Illinois’ Cannabis Rules Dissected at the Green Market Summit

//Illinois’ Cannabis Rules Dissected at the Green Market Summit

Illinois’ Cannabis Rules Dissected at the Green Market Summit

This panel was recorded on May 7 at the Green Market Summit in Chicago.

Kris Krane, 4Front Ventures:                         So this panels about the economics of cannabis in Illinois. I’m sure a lot of people are very interested in the bill that was just introduced. So we’re going to get to that later because I want you guys to stick around for the whole panel. We’ve got a medical marijuana program here, it’s still a pilot program, technically. Been fairly slow to develop compared to some other states. Can the panelists talk a little bit about what this program has looked like to date?

Ally Marotti, Chicago Tribune:                       So just to kind of give a snapshot of the numbers, we’re at about 62,000 patients right now. That has gone up, even in the past two or three months since February when the state rolled out their new opioid pilot program. Which allows anyone that is prescribing opioid to access medical cannabis.

The other big things that they did back in February, were that they eliminated the background check, and fingerprint requirements for patients, which made things a lot easier and quicker for patients to get their medical cards. They’ve also started granting provisional cards, which if you apply, you can get your card immediately and download it sort of like you would a plane ticket on your phone, and get into a dispensary that way. Instead of waiting, what was taking up to three months for the state to process your application.

So all over the state the numbers are up as far as foot traffic into the dispensaries, and I think we’ll see that. The main numbers haven’t been released yet, they usually release them at the beginning of the month. So I think we’ll see that going up kind of exponentially.

Larry Mishkin, Hoban Law:                    You know, the market in Illinois, for the medical side, has made great strides. It started out, I think, with a very rough roll out, and some uncertainty as we were changing governors right at that particular point in time. I don’t think it’s any shock or secret to say that our prior governor was no fan of this industry, probably … not probably, did a very good job of standing in the way of really giving the program a chance to grow, I think in the way that most people anticipated that it would grow. The hope is now that Governor Pritzker’s in charge, that he’s going to kind of take the shackles off of that a little bit, and really let the medical program go where it needs to go.

But we should all bear in mind that under the current law, the program has just about a year left, July of 2020, if the Illinois state legislature doesn’t expand the medical program, or make it permanent. That shouldn’t be lost in all the shuffle and excitement about adult use.

David Friedman, Young America Capital:               I think one of the positive things that’s come out of being, in what I think we would all agree was the most restrictive marketplace in the United States when the program first rolled out. I think the initial conditions were like nine-

Kris Krane:                          Jersey may have been a little more restrictive.

David Friedman:               Maybe. But if you look at the landscape of the companies that have come out of Illinois, there’s arguably four or five of the top ten MSO’s that have come out of Illinois. You’ve got the GTI’s, you’ve got the Cresco’s. I think by being in a highly regulated, restrictive environment, it forced some really significant capital to come into the space, and best practices to come out of the space. Illinois has actually become a leader in the international marketplace as a result of that early kind of restraints that were put on us.

Kris Krane:                          You know what’s fascinating me? You have really probably four or five of the, I would say, top 12 MSO’s in the country that are headquartered here in Chicago, that came out of this market, which is interesting given that it’s by and large been a pretty crappy market. Right? It’s on the face of it where you would think investors would be pouring lots of money right into the Illinois market when you’ve got a pilot program, you’ve got a really restrictive list of qualifying conditions. Everybody knew from day one this was not going to be the best sort of commercial market, and yet you do have some of these largest players in the country that came out of here.

David, you mentioned some of those reasons. I’d be curious to hear a little more from the panel why has Illinois, and Chicago in particular become such a hotbed for national companies given the relative weaknesses of the program?

Bill Marcus:                        I’ll comment on that. I can’t underscore. I cannot underscore David’s point enough that we happen to be one of the most restrictive, most difficult states to open up in. The capital, I was involved in looking at these companies as they rolled out, the intensive capital investment for a single facility license is upwards of $10 million to $15 million as a minimum, per license. And you have 15 operators here in Illinois-

Kris Krane:                          On the grow side.

Bill Marcus:                        Right, on the grow side. And on that grow side, I believe in the first year you had 7,000 to 10,000 patients.

David Friedman:               The first two years.

Bill Marcus:                        Yeah, you can’t imagine the kind of financial stress these companies went under. I know this because they had to go after round, after round. So to your point, I think it came out of the fact that we were lucky, and blessed that we had very strong capital markets and hedge funds centered in Chicago, that understood this, and were well schooled in terms of going the distance in these investments. They approached it not as a gamble, and not as a lark, it was very well thought out of, and very well supported from an investor base.

Larry Mishkin:                    I would agree with that, and I think that a lot of these guys from day one knew what they were going to do, or had very good ideas. The fact that Illinois was so restrictive, gave them great incentive to look outside of the state of Illinois, and to look at other states. But they’re all highly, highly qualified people who are all successful in other businesses. In that respect, it’s not really surprising at all.

Ally Marotti:                       Yeah, that’s a really good point. I think a lot of people … in other states out west, for example, the industry was built on the backs of folks that maybe were growing illegally, had been dabbling in it in some other way. But here it wasn’t like that. You had lawyers leaving their jobs. You had real estate executives leaving their jobs.

I think part of that is because it was so restrictive, the law was so complicated, you needed a lawyer to be behind a company, to get it up and running, and understand what all the restrictions were. But I think it’s been really interesting for me covering this industry. Up until really last summer, I think the biggest narrative was how all of these companies here were getting creative to find capital. Were they going to go public in Canada? Were they going to somehow convince an investor to invest in them? Were they going to move to another state and operate, which obviously is a big challenge to overcome in and of itself, but it does open up more capital in that way.

