The cannabis industry is growing rapidly – literally! Across the country, retail stores and medical dispensaries are seeing large revenues, despite the even larger burden of regulations and the persistent federal prohibition of the practice. However, despite the federal prohibition roadblock, 33 states have legalized medical marijuana and 11 have voted to legalize marijuana for recreational use as well. One of the first states to legalize recreational marijuana was Colorado, followed by Washington and Oregon. While each state has their own system of licensing and regulating marijuana establishments, Nevada has emerged as the gold standard for regulating the industry.[1]

Many of the dispensaries, especially in Nevada, are seeing their efforts pay off. Despite the multitude of hoops that potential dispensary owners have to jump through, once accomplished, dispensary owners can see a steady flow of business. However, it is not all positive, despite broad popular support for legalizing marijuana for recreational use,[2] many potential owners still struggle to achieve their goal of opening a dispensary. Before getting into the nuts and bolts of opening a marijuana store or dispensary, below are charts laying out where marijuana may be legally grown and sold (ignoring the current federal prohibition).

 

 

 

Now that we have looked at the states where opening a medical or recreational marijuana dispensary is legal, below are a few other details to consider when thinking about opening a marijuana dispensary or store.

How do I start a dispensary?

Two things to be keenly aware of when looking to open a marijuana dispensary is that it is still federally illegal and if charged with a federal crime you may be punished with prison sentences or fines.[3] Second, each state has its own unique system for licensing and regulating marijuana and marijuana establishments.

Eleven states, as well as the District of Columbia, now allow for recreational or adult-use possession as well. While some of those 11 states have not opened recreational dispensaries quite yet, the states with retail marijuana stores have their own set of challenges and requirements. However, just because you have years of experience as an entrepreneur or know the product well, doesn’t mean you should open your own dispensary. Not only are there special considerations within the industry, but you must also follow strict regulations and laws throughout the process.

In the states and localities that allow for medical marijuana dispensaries, those looking to open a dispensary should take into account the importance of protecting patient records, similar to medical offices. While it is not exactly clear whether the Health Insurance and Portability and Accountability Act (HIPPA) applies to medical marijuana dispensaries, it does not hurt to be overly cautious. In Nevada, the Nevada Administrative Code (NAC) explicitly states that the Department of Taxation may not compel the “production of books or papers that contain individually identifiable health information.”[4] Additionally, medical marijuana dispensaries should be familiar with the current laws and regulations in order to best inform patients of their rights and responsibilities.

If operating in states that allow for retail marijuana stores, or adult-use dispensaries, a dispensary owner should be familiar with the regulations that relate specifically to recreational marijuana. For example, all 11 states that allow for recreational use restrict it to adults 21 years or age and older. Therefore, retail marijuana stores, and their operators, should be aware of the industry’s best practices for how to limit access to only those customers that meet the requirements within the state. Additionally, some states, such as Nevada, limit the number of dispensaries that are allowed to operate within the state.[5] Therefore, it is important to know whether it is even possible to apply for a license to dispense recreational or medical marijuana. Knowing this may drastically affect a business plan.

Here are a few things you should know before getting started.

Boost Your Marijuana Knowledge

Every successful entrepreneur understands that product knowledge is crucial to a new startup business. If you hope to make it in any industry (especially one new to the scene), then you should develop a business model around your product. Appropriate industry knowledge should also include the state-specific standards in type and potency of marijuana products. Not only should you know the range of cannabis strains, where they are sourced, and how you should market each one, you should also know your state’s marijuana laws. While Nevada’s medical marijuana laws and recreational marijuana laws share a lot of commonalities, there are also aspects unique to both. For example, in Nevada, medical marijuana patients are allowed to purchase over twice the weight of usable marijuana as compared to recreational marijuana customers.[6] Every state that has legalized some form of marijuana use has its own set of laws, regulations, fees, and more.

Since cannabis was first legalized, the industry has seen significant growth. Today, the sales revenue earned from cannabis sales have reached unprecedented numbers. These numbers significantly increase in states like Colorado, California, and Nevada who have legalized recreational use. For example, Nevada marijuana tax contributions exceeded $100 million in the 2019 fiscal year.[7] However, despite these large tax revenue numbers, many dispensaries and retail stores are finding it difficult to turn equally as high profits due to the federal prohibition on deducting business expenses when filing their federal taxes. According to federal law,

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business . . . consists of trafficking in controlled substances . . . which is prohibited by Federal law or the law of any State in which such trade or business is conducted.[8]

According to research, the legal cannabis industry is poised for explosive growth over the next decade.[9] It is estimated that the total spent on legal marijuana worldwide will hit $57 billion by 2027.[10] The recreational market is expected to cover 67 percent of this overall number, whereas medical marijuana is expected to comprise the remaining 33 percent.[11] The largest group of legal consumers of cannabis will be in North America, going from $9.2 billion markets in 2017 to an estimated $47.3 billion in 2027.[12]

This fast-growing industry offers numerous opportunities for hard-working entrepreneurs.

