So you decided you want to join the green rush and open a marijuana facility? This could be the decision that changes your whole life for the better, if you do it right. Now that Michigan has passed legislation allowing for Recreational Marijuana, it is an excellent time to get involved. Here are the main things you need to consider as you begin your journey to finding your green zone.
Before you make any moves in the marijuana industry, you should have a very good understanding of the different types of marijuana businesses, and which one you want to operate. The state of Michigan segments marijuana businesses into a few different categories and each one is only allowed to perform certain types of activities.
In general, you will be choosing between
Cultivation - growing, harvesting, and drying the plant
Processing - any sort of extraction, making edibles, oils, tinctures, etc, falls under this category
Dispensary - the retail storefront where consumers are allowed to buy marijuana product
Safety Compliance - the testing facilities that check for contaminates and ensure the product is safe before it is sold to consumers
Secure Transport - the transportation company that moves marijuana product and money between various businesses
MicroBusiness - retail store front that grows all of it’s own product onsite (similar to a brewery)
A common reason that people get into the marijuana industry is because they have a passion for the plant. For some, it symbolizes helping people, healing, and nurturing. To others, it is an action of defiance against an authority that has prohibited it for so long. In some situations, it is purely a money play.
Regardless of the reason that you were initially drawn to the marijuana industry, you still have to choose a segment of the industry that you can love enough to do it every day.
Are you really skilled at marketing and customer experience? Opening a dispensary or a microbusiness might be perfect for you. Do you lean more towards logistics or process-based operations? A cultivation facility or transportation company may be right up your alley.
Sometimes, depending on the local rules and your personal ambition, there is also the potential to operate two or three facility types at the same location. This is referred to as vertical integration or co-locating. There are pros and cons to structuring your business this way, and it’s not the right move in all situations.
If you would like to learn about the different license types and strategies in more detail, we have a full article outlining Michigan Recreational Marijuana License Types and Vertical Integration In The Marijuana Industry.
Marijuana-related businesses are not inexpensive to open. You will pay a premium for everything, from real estate, to insurance, to bank accounts.
While everyone wants that fancy dispensary on the busy corner in metro Detroit with the $10 million dollar price tag, the nice location a few hours outside of the city for $400k might be more realistic.
When you find the perfect location, you want to make sure you have the money available to pull the trigger. Sellers are not going to take you seriously if you are trying to tie up their property while you go fundraising, and good deals do not last very long in this industry. The buyers that get properties are the ones that have their ducks in a row, can prove they have the cash in the bank, and are ready to put down non-refundable deposits to show they are serious.
If you don’t have enough cash to open the operation yourself, there are various different options you can pursue.
Private Lending - Because of the federal illegality of marijuana facilities, this is the most common method of borrowing money in the marijuana industry right now. In a nutshell, you borrow the money from family, friends, or private investors that want to make a return from the industry, but don’t necessarily want to operate the facility. They will often put a mortgage on any property or other assets that the business has in order to secure their investment, but this is negotiated on a case-by-case basis. You can expect to pay anywhere from 12 - 18% interest if you borrow money from a private lender in the cannabis industry.
Partnerships - There are many people who don’t have enough capital to bring a cannabis operation to fruition, or are lacking the expertise to operate all aspects of the business. A common solution to this is to find a partner or two and go into business together. If you don’t know anybody in the industry yet, go network. There are many cannabis business groups that have been created over the past several years, and they are a great place to meet other people who are already in the industry or are interested in getting in.
Bank Loans - While there are very very few banks willing to lend to marijuana businesses, they are out there. These are typically going to be smaller local banks or credit unions. Your best bet here is to talk to one that you are already banking with, or get a local referral while you are networking with other operators. While it is unlikely, you might just get lucky.
There are two levels of licensure at the state, and at least one at the municipal level.
First, is the state prequalification. This is where the state goes through the applicants' finances with a fine tooth comb, reviews all of their businesses and partners, completes the background check, and basically scrutinizes every aspect of somebody’s life. And I mean every aspect. I had a client that had a boating ticket when he was a teenager, and they made him go back to that city and get a copy of the ticket, and submit an explanation of what happened. It’s crazy. They have loosened up a little bit recently and have started pushing applications through, but the first ones to get processed were taking up to a year to go through the review process.