Again, as recent as last summer, there were a lot of companies here that had not recouped their investments from 2014-

Kris Krane:                          And still haven’t.

Ally Marotti:                       Still, yeah, exactly, exactly.

Kris Krane:                          We’re talking about increased patient numbers, we’re at 60,000 patients or so now. In a state of 13 million people, that’s not a lot.

Ally Marotti:                       Usually it’s 2% to 3%.

Kris Krane:                          That’s right.

Ally Marotti:                       And here, besides the opioid provision that I mentioned earlier, it’s still at about 40 conditions. Chronic pain is not one of them, that’s the biggest qualifying condition in most states.

Kris Krane:                          Let’s talk about that. As we’re talking about the development of the program to date, this has been not only discussed, but actually litigated, this issue of adding chronic pain and some others. Talk a little bit about what’s happened to date, or the efforts to date to get more qualifying conditions added, and where does that currently stand?

Larry Mishkin:                    Well, sure. We did not have a lot of success following the rules. The rules required submitting petitions to the governor’s board made up of 12 people who would meet every six months, and they would decide. Twice the governor’s board came back to the Department of Health with 12 conditions that they had all approved unanimously, and both times they were told, “No thank you,” and they were turned away.

Kris Krane:                          So the governor rejected his own panel’s recommendations?

Larry Mishkin:                    The governor rejected his own-

Kris Krane:                          He’s allowed to do that?

Larry Mishkin:                    He was allowed to do that under the law, yes.

Kris Krane:                          So what happens from there?

Larry Mishkin:                    Well, so what happens from there is we wind up with people filing lawsuits. Actually it’s been fascinating though, the lawsuit that filed for retractable pain, the theory was one of equal protection. That the state cannot, on the one hand, declare that cannabis is a medicine, but then on the other hand determine that it can be a medicine for some conditions, but not for other conditions. In what seemed like a very random way that they did it, and the state lost in the trial court. And the trial judge ordered the state to start admitting patients into the program with chronic pain.

Immediately Governor Rauner’s administration took the matter up on appeal, and as a result, the status quo was maintained, pending the ruling on the appeal. But it’s still on appeal. Governor Pritzker could direct Kwame Raoul, the State Attorney General, tomorrow to go in and withdraw the state’s objection. That would in effect immediately add chronic pain to the list of conditions that would allow you in.

Bill Marcus:                        Just to be clear, it’s not chronic pain, is it? It’s post-surgical intractable pain.

Larry Mishkin:                    Intractable pain, yeah.

Bill Marcus:                        It’s slightly different-

Larry Mishkin:                    Yes.

Bill Marcus:                        … it’s still wide open, but not quite as wide open as chronic pain.

Larry Mishkin:                    You’re right.

Kris Krane:                          And that hasn’t happened. The Governor’s not taken that step yet, and there’s a lot of people questioning why. The Governor campaigned on expanding the medical program, and on legalizing. The easiest thing that the Governor could do to expand the medical program is say, “Drop this appeal,” and all of a sudden you’ve gotten intractable pain, and a number of other conditions that will qualify. Why do folks think that hasn’t happened yet?

Larry Mishkin:                    I think that takes away some of his political power, to be able to push through the adult use. If all of a sudden you’re able to open the market widely to chronic pain, or intractable pain, then there’s less of an argument, and you could split the … even the majority or the super majority of democrats even more. They can say, “Well, we can kick adult use down the road.” So Pritzker’s a business man, right? If I’m him, I’m going to push through that legislation, and then I’ll circle back, and remove the blocks to the medical conditions.

Kris Krane:                          Do you think he’s waiting to see if the bill doesn’t pass?

Larry Mishkin:                    Maybe.

Ally Marotti:                       Yeah, I think we should also say too that there is a bill that’s been introduced that would make the medical program permanent. Because right now, I think you said that-

Kris Krane:                          Morgan’s bill.

Ally Marotti:                       Yeah, it’s still a pilot program in Illinois.

Kris Krane:                          Yeah, it expires next summer. We’ve got about 16 months or so left, I believe, until the program is technically expired, maybe less.

Larry Mishkin:                    Next year.

Kris Krane:                          Yeah, so less. Let’s stay on this issue, the qualifying conditions, because that really is what drives the market. We look at a state like a state like Arizona’s got about, I think, just over 5 million people, maybe 6 million people. There’s, I think, over 200,000 patients there now. And we’re still at 60,000 in a state of 13 million people here in Illinois. So it’s a pretty poor patient count, compared to what you see in a lot of more mature medical markets.

Ally, you mentioned the opiate bill, and that bill was meant to expand the patient population. I think we’ve seen that it has had an effect. It hasn’t quite had the effect, it seems, that folks may have expected though. So what have we seen out of the opiate bill?

Ally Marotti:                       So I think from what I’m hearing from operators, the biggest influx of patients right … in early February, right after they passed that bill, was from the folks that were granted provisional access. Like I talked about earlier, they could get in quick, they didn’t have to wait for the application to be processed.

We’ve been seeing the opioid has been making a difference. They’re reporting numbers on that separately from the medical cannabis program, because it’s seen as two different things. In April, there were about 1,000 patients enrolled in that. So pretty low numbers, I think for now. All the operators are expecting that to really pick up. In other states, I had mentioned, with chronic pain, which is different than allowing opioid patients. But you do get some of that population, 2% to 3% of the population. So, I don’t know what that is here. We have room to grow for a couple hundred thousand more patients.

Bill Marcus:                        Yeah, easily.