Become Acquainted with the Industry

Like any new or emerging industry, governmental regulations and policies are constantly changing as time progresses. Therefore, one way to become acquired with the industry is to be involved or stay up to date with the newly enacted legislation or potential future legislation. Additionally, there are industry specific associations that work to advance their common interests. For example, in Nevada, the Nevada Dispensary Association (NDA) is focused on, “developing and promoting best practices among Nevada cannabis dispensaries as well as supporting the efforts of cannabis establishments to provide high quality, safe cannabis to Nevada’s consumers.”[13] The NDA offers a multitude of educational trainings for people who are either interested in, or looking to become more experienced in the marijuana industry. For potential owners or operators of a marijuana dispensary or retail store, it could be beneficial to either work for another dispensary or take several training classes to become intimately familiar with the marijuana industry in Nevada.

Consider the Requirements of Running a Dispensary

Before getting into too much detail, it is important to understand that in Nevada the number of medical marijuana certificates and retail marijuana store licenses are capped by statute[14] and thus currently there are none open to apply for. While it is possible to purchase one that has already been issued, that presents its own challenge that will be covered further in the blog.

There is a significant amount of risk involved in starting a marijuana dispensary or retail store. Applicants will need to jump through a lot of hoops, legalities, social stigmas, and difficulties. However, passionate and determined investors can usually overcome these challenges and become dispensary owners, if they understand what that entails. Some of the following information to consider and weigh before taking the first step are:

  • Understanding the state’s medical and recreational marijuana laws;
  • Understanding there are significant challenges to banking when operating a marijuana business;
  • Understanding that federal laws have supremacy over any state law authorizing the production, sale and use of marijuana; and
  • Understanding that medical and recreational marijuana is one of the heaviest regulated industries in the country.

In Nevada, when applying for a medical marijuana dispensary certificate or a retail marijuana store license, applicants are evaluated generally on their merits and experiences. More specifically, medical marijuana applicants are evaluated based roughly on:

  • Evidence that the applicant controls not less than $250,000 in liquid assets;
  • Evidence that the applicant owns the property or has the written permission of the property owner to operate the proposed medical marijuana establishment;
  • A complete set of the person’s fingerprints and written permission authorizing the Department to forward the fingerprints to the Central Repository for Nevada Records of Criminal History for submission to the Federal Bureau of Investigation for its report;
  • The name, address and date of birth of each person who is proposed to be an owner, officer or board member of the proposed medical marijuana establishment;
  • The name, address and date of birth of each person who is proposed to be employed by or otherwise provide labor at the proposed medical marijuana establishment as a medical marijuana establishment agent.
  • Operating procedures consistent with rules of the Department for oversight of the proposed medical marijuana establishment, including, without limitation;
    1. Whether the proposed medical marijuana establishment will sell or deliver edible marijuana products or marijuana-infused products, proposed operating procedures for handling such products which must be preapproved by the Department; and
    2. Proof of licensure with the applicable local government authority or a letter from the applicable local governmental authority certifying that the proposed medical marijuana establishment is in compliance with those restrictions and satisfies all applicable building requirements.
  • Such other information as the Department may require by regulation.

When applying for a recreational marijuana retail store license, the application requirements are generally the same, although the Department of Taxation has the discretion to set up applications however they see fit, within the limits of the enacting statute and regulations.

What are the basics of setting up a cannabis dispensary?

Getting a cannabis dispensary business up-and-running in Nevada takes a lot of time effort. Before paying the requisite fees, following the regulations, and procuring the licenses, the first step is to establish the actual business entity. To get headed in the right direction, here is a step-by-step guide. While following these steps will not guarantee success, or even being awarded a license, they are a roadmap to guide the way.

 

Prepare a Business Plan

The first step to take, even before applying for a license, is creating a comprehensive business plan. Making a business plan will help show potential investors a clear description of future businesses. As mentioned earlier, if you are new to the industry, you should seek out an expert for help in creating your business plan. Working with an industry expert could help applicants understand everything a dispensary business plan needs and should include.

Generally, a business plan will include a distinct description of the company’s goals, assets, strategies, and projections. It will also illustrate how you plan on establishing your business, whether that is as a single proprietorship, limited-liability company or a corporation. However, you should work with a lawyer when making these decisions, as they can largely explain the regulations in your jurisdiction as well as the benefits of each business model. This is just one of the many reasons why you should seek legal advice as you begin setting up a medical marijuana dispensary or retail marijuana store.