When somebody says they have a license but they don't have a location yet, this is often what they are referring to. It is not actually a license, it is a prequalification saying that they can get a license, after they find a location and the city approves them. Many cities are requiring this before you can even apply for a municipal permit. This pre-qualification is not transferable between people or entities. Every person needs to go through this process if they have more than 10% interest in the company, even if it’s indirectly like a landlord taking a percentage of profits as rent payment, or a consultant with a sales based fee structure.
While it is not absolutely necessary to start your prequalification before you find a property, you don’t want to find a property that you love and then find out the municipality won’t let you submit an application because this isn’t completed. This is especially important in municipalities where permits are limited and competitive.
Now that you know what type of facility you are going to open, and you have the money available to make it happen, it’s time to start looking at where you want to open. The geographical location of your marijuana facility is crucial, many reasons. Logistically, it usually makes sense to be close to your customers, and far from your competitors. However, your choices are going to be significantly limited by the laws and ordinances at the city level. You will need to find municipalities that are opted in, allowed the facility type that you want, and still have permits left.
In Michigan, municipalities have the option to allow or prohibit each type of marijuana business. Even though marijuana has been legal in Michigan for several years, most municipalities are still prohibiting marijuana businesses from opening within their borders.
To outline the rules the govern marijuana businesses, the municipality drafts and adopts a Marijuana Ordinance. These ordinances set the rules of operation for medical and recreational marijuana business owners. Most importantly, they outline the number and type of permits that are going to be issued within the municipality, and what the requirements are to get one. Most cities that allow marijuana facilities at all have a limit on the number and types of locations that will be permitted, and they typically go fast.
The typical marijuana ordinance contains the same general information, outlining the types of facilities allowed, how many can open, and discussing the specifics of operation rules ranging from what hours they may operate, to the building requirements each facility type must meet.
Here is a link to our list of Cities In Michigan Allowing Marijuana Facilities
You will also want to review any amendments that were made to the zoning ordinance. The zoning ordinance is a second document created by the city, outlining which facility types can be located in each zoning district. If your facility is located in the wrong zone, your license application at the local level will typically be denied immediately.
Cannabis operations are often limited to industrial types of zones, but this can vary with each municipality. The zoning ordinance typically also includes regulations on how far the facilities have to locate from churches, schools, parks, etc, which are called buffers. In many cases, this buffer also prevents dispensaries from being within a certain distance of each other.
It’s not enough to know how many feet a facility has to be away from a school, you also need to know how the municipality measures that distance. The most common measurements are parcel to parcel, right angles along the road, and building to parcel. You can see from the example, the buffer distance is much shorter when measured from parcel to parcel than measured with right angles. A 500 ft buffer measured from parcel to parcel is very different than a 500 ft buffer measured with right angles.
In addition to zoning, there are other types of restrictions that cities will put into place. This should all be outlined in the marijuana zoning ordinance.
Some other restrictions that you will come across are regulations on building square footage and property acreage. Detroit has restrictions in this area for example, with a cap on their building size of 50,000 sq ft.
There are a few other ways that cities will limit the number of facilities coming into a municipality. They often cap the number of permits, but they can also put a moratorium in place, which means they just completely stop taking applications. Other times they put a buffer between facilities, so once a business is approved, nobody can open up within a certain radius.
Another item to be on the look out for is whether a municipality requires applicants to have completed the state prequalification process before applying. Many municipalities are requiring that applicants be pre-qualified by the state before they can even submit an application at the local level. Some are requiring that the applicant submit for pre-qualification within a certain timeline after getting the approval, and others are requiring that a full state license be issued within a certain time.
Many municipalities put an application window in place. That means that they will accept applications during a certain timeframe, and then they are done. Some will accept applications until all permits are issued, if they have a cap on permits. Others will take applications indefinitely.