Ally Marotti:                       It’s what folks are expecting.

Kris Krane:                          Yeah, easily.

Ally Marotti:                       And growers and operators are ready for that, but they’re preparing for that. We can get into this later too, once we talk about the new legislation that was introduced over the weekend. But operators here are ready … they’re getting ready for recreational too. But they say that they can also handle a steady increase in patient count, because as the program grows, and if recreational comes on line, like it’s expected to. The medical program will also grow as well. Just because more people are aware of it. There are still people in Illinois that don’t even know we have a medical program. So education’s a big part of what’s keeping that growth at bay right now. So we’ll see.

Bill Marcus:                        But the opioid thing, and I’ll kick it back to you Kris, because you pointed something out earlier, it’s still disproportionately beneficial to the people who are less disproportionately affected by what’s going on. There are not opioid patients in the south side of Chicago, because they don’t have insurance.

Kris Krane:                          That’s right. So my company 4Front, we own and operate Mission, which is the only dispensary right now in the south side of Chicago, down in South Shore. It’s a pretty economically depressed area by and large, and we’ve seen very little impact from the opiate bill. We have seen an increase in patients, we continue to see a steady increase. But we were seeing a steady increase before the opiate bill. It has gone up a bit since then, but from what we’re hearing, from talking with other operators, from the statistics that are being released, this bill has really impacted the dispensaries in the suburbs, and in the high income areas. Where you tend to have more people with opiate prescriptions. You tend to have more people with health insurance. It hasn’t really impacted the businesses nearly as much in lower income areas where you don’t have as many people with those prescriptions. Where people are more likely already getting their opiates from the illicit market, so they don’t have the prescription. You just have not seen that increase in the number of patients in the lower income dispensaries.

So, all right, well let’s start moving to what’s coming here, the legalization bill has been introduced. There’s a lot of exuberance around it, and a lot of media in the last few days around this thing, and whether it’s going to pass. So, Ally, you’ve been covering this for a while. Do you want to sort of kick us off here, and give us some of the high level highlights of what’s currently in the bill?

Ally Marotti:                       Yeah, for sure. So, from a consumer standpoint, the bill would allow each person to possess 30 grams of cannabis, and that’s per household. And also you can grow five plants in a locked room, that’s not accessible to public-

Larry Mishkin:                    Not visible from the outside.

Ally Marotti:                       From the outside, yes. From the business-

Kris Krane:                          They’re literally legalizing closet growers?

Ally Marotti:                       Yeah, basically. I think it will be interesting to see if more clarity comes out around that. Because I feel like there’s some natural light that might be needed in there.

Kris Krane:                          Yeah, it would be nice if you could grow some in your backyard.

David Friedman:               We sell some great grow lights.

Ally Marotti:                       I think about my little plants at home, they would not do well in a closet. Not cannabis plants, regular plants.

Kris Krane:                          Wink, wink.

Ally Marotti:                       Right, but so on the business side, there’s a huge social equity aspect of it. Right now the diversity numbers, as far as operators go in the industry, are not great. Part of that is because there was such a high barrier to entry. Such high application fees, licensing fees, that type of thing, with the medical program. So there’s a huge portion that addresses that. They’re looking at bringing in some money from the medical program, and then the recreational program, to back loans and financially subsidize some of these folks that want to get into the industry.

They’re looking at letting the medical operators, now the growers become growers, and keep those licenses just at those numbers for the first year. The bill is over 500 pages long, so there’s a lot more to it than that, but hopefully that’s a good overview.

Kris Krane:                          Yeah, that’s great. Anything anyone else wants to add? Any provisions that we didn’t hit on yet?

David Friedman:               I think the 800,000 previous convictions is a big deal, very big deal. I think you were talking about that in terms of Larry, what that means for the economy, the local economy’s. Especially in the areas where you are in the south side, where it’s economically depressed. These people can’t get jobs. This is a real stigma for a lot of people. That’s a huge portion of population, 800,000.

Kris Krane:                          800,000 is a lot of people. It’s a state of 13 million people that’s one in-

David Friedman:               Right, it’s 78% of the population.

Kris Krane:                          … it’s a big percent of that. I know when you’re saying 800,000 people, we’re talking about record expungement here, right? So can we talk through the mechanics of what that would look like, what expungement itself would look like? Is it something where folks are going to have to apply to the state to get their records expunged? Or is the onus on the state to go and find anybody with a cannabis conviction?

David Friedman:               Actually, the way it’s written is the police departments are going to be responsible for identifying people in their communities, and then they’ll run the program to get the expungement’s through … I’m sure they’ll come up with a committee, or whatever it is. That should be pretty interesting.

Kris Krane:                          I imagine that’s not going to be popular amongst a lot of law enforcement agencies.

David Friedman:               I can’t see it being very popular.

Larry Mishkin:                    Well, I don’t think it’s going to popular among a lot of the people in the communities either. They have to go back to the people that put them in the system in the first place, to get out of the system. I think there’s a lot of details they’re going to still have to be worked out about this-

Kris Krane:                          No doubt. As an old school activist, and advocate on this, in my mind the onus should absolutely me on the state. If you have a conviction, and the state put you through the ringer on that, the onus should be on them to find the-

Larry Mishkin:                    They have all the records too.

Kris Krane:                          Yeah, exactly. They have the records. It should not be on the individual to have to go and seek out the state, and get the records expunged.

Bill Marcus:                        I think it’s unclear. I think it’s the police departments are responsible for identifying the people in their community. I don’t believe that the people in the community have to go to the police stations to get it. It’s still a little unclear, well it may not be unclear, I haven’t read all 500 pages though.

