurt you.

“Many people prefer to go to a licensed dispensary where the product is tested, there is more diverse product and knowledgeable salespeople,” he noted.

Attorney Douglas Mains isn’t as sure.

“I don’t think we’ll ever get rid of the black market completely – it’s in our country’s DNA to resist regulation,” he said. “Cannabis is unique that people have used it for decades, there’s a loyalty and trust if they’ve been buying it from their local dealer. As the system evolves and grows, it will become easier to go to local stores, which are well-lit, have no crime, and prices aren’t much higher. They’ll get used to it.”

The goal for the industry, now, is to rid itself of excess untested product by passing the Marijuana Safety Act, Linder said. “It’s our number one priority, which licenses the caregivers. We don’t want them out of business – we want them accountable. These bills will decrease the number of plants in the house to 24 from 72. If you have more than that, you have to move to an industrial or agricultural setting.”

In addition, they must report their address, which will allow for accountability as well as for tracing by law enforcement and Marijuana Regulatory Agency.

“They aren’t supposed to sell their product. They do,” Linder said. “We’ll say they can, not be charged tax, but they must have their product tested. People who stay in their homes can be exempted from testing.”

The act would permit specialty marijuana growers to have more than 24 plants and up to 96 plants, as long as they test.

Linder noted that as an added benefit, it will provide a lower barrier for entry for disadvantaged communities for social equity. “The license to get in is only $500,” he said, compared to thousands of dollars in the current recreational market. “We’ve made a lot of concessions to right-size the market.

“We’re not trying to reignite the War on Drugs,” Linder said. “We’re trying to get everyone to play by an accepted set of standards.”

The Michigan Cannabis Manufacturer’s Association decided to do bipartisan polling and focus groups to determine citizen’s perspective about marijuana, with Greenberg Quinlan Rosner and Public Opinion Strategies coming out with a statewide survey report in August 2021 that showed overwhelming support, “both broad and deep,” for regulating medical marijuana to the same standards as recreational marijuana.

Their survey showed strong bipartisan support (61 percent) for testing, as well as location and licensing. Linder noted they believe the bills will pass.

“If you look at pot like liquor, it’ll get better,” said Michelle Donovan of Clark Hill. “It’s catering to an untested market, as well as minors. Eventually, the more industry is regulated, that will fade away, just like we no longer buy bootleg booze on the corner. Marijuana, cigarettes and alcohol are all taxed. (The black market) will eventually get squeezed. Ultimately, people want to be regulated – they want to be legitimate.”

Source: https://www.downtownpublications.com/single-post/promise-and-reality-of-recreational-cannabis

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