You also need to understand the city’s selection process. Is it going to be a lottery? There have been some cities that are literally drawing winners out of a hat. Some, like Warren, put a point system in place and graded applicants based on their applications. This usually ends in a lot of lawsuits. Other cities like Ferndale went with first come first serve. There are often people camped out in these lines for days to ensure that they are first in the door when the application window opens up.
When you are choosing the municipality that you want to operate your marijuana facility in, you will need to confirm that they allow the type of marijuana facility that you want to open, that they still have permits available for the type of facility that you want to open, and that you can meet the requirements put in place by the municipality to obtain one of their permits.
There are many websites marketing ‘green-zoned’, or ‘well-rooted property’, without having completed any research or verification on the qualifications of property at all. There are companies that market themselves as real estate brokerages that are actually unlicensed and illegitimate, and many ‘consultants’ that may or may not know anything about finding a property that actually qualifies as a marijuana facility. Make sure that you complete your own due diligence on any real estate that you are going to purchase, and confirm with the municipality yourself that it actually qualifies as a marijuana facility.
Researching municipalities and their marijuana regulations can be extremely time-consuming and tedious. When you purchase a property from Bricks + Mortar Cannabis, we have already completed that work for you. We internally vet all green zone property listings, check ordinances, and confirm with the municipality. You can filter available green zoned properties by the type of marijuana facility that is allowed at that site, and choose a property closest to the area that you are targeting for your facility.
Now that you understand the Marijuana Facilities Ordinance and the Zoning ordinance, your next step is locating a property that is in the right area, meets your needs, and is in compliance with both state and local laws. At this point, it may seem like you are looking for a needle in a haystack, which in some cases, you are.
Each recreational marijuana facility type has a different type of ideal real estate. For example, the most sought-after dispensary property is a stand-alone, small-scale retail building. Preferably it will have no shared walls, its own parking lot, and is highly visible on a busy street.
Conversely, large industrial warehouses with high ceilings and heavy power are typically ideal for marijuana grow and processing facilities. If you are opening an outdoor marijuana farm, you will probably be looking for something with a lot of acreage and privacy in a southern climate.
Our list of Marijuana Real Estate For Lease And Sale will help you get started in your search.
Finding property to lease as a marijuana facility is often even more challenging than finding real estate to buy. There are several reasons for this.
Some people still aren’t comfortable with marijuana in general. They may have concerns about crime, religious beliefs prohibiting it, or any number of other personal reasons why they don’t want to have a tenant in the marijuana industry.
However, it is often business related. In many cases, landlords have debt on their buildings, which means they are bound by the rules put in place by a federally regulated bank that has a mortgage on the property. This can put the landlord at risk of having their mortgage ‘called’ if they lease to a federally illegal operation (the bank can require a borrower to pay the full balance off immediately if they aren’t abiding by the mortgage terms).
If you decide you want to lease real estate for your marijuana facility, you will likely need to find a property owner that doesn’t have any debt on the building, and then convince them of why they should let you rent the building from them. It is crucial that you are upfront with your landlord from the start of negotiations. They will need to approve any marijuana facility that you open in their property, and often have a significant amount of authority in deciding whether your permit will be renewed by the municipality each year.
Leasing can have financial and tax benefits. You don’t have to come up with as much cash out of your pocket as you would if you purchased a building, which can be a lifesaver when starting a new business. Lease payments might be able to be deducted from your income, depending on your tax structure.
However, there are downsides to leasing as well. You are losing some control over your business. There may be restrictions on renovations you can make to the property, or you may have to get landlord approval before making changes. There are also lease terms you will need to abide by or risk potentially being evicted from the property. If you don’t have the ability to purchase the building at the end of the lease, any investment that you made into improving the building is lost.
Ultimately, whether you purchase or lease is going to depend largely on what is right for your business, and whether you are able to find a landlord that is willing and able to work with you.
Now, you have found the perfect property. If definitely qualifies, the city is taking applications, and you are ready to make an offer. Now what do you do?
For a purchase - have your agent or attorney draft a purchase agreement outlining the terms that you are willing to move forward with and present it to the seller or the seller’s agent. For a lease - draft a letter of intent outlining your lease terms. The landlord will probably have a standard lease they want to use.