Kris Krane:                          In most states, the way they’ve dealt with this is that the onus is on the individual with the record. To then apply to the state to have the record expunged, which most people are not going to do. Because they don’t know how, they don’t know the laws in place, there’s a fee generally associated with doing that. And like you said, not a lot of people are going to want to walk into the police station that put them in jail in the first place and say, “Hey, get rid of my record.” Particularly in communities that have been disproportionately targeted by law enforcement for marijuana crimes. Well, will no longer be crimes, right?

Bill Marcus:                        A lot of drug offenses. I think there’s two really interesting things about the social equity program though. One is expunging 800,000 felony convictions extends way beyond the cannabis industry. These are people who can’t get jobs because they have a felony conviction. Not people who can’t get jobs in the cannabis industry.

Kris Krane:                          Right, they can’t get jobs, that’s right.

Bill Marcus:                        The reach of that is significant, way beyond cannabis. The second thing is if you look at what’s going on in the legislature right now, and the people that are speaking out against the bill, Madigan primarily. The biggest pushback is coming from the leniency around the record expungement, and the social equity program.

So there’s going to be some infighting in between the moderate democrats and the liberals that control two thirds majority of both houses around this social equity component. It’s going to be really interesting to see how that plays out. It’s not going to be a very popular piece of legislation to be on the wrong side of.

Kris Krane:                          Like we were talking about earlier, this is basically what sunk legalization in New Jersey so far. The parallels between Illinois and New Jersey are pretty stark. You had both states where you had a democratic either super majority, or a very strong majority in both houses. A republican governor who had done everything he could to try and stifle the medical program. Ended up either losing to, or in Jersey’s case, either retired and then democrat in both states ran on legalization as a top priority. Pushed a bill in their first year. Lot’s of exuberance that it was going to get passed. Well, we’re year two in Jersey now, and that bill still hasn’t passed. My understanding is a big piece of that was this issue around expungement.

From what we hear, behind the scenes, there likely were enough votes to get it passed there in the house, but they were a couple of votes short in the senate. That was over this issue of expungement, and where the threshold should be. In New Jersey, it was any marijuana crimes that included offenses up to 500 pounds.

Bill Marcus:                        Five pounds.

Kris Krane:                          Five pounds, sorry. 500 pounds would be a lot.

Bill Marcus:                        Pretty much [crosstalk 00:19:38].

Kris Krane:                          But for the number of more moderate democrats there who said, “That’s too much, I can’t get on board with this bill,” when they started doing some of the jockeying behind the scenes saying, “All right, how about if we lower it?” You started losing members of the black caucus, and Latino caucus that were saying, “No, this impacts members of our community, and we’re not going to lower this because we’re still going to have a lot of members of our community that are walking around with felony convictions.”

When you have an issue like this where you’ve got virtually no support from the republican side of the aisle. There are a few … there were a few in Jersey, there’s going to be a few here. But by and large, this is a battle that’s playing out within the democratic party. You don’t have a whole lot of wiggle room if you have virtually nobody from the other side. You’ve got moderate democrats that are going to want it to be a more … a little bit more of a restrictive program. Then you’ve got progressive democrats that are going to want to see it much more free, and open. You’ve got, in both states again, very strong, very large Latino caucuses, black caucuses that want to make sure that the interest of their communities are being represented. In some cases that conflicts with what the moderate democrats are going to want to see.

So I want to come back to the social equity question here in a minute, but I think this is probably a good time to sort of ask for predictions. Like what are folks thoughts here on how likely this thing is actually to get passed this session?

I want everyone on the record here.

David Friedman:               I think given the amount of time we have, and we do have a good amount of time-

Larry Mishkin:                    This session’s over in a month, isn’t it? We only have a month for this session.

Kris Krane:                          Less.

David Friedman:               For this month.

Kris Krane:                          Pritzker’s saying it’s going to be passed succession, and it will start in January first. Is that going to happen?

David Friedman:               I think that it’s going to happen. I think that … my reasoning for it also has to do with the fact that social inequity is a big, big deal. Pritzker really behind the scenes, I’m told, has worked very hard on this.

Kris Krane:                          No doubt about that.

David Friedman:               Rep Kelly, and others. Also the fact that the main constituents in Illinois have worked hard from a corporate standpoint, in terms of lobbying as well. I think it will pass. I want to … I’ll let the rest of the panel talk, and then I want to bring up one more point.

Kris Krane:                          All right, we got one yes.

Ally Marotti:                       Okay, so I’m going to remain objective as a journalist, and not say one way or the other if I think it’s going to pass or fail. But I will tell you what I know, and I know that the sponsor’s of this bill have been working on this for a long time. This wasn’t something they started putting together as soon as Pritzker got elected. They’ve been working in the space, on the medical side for years.

The social equity part of it, that seems to be drawing some ire from some folks now. Nitpicking what’s wrong with it, what can we do better? The sponsor’s again, worked with folks, minority groups, the Illinois black caucus. A lot of different folks came to the table to put this bill together. I’d imagine that’s why it’s over 500 pages long. So I think that’s also part of why they waited so long to introduce it in this session. We only have a few more weeks to get it passed. I think it’s partially because they hadn’t reached a decision on stuff. I was reporting out a diversity story a few weeks ago, and at that point they hadn’t nailed down the social equity part of it.

So I think this is something that they had a lot of people weigh in on, and they thought, “How are we going to get this passed? How do we need to write this language to get it passed before they put it in there?”

Kris Krane:                          So take that as a yes?

Ally Marotti:                       We’ll see, we’ll see.