For additional help, consider looking at the U.S. Small Business Administration website. Their site is full of resources and information on writing a business plan for other businesses.[15] However, while a good source of general information, it is important to understand that the U.S. SBA will not have a thorough database for marijuana-related businesses because it is federally illegal.

 

Secure Funding

One of the first major obstacles that hopeful dispensary owners face is securing funding for their business. According to a survey conducted by See Change Strategy, financial news and information firm, 24% of dispensary operators had difficulty securing financing from investors. Not only are banks reluctant to lend money to dispensary operators but they are federally prohibited from doing so. Due to the exorbitant capital needed, it will fall on the shoulders of the owners to raise large sums of money. To give an example of the large amount, Nevada marijuana companies have recently been bought for anywhere between $20 million and $290 million.[16]

Depending on your state, starting a dispensary from scratch requires anywhere between $150,000 to $2,000,000, according to Gary Cohen at Cova Software, and sometimes much more.[17] You will also need to spend a lot of upfront costs for things such as the licensing process itself, with estimates ranging from $5,000 to $25,000 or more, and legal fees, roughly $20,000 and up.[18]

You will not be able to work with a bank because marijuana is federally illegal. It is important to remember that banks put themselves in jeopardy with federal laws when accepting money generated from illicit activities. Therefore, it will be difficult to find a bank willing to assist a new marijuana-related company because it is federally illegal.

 

Hire a Professional (an Accountant, etc.)

Since finances are a large part of starting any business, having an accountant who knows what they are doing can be invaluable. A Certified Public Accountant (CPA) can help you navigate the financial side of your business. They will also know how to handle the finances properly and forms specific to a cannabis dispensary business. Moving forward, a CPA can also help manage your future finances, including payroll.

As a potential cannabis dispensary business owner, you will also need the help of a professional legal counsel. A lawyer can help you navigate the unique legal situations associated with the marijuana industry, including the necessary forms, permits, and licenses. All in all, a lawyer will make sure that you are in full compliance with all city, county, state, and federal regulations.

When looking for legal counsel, be sure to understand that marijuana regulations are extensive and complex. Often, every level of governmental agency is involved with a new marijuana establishment. Therefore, it is important to find and hire an attorney who not only has extensive experience with the state laws but also is well versed in county and city ordinances as well. In Nevada, with the majority of residents living in Clark County, the interplay between the City of Las Vegas and Unincorporated Clark county can seem like a gauntlet of regulations at times. Therefore, it is best to find an attorney who has practiced in marijuana for several years and is familiar with the laws and regulations in every jurisdiction of Nevada.

 

Find Your Location

Once you have all the necessary funding, you can now move forward finding a suitable place to set up shop. Since cannabis dispensaries are higher risk than other businesses, many owners prefer to rent their first property. However, if you are renting, you must disclose to the property owner that you plan to operate a dispensary on the property. As you look for a property, make sure that it meets all the necessary local ordinances. In Nevada, some of the primary things to consider when looking for a suitable location for a marijuana establishment are: 1) The location cannot be within one thousand (1,000) feet of a public or private school that provides education between preschool or kindergarten through grade 12 and that existed on the date on which the application for the proposed marijuana establishment was submitted to the Department; or 2) The location cannot be within three hundred (300) feet of a community facility that existed on the date on which the application for the proposed marijuana establishment was submitted to the Department.[19]

You can also use online tools to find a suitable location, traffic pattern information, demographic data, and traffic generators. These tools can help you decide which locations will suit your dispensary the best. Prospective business owners may use Google Maps to estimate the distance between potential locations and surrounding facilities. While not always reliable, it is a good starting point.

 

Grow Your Business

Now that all the necessary steps have been taken, you can apply for the required licenses and approvals before opening the doors of your medical marijuana dispensary or retail marijuana store. As you do so, make sure you maintain a respectable presence in your area, by providing adequate security monitoring and giving back to the community.

Why are finances a major hurdle for many cannabis dispensary businesses?

 As mentioned earlier, many new cannabis business owners encounter a lack of funding opportunities early on. This curbs many dispensaries’ ability to thrive. In essence, unless new businesses are self-funded, the chance of them getting capital from financial institutions is slim.

 When California and other states began legalizing marijuana, the industry mostly depended on homegrown businesses where the vast majority of companies were startups with little seed money or overhead. But as new laws and regulations crept in, business operators were forced to change their financial systems. These rules are making it even more difficult for those entrepreneurs hoping to make a name for themselves.  

Additionally, Nevada issues a finite number of retail marijuana store licenses. As of September 1, 2019, all of the medical marijuana dispensary licenses and retail marijuana store licenses in Nevada had been allocated. Therefore, the most immediate solution for business owners looking to enter the medical marijuana dispensary or retail marijuana store sector would be to look at purchasing a dispensary license