Ideally, you should try to get a permit from the city before you close. That way you know the property works and it is just a matter of them following the process to complete construction and get it state compliant. However, this isn’t always feasible or agreeable to the seller.
Decide how much hard money you are willing to put down. Hard money is a deposit that is often completely non-refundable, no matter what. Sometimes it is paid directly to the seller and not even held in escrow. In some very competitive cities, buyers are putting down a lot of hard money. In Southfield for example, buyers making offers with $300,000 - $500,000 hard deposits. In less competitive cities, $5000 to $10,000 may be enough to show the seller you are serious.
In some scenarios, sellers are willing to take monthly payments while the application is in process instead of a big chunk of money up front. While this may be more affordable in some situations, there is always a risk of municipal delays.
A municipal permit is an approval issued by the municipality on a particular property. That permit can be brought back to the state to show that the city is allowing the applicant to open a facility there. This is a requirement before the state will issue a license.
If you are purchasing a property that already has a permit issued on it, there is probably a process that you will need to complete with the municipality to have it moved to your name. Sometimes these permits are transferable between companies, sometimes they are not. It is completely up to the city on how they handle these situations. Many cities are starting to add verbiage in their ordinances requiring that a permit holder notify them in the event of any ownership transfer of portions of the entity. It’s important to talk to the city in each situation and make sure there is a way to complete the transaction.
If the property that you are buying is in the right zone but it not permitted, you will want to complete the application and submit it to the municipality for approval. If you are able to obtain the approval before you close on the property, you will know for sure that you will be able to operate the type of marijuana facility at the location that you are trying to open. If you can’t get the approval before you close, do as much due diligence as you can, and see if the municipality can give you something in writing confirming that the property qualifies.
In addition to the local permitting, there are some other hurdles involved in closing marijuana related transactions.
Title insurance - Make sure your title company knows that it is a cannabis related transaction. The last thing you want is the title company pulling out the day before closing. We recommend you use a title insurance company that specializes in cannabis related transactions, like Token Title Agency, so you don’t have to worry about issues like that.
Escrow Services - If you are purchasing a business or making a deposit for a lease, you might not need title insurance. However, you will probably still want to use an escrow service. Token Title can handle escrow for any type of commercial transaction, regardless of whether there is real estate included.
While closing on your new property is a very exciting time for you and your business, we understand that it can also be a very stressful time of transition. Here at Bricks + Mortar Group, we wanted to make this transition as stress-free as possible for you. Below you will find a checklist to help you throughout your closing process!
Look Out For Wire Transfer Fraud
Wire transfers of real estate dealings are one of the highest targeted sources for email hackers/criminals. In many cases they are able to intercept key data regarding the transfer, and redirect the funds into a different account through fake emails. These emails may be incredibly convincing and professional looking.
As soon as you sign the paperwork and make the payment, that property is yours. Make sure it is covered by insurance before you buy it so you don’t have to worry about any surprise losses at the worst time.
With frigid Michigan winters, this is especially important. If the seller turns the gas off on the day of closing (which they should), and you forget to turn it back on, you might find yourself with a very expensive plumbing repair and flood cleanup.
Using this map from LARA, you will be able to identify what utility companies service your new property. You can transfer service into your name by contacting the utility company directly. You can typically schedule this in advance as soon as you know the closing date.
Water service is typically handled by the city or township that you are purchasing the building in. Make sure that a final water reading request has been submitted to the municipality before you close on the property so you don’t inadvertently get charged for the prior owner’s water usage. Your agent and title company should assist with this process as well.
Now that you have purchased the property, it is time to start construction! This is taking companies anywhere from 6 to 18 months depending on the extent of the renovations needed, and how quickly they are able to get their contractors on the project. Many companies are dealing with material delays, staffing delays, and other supply chain issues, so be sure to account for these possibilities in your financial projections.
Once construction is complete and the local government has approved your facility, you can submit for your final state license. The State of Michigan will come out and complete their inspections, and assuming all goes well, you will receive your full license to operate!