Larry Mishkin:                    I would like to be optimistic, but I recall all of the problems that surrounded the roll out of the medical program. It took longer to pass the legislation than they thought. It took forever to get the administrative regulations issued. Long before we’ll ever have an adult use sale, all of these things are going to have to be worked out.

I think it’s very, very optimistic of them to believe that they can get it passed this session. We don’t have any final word on what Michael Madigan has said. We all know that nothing’s going to happen in this state, unless Michael Madigan supports it. I think part of what’s going on is he’s trying to get a feeling of the pulse of that part of the state that lives south of I-80. Whether the people down there are really going to put their support behind this.

I can’t speak to that one way or the other, because I don’t know the answer. But, there are a lot of issues out there that do have to be addressed. I’m not saying it can’t be done, but I see it as being somewhat problematic. The social justice side of it is certainly the bedrock in the foundation of this plan. But even that becomes problematic in terms of … is every group that feels like it should be supported getting supported?

I’ve talked to a number of women who are in the cannabis industry, and they’re very distressed by the fact that the social equity portion says nothing about women. It doesn’t provide that there should be loans, or situations to allow women owned businesses to be able to get a head start. Will that go anywhere in terms of tripping this up? Again, I don’t know. But there are a lot of issues out there that we haven’t been hearing about. They’re going to have to be resolved before the program can get going.

Kris Krane:                          Is that a no?

Larry Mishkin:                    That’s a, I don’t think so. But I’d like to be wrong.

Bill Marcus:                        I’m going to be a firm no, but I’d like to be wrong. I think the bottom line, as Larry said, nothing gets done in this state without Madigan behind it. He has come out saying that he’s not in support of the bill because of the extensive nature of the felony expungement’s. Both the Sun Times, and the Tribune have come out and said, “We’d like to see it slowed down.” The head of the NAACP has come against it here, because they don’t think it goes far enough. With three weeks left in this session, I don’t see the state of Illinois moving that fast. Will it happen this year? In the next session? And is Pritzker’s goal to get this thing forced to a floor vote so that he can flush out everybody’s position? I think that’s probably more in line with his thinking as a business man. I’m going to say unless something drastic happens, and Madigan comes out and says, “Hey, this is what I want,” and he gets it, it’s a no for this session.

Kris Krane:                          And I’ll put myself on record as well. I think it’s a probably not. I also very much hope I’m wrong. But despite all the exuberance, no state has passed legalization through the state legislature yet, period. Vermont came closest. Some consider that legalization, I’d call it like super decorum. Basically it’s illegal to posses up to an ounce, to grow up to six plants, to gift it to friends. But there’s no legal commercial cannabis in Vermont. I think they will be the first state to do it. I think it’s going to happen this year in Vermont, because it’s another step. They’ve already taken that first step.

It’s really hard to get any semi-controversial legislation passed the first time it’s introduced. Because of all these issues that we’ve been discussing. There are constituents, there are representatives, there are representative constituents that have specific concerns that may conflict with other representatives concerns. Even if they in theory support legalization. It’s very hard to get a majority to yes in the first go round. It’s the reason why it hasn’t happened yet anywhere, despite the fact that nine states and D.C. have now voted for it. We’ve adequately demonstrated that the public is in support of legalization, but the legislature’s haven’t quite figured out how they can get consensus amongst the legislators to get it passed. So I think it’s a real uphill battle to get this done this year.

Bill Marcus:                        And this is Illinois, it’s very much of a, “What’s in it for me?” So everyone of these voting congressmen, and voting senators still has the opportunity to pass the hat around and decide what it is that they want out of this. I don’t think there’s enough time left for that to happen.

Kris Krane:                          Now to be fair though, they did get some of that already. Part of what governor Pritzker did, and part of the reason why they waited so long to introduce this bill was that they wanted to get the budget passed first. The budget has money allocated for pet projects all around the state that is tied directly to cannabis revenue. So if those members don’t then vote for cannabis legalization, they don’t get the money for their pet projects in their districts. Does that make anybody a little more optimistic or? It doesn’t make me, but trying to come around on the rosy side of this here.

Bill Marcus:                        I think it’s certainly a benefit towards getting a yes vote, but I just don’t think it’s enough yet. I think that there’s more than just $120 million of allocation of tax resources, and other things that these legislators are going to want baked into this bill. It’s an important bill, it’s going to get stuffed with all kinds of things before it’s passed, in my opinion.

Larry Mishkin:                    Well, the other thing is that he’s making all of these predictions about how much revenue he’s going to generate off the program, and the program hasn’t started yet. I think that was a problem when the medical program rolled out too. That I saw investors who would come in, and say, “We’re going to make this much this year, and this much the next year,” and the program hadn’t even gotten off it’s feet yet.

So it’s optimistic for Pritzker to kind of guess how much money he’s going to get out of this program. But given the slowness with everything else, I think it’s overly optimistic to suggest he’s going to be getting that much money initially.

Ally Marotti:                       I do think that most of the … I could be wrong about this, so correct me if any of you guys know, but I think some of the budget set aside that he had were from the licensing fees?

Larry Mishkin:                    Yes, that’s true.

Kris Krane:                          I believe that’s right, yeah.

Bill Marcus:                        Those weren’t budgets set aside, those were for the social equity program, right?

Kris Krane:                          Oh.

Ally Marotti:                       No, I’m talking about in Pritzker’s budget for 2019. He had … yes, he had some line items that he took directly from licensing fees for the recreational program. But doesn’t the bill say that there’s no new licenses that are going to be awarded yet this year?

Bill Marcus:                        No new one’s, but the existing license holders are still going to have to pay for their recreational license.

