It’s not easy being green: Cannabis business hopefuls need to understand the challenges to entering New Jersey’s legal cannabis market, including real estate limitations and high initial investment, before diving in.
The fiscal barrier to entry is wide ranging. During an NJBIZ Business of Cannabis virtual panel discussion June 28, Higher Yields Consulting founder and CEO Cory Waggoner said he’s seen dispensaries built for $150,000, and at least one 25,000-square-foot dispensary built for $8.5 million.
“On the cultivation side, a rule of thumb that we’ve been using – and it continues to increase – is about $400 a square foot to build a building—build it out and then bring in all the equipment,” he said. Keep in mind, too, that cannabis-related construction is not immune to challenges currently facing that sector either, such as the high price of steel and long wait times—like 20 weeks for custom cabinets.
“Extraction can kind of change, depending on what you’re trying to do,” Waggoner continued. “If you’re just going to use a hash press you can pick those up for like $8,000 but if you’re doing cryoethanol extraction, you’re going to be in that half-a-million-dollar range depending how much you want to process and how often you’re going to going to run the machine.”
Waggoner was joined on the panel by Colby Piper, director of cannabis real estate for RIPCO Real Estate LLC; Eric Altstadter, audit partner and chair of EisnerAmper’s cannabis and hemp practice; Lauren Iannaccone, cannabis attorney at Connell Foley LLP; and Louis Magazzu, attorney at Magazzu Law Offices.
A strong retail tenant and strong competition
It’s no secret that cannabis businesses are often subject to higher rents than traditional businesses. In New York, the $2 million fund to support social equity candidates, which New Jersey lacks an analog of, will be largely consumed by high Manhattan rents, Piper explained.
And yet, despite higher profit margins, some landlords are steadfast against allowing cannabis businesses in their buildings, likely due to perceived risk associated with cannabis’ federal illegality.
“My elevator pitch to landlords that are on the fence of what they want in their space is I tell them ‘name one other business that is pandemic proof and an essential business that will come in, pay 20% higher [rent] and put a million dollars into your space.’ It changes their mind immediately,” Piper said.
“We are going to be the strongest retail tenant in the retail space for the next 10, 15 years until something cool comes in, so as a landlord, just like we want to be first to market in the cannabis space, you want to be the first to get one of those spaces as well,” he added.
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Much of the conversation leading up to cannabis legalization in New Jersey touched on social justice. Piper sees the Cannabis Regulatory Commission’s social justice initiative as a failure. Small businesses entering the state’s adult-use market will face challenges competing with the existing operators, he said, which are mostly multi-state operators.
“[MSOs] use one other acronym—MSOs take advantage of OPM, other people’s money,” Magazzu explained. “If you look at [the stock market in] Canada, most of [the MSOs] are hemorrhaging money and, unfortunately, that burn rate is at the disadvantage of the smaller folks who have to use it out of their own wallet.”
Cannabusiness accounting remains tricky when you consider Internal Revenue Service tax code 280E, which prohibits deducting normal business expenses against taxable income earned from the sale of Schedule 1 drugs. States with legal, adult use markets are starting to decouple from 280E, though, to be more hospitable to their cannabis businesses.
California cannabusinesses have been grappling with the challenges of 280E since medical cannabis got the green light there 26 years ago, and only within the last two years have they had relief. EisnerAmper’s Altstadter explained the reason for the holdup: States decoupling from 280E won’t be subject to any sort of penalty from the feds—the issue is that they’ll lose revenue.
More cannabis info for businesses
Altstadter said that in the interest of being competitive with New York and the rest of the country, New Jersey will likely decouple from 280E at some point. Now, he noted, cannabis companies can find some tax relief through an employee retention tax credit—a payroll tax credit that results in a refund on the employer’s Form 941.
As for employers outside of the cannabis space, Iannaccone addressed the lack of training available for Workplace Impairment Recognition Experts, which the state’s enabling legislation requires by law, and who are an integral part in allowing workplaces to remain drug free without limiting an employee’s right to consume cannabis off the clock.
The CRC is tasked with creating a certification for WIREs; despite cannabis’ availability, it has yet to do so.
“It puts businesses in a real sticky situation,” Iannaccone explained.
For now though, she said, it doesn’t benefit employers to bury their heads in the sand: while they’re waiting on the regulations, they can at least engage their employees and update their employee handbook to prohibit on-the-clock cannabis use.