Ally Marotti:                       Okay.

Kris Krane:                          And even for [inaudible 00:29:18], let’s get into that. We want to talk about licensing. My understanding is we’re really not looking at new licenses for a year, right?

Bill Marcus:                        That’s my understanding. No new licenses for a year, for anything. $75 after a year for dispensaries, and $40 for craft cultivation, processing, and transportation after a year.

Kris Krane:                          Okay, so let’s say on the cultivation side first. So that’s 40 new craft cultivation licenses a year after the bill passes. What about the existing operators? Those get grandfathered in automatically?

Bill Marcus:                        That’s my understanding the way the bill’s written now, they pay their fee, and they’re automatically granted a recreational license with unlimited capacity.

Kris Krane:                          Mostly, yeah.

Bill Marcus:                        Yeah, devils in the details but generally speaking, there’s some qualifications-

Kris Krane:                          Essentially the idea is-

Ally Marotti:                       Have you guys read all 500 pages of the bill?

Bill Marcus:                        You’re lawyers?

Kris Krane:                          Flip the switch for the existing license holders, wait a year, then grant some more licenses. Which, look, there actually is a good public policy rational. I say this full disclosure. We are one of the existing license holders. Both in cultivation, and retail. I try not to speak out of self interest here, I’ve actually argued with my colleagues in a number of states on whether or not we should add more licensees. I tend to fall on the side of I think we should, and we’ll get into that in a moment.

But there is a policy rational for giving a headstart to the existing operators, right? Number one, they did take these massive risks at a time when the program was non-commercial, and it bled money for many years. So give them a little bit of a headstart to recoup some of that.

But the biggest one is they have the infrastructure in place. They’re already growing cannabis, and if you want the program to get up and running, and you want to provide cannabis to the public as quickly as possible, let the folks who are already doing it flip the switch, and start growing for adult use as well. They can get to market faster. Even if you start issuing new licenses right away, there’s still an administrative process. There’s still an application process. Then they have to go through zoning, and permitting. You have to actually build out. Plants take four months to grow. So even once you get plants in the ground … realistically, best case scenario, it’s a year after licensing starts before anybody else is really even online.

So the initial folks are going to have an advantage no matter what. Again, there’s a public policy rational for that. My question though is, is there going to be enough supply to meet demand in this market? Given how few new licenses we’re talking about issuing?

Larry Mishkin:                    I think with respect to demand, initially I’m not particularly concerned about that. Because most of the grower’s are not growing on anywhere close to the full square footage that they currently have. Because as it was accurately pointed out earlier, there just weren’t enough patients to justify that. It’s going to take a while for new cultivation centers to get up to speed anyway, so we’ll find out relatively quickly whether the current cultivators can do it.

The thing that we were all talking about that I’m a little surprised is, not immediately adding more dispensaries. Because some of the dispensaries that currently exist, certainly on the north shore, from time to time find themselves running out of product. Over marketed by people who are choosing those particular dispensaries, and I’m not sure that we can get by on 50 or 55 dispensaries for the entire state if we’re going to have adult use.

Kris Krane:                          We have 55 retail outlets for a state of 13 million people. And even though they’re going to grant 75 more a year later, again-

Bill Marcus:                        Those are not enough.

Kris Krane:                          … it’s going to be at least a year before those stores start getting open. If past is precedence for other states, it will probably be longer.

Bill Marcus:                        But I do think they have to protect against a rush of inexperienced operators flooding the market with product that has all kinds of problems. They don’t have the resources allocated. They don’t have the revenues to be able to police all of this. So I think there’s some concern around if we let too many people in too quickly, how are we going to manage the market as well?

Ally Marotti:                       There’s definitely some concern around that, I’ve heard from growers. The other thing to point out is that many of these big multi-state growers that are based here, and have operations here, have been expanding their grow facilities, readying for this since last summer.

Some of that was to prepare for the growing medical program, like we talked about earlier. If you think about these facilities, most of them in Illinois … I’m not sure if any of you have ever visited one, but there are these big unmarked facilities that just look like warehouses in the middle of nowhere. But many of them, when they started out, they did build outs, and had phases. And for many of them, they only had a few of their growing rooms open. They’ve been expanding over the past year to add more grow rooms. Build out the whole

Kris Krane:                          But even then, but let’s stay on this. So let’s say you’ve got basically 15 cultivators now, and a few of them have multiple licenses. So really 19 essentially that have licenses. So you’re talking about 190,000 square feet. Total canopy space, 190,000 square feet. Will that serve a market of 13 million people plus however many tourists come to Chicago every year? Is that enough?

Bill Marcus:                        So that’s 1.9 million square feet if they’re fully built out. 100,000 per-

Kris Krane:                          100,000 per, right.

Bill Marcus:                        So it’s 1.9 million square feet. It’s still, I don’t think is enough to support-

Kris Krane:                          Still, is that enough to supply the market?

Larry Mishkin:                    Kris, I’d like to throw that back at you, as a commercial grower, what do you think?

Kris Krane:                          I don’t think it is. That’s why I asked the question, I don’t think it is.

Ally Marotti:                       We’ve seen a couple of studies come out on this. There is a study sponsored by the industry. There is a study sponsored by the sponsors of the bill. One of the studies found that for at least the first few years, the current growers could supply. That’s because it takes a few years for a market to reach full maturity. I think it took Colorado four or five years, they say. I guess that’s where we’re at sort of right now with legalization in Colorado, four or five years in. I think it’s reached maturity now, maturity being full demand.

We hear a lot of stories about dispensaries selling out the first day that sales start. But also, something to consider is that the first day, the first week sales start, there’s going to be more sales than there would be even two months into the program. Just because there’s a rush. When a new store opens, when a new product is available.

The study that the sponsors of the bill put out there was done by a firm in Colorado. They did make a lot of comparisons to the Colorado market, and Illinois is very different. We have a larger population, it’s dispersed differently. There’s a lot of things to consider here. I think-

Kris Krane:                          And you’re not going to have 1.9 million square feet. Not all of those growers-

Bill Marcus:                        They’re not going to max out in the first year.

Kris Krane:                          Our building maxes out at 94,000 square feet, and that’s not all canopy space. That’s your total footprint. That’s the total footprint. So that includes the processing areas, and hallways, and everything else. It all has to fit within the physical building that we have. Are we looking at a major supply problem in Illinois if this bill passes as it currently stands?

Ally Marotti:                       I think that the biggest concern would be, and I could be wrong about this. Again, would be the dispensary side of things. Because that number seems way off to me from all the studies that I’ve seen. To only have 55-

Kris Krane:                          And then 75 a year later, which will take them time for them to come on line as well.

Larry Mishkin:                    We saw that in Massachusets when they first rolled out adult use. They only had, I think, initially three dispensaries-

Kris Krane:                          Two to start.

Larry Mishkin:                    … and none of them were located in major metropolitan areas.

Kris Krane:                          The first one in Boston just opened about a month ago. The Boston Metro area in Brookline.

Larry Mishkin:                    Right. But prior to that, you had people getting up at 3:00 in the morning to drive to these locations to get there before they ran out of product. I think it’s a natural part of-

Kris Krane:                          They all have limits in Massachusets, products. So if you go in as an adult use consumer, to buy cannabis at one of the legal dispensaries in Mass, at this point, still virtually everyone of them will have a limit on how much you can purchase that’s well below what the state limits are. It’s the only way they can keep product in house.

Ally Marotti:                       I think with dispensaries too, if you look at the map now from where the 55 dispensaries are located, the map of Illinois, there are some big holes. Part of that is because they were, I believe, a handful of licenses that were never awarded, or were awarded and the dispensaries never opened. Mission is the only one sort of on the south part of the city. So there are some holes there, even considering the population. Obviously in rural Illinois, there’s a population disparity there, but there are some holes. So that would be something else.

David Friedman:               I think erring on the side of caution, and Larry you’re the most legally trained here, if the program is going well, and there’s huge demand, can’t they amend this program at some point?

Larry Mishkin:                    Always. They could always amend anything.

Kris Krane:                          But that takes time. You got to issue more licenses, they got to build out. You got to recognize, it’s from licensure to opening, it’s best case it’s a year.

David Friedman:               What I think we got right here in Illinois, and I can’t underscore this enough, is I look at this room and I see maybe a couple of people of color here. Is that we got the disenfranchised right. That’s a big deal here to me.

Kris Krane:                          In the bill, you mean?

David Friedman:               Yeah.

Kris Krane:                          It’s not in the medical program.

Bill Marcus:                        That’s just the way that it is.

David Friedman:               No, in the bill, if that passes. We were talking about the odds of the bill passing, right? There’s other incentives. At some point, it might be one year, two years, four years out where demand meets supply, there are, I believe, those that read the bill, all 500 pages, some benefits including people of color, and disenfranchised in terms of lower fees. As well as I think lower taxation.

Kris Krane:                          Right. The bill’s trying to address the fact that folks from disproportionately impacted communities, primarily people of color, people from communities that are most targeted by the drug war, have an opportunity to participate in the new legal economy, which is something I think that everybody would admit the medical program did not do well. There’s very few people of color, very few women represented amongst ownership in the current medical industry in Illinois. And there’s a recognition that we need to create avenues to entry into the industry. Particularly when we’re talking about a drug war, marijuana prohibition that’s been essentially fought on the backs of young people of color. That there needs to be an avenue for these folks to participate.  I will say I’m skeptical that the provisions in the bill will really achieve this goal.

Bill Marcus:                        I agree.

Kris Krane:                          I think it’s laudable they way that they’ve done this, and frankly I’m not sure that there’s a way that they could write it that would achieve the goal.

Bill Marcus:                        Look, a 5,000 square foot facility-

Kris Krane:                          We’re talking about craft grows. How can a 5,000 square foot craft grower compete with 100,000 square foot-

Bill Marcus:                        Exactly. And how much of a craft grower market is there going to be? We got a lot of craft brewery’s in Chicago so-

Kris Krane:                          There will be a craft grower market. But the problem is most of the craft growers are not going to grow craft quality cannabis.

Bill Marcus:                        Correct.

Kris Krane:                          Especially because you have a small grow doesn’t mean you’re a great grower. So yes, the smaller growers that grow the best quality product, there will absolutely be a market for that product. But if they’re growing mediocre quality product, they cannot compete on price with somebody’s who growing in a 100,000 square foot facility. So that will make things very difficult.

My concern though is it’s expensive to get these businesses up and running. Even a 5,000 square foot craft grow is probably going to cost close to $1 million to get operational. A dispensary is still going to cost you, best case scenario a half a million dollars to get operational. Where does that money come from? The bill sets aside $20 million to go into a fund to help fund social equity applicants. That’s 20 grows at best, absolute best case scenario that will cover 20 grows.

So where does the money come from to insure that the social equity applicants can actually get their businesses operational?

Bill Marcus:                        And that’s why you have the … same they had in Oakland where you’ve got larger companies, and business in affluent investors trying to find minorities in equity participants to front for them. Then you have to start to police that, and in the application process, that becomes very difficult. You run into problems.

Kris Krane:                          Very difficult.

Larry Mishkin:                    Well, there were bonus points, if I recall, in the medical applications for-

Kris Krane:                          There were bonus points, yeah. It didn’t do a whole lot.

Larry Mishkin:                    Right, it didn’t do a whole lot. I don’t like to use the term social engineering, but part of what they’re trying to do here is create a solution … I admire what they’re trying to do, and I think it’s the right way in theory. But whether or not it can actually play out specifically, and create the type of opportunities that they want, we’ll have to see.

Ally Marotti:                       So this is just speaking from my reporting, this isn’t an opinion or anything. Many other states have started thinking about the social equity points when they came on line with their medical programs. Many states east of here, Ohio for example, New York, I believe. A lot of them built into their application programs, social equity points. They awarded points for certain things. They require companies applying to tell them how they would make sure their workforce was diverse, and layout that business bend from the get go.

Ohio, I believe, awarded a certain number of license to companies with diversity ownership, that sort of thing.

Kris Krane:                          Pennsylvania did a lot too.

Ally Marotti:                       Pennsylvania, exactly. Speaking with the law makers here when they were crafting this bill, they were saying, “Other states have tried, but no one’s gotten it right yet, and we want to be that state to get it right.” So some of the things that they were telling me was that … like you guys make good points, but also that’s having other licenses, having other types of licenses … so with the medical program right now, we have growers, and sellers, and that’s it.

So with the recreational program, there would be delivery licenses-

Bill Marcus:                        Transportation and processing.

Ally Marotti:                       … transportation and processing licenses. So that offers more avenues of entry into the industry. There are also companies here, Revolution Enterprises is one of them, that have already started working with folks that are in these opportunity areas, that are interested into get into the industry, and weren’t able to get in for whatever reason on the first time around. They’re helping to train them, just prepare them for the application process, which can take months to build a team to do that, train them on growing practices, and that sort of thing. Just to sort of help lower the barrier of entry.

So there’s a lot of industry operators that have already been thinking about this too. Again, take that with a grain of salt, because these are the big guys. And how would a new entrant ever be able to compete with a multi state operator at this point?

Kris Krane:                          I think what we’re starting to see … this becomes a very delicate balancing act, is this sort of partnership between MSO’s and social equity license holders. We’re starting to see this around the country. I’ve made the case, and shameless plug alert, I wrote a column for Forbes last year about how the lack of access to banking is particularly harming mom and pop owners, and social equity applicants.

If you are a license holder of say, one of … look, after they grant 75 licenses, we’re looking at around 130 retail licenses in a state of 13 million people. If you had one of those licenses, and this was not federally illegal, any bank in the state, any bank in the country would give you a small business loan, or a loan to get your business up and running. Access to capital would not be that challenging to someone in a market where licenses are so limited. But in the absence of that, where do you go for money?

I think we’re at a point now where we talk about how much more capital there is in the industry, and there’s a lot more capital we’ve seen come into the industry in the last two years. I would actually argue it’s more difficult for the mom and pops today to access that capital-

Bill Marcus:                        Completely agree.

Kris Krane:                          … than it was two years ago.

Bill Marcus:                        100%.

Kris Krane:                          Because you have so many operators that have so much experience. So if you’re a cannabis focus fund, or an individual angel investor, or a family office, which is where 99% of the money’s coming from these days. They’re going to be much more comfortable putting their money into a company that has a proven track record. Rather than to somebody that’s a start up that has to compete against these companies with a proven track record.

So right now, we’ve created a situation because of federal prohibition, and the lack of access to banking, where really the most viable source of capital for the mom and pop’s are the large players. That’s not inherently a terrible thing, if it’s done the right way. But it also can be very exploitative, and we’ve seen it done in a way that is not really beneficial for the social equity applicants where they really just do become front faces for the MSO’s, rather than the MSO’s empowering them to be actual entrepreneurs, and business owners in the space.

Larry Mishkin:                    I think you’re right, and I think what we’re really going to see here is that social equity can only go so far, as long as marijuana stays a schedule one. The elephant in the room, people have these conversations, but we don’t focus on enough is why is it a schedule one? Not the history, and all of that, but today-

Kris Krane:                          That’s another panel.

Larry Mishkin:                    Right. Today’s intelligent people who understand and know, and see why we haven’t been able to move this off of schedule one, and really off of schedule two. Once we can do that, and we solve the banking problems, that will solve these issues that we’re talking about. Because people will have access to small loans.

Kris Krane:                          So I think … Ally you have one more point to make, and then we’re going to open up for questions.

Ally Marotti:                       Sorry. I was just going to say that there’s also the folks here in Illinois that support opening up the banking system, but again, there are a lot of small community banks here that … a few that work with the industry now, but also many of them won’t touch it until it’s federally not a schedule one anymore.

Larry Mishkin:                    You have money laundering problems where these banks, and the bankers-

Ally Marotti:                       It looks like you’re [inaudible 00:47:13].

Larry Mishkin:                    Unless they pass the SAFE Act, which is currently before congress on the federal level, which would remove a lot of these restrictions in states that have programs. But in the absence of that, any banker who does the business, the individual banker, potentially faces criminal penalties.

So banks are very dis incentivized right now to do this. Again, if we take this off os schedule one, and schedule two, that problem goes away.

Bill Marcus:                        My daughter thinks that we’re an episode of Ozark. We spend all of our time trying to move money through the banking system. So now that the series has ended, they call me once a week to get an update.

 

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By | 2019-05-15T10:55:48+00:00 May 15th, 2019|Business|0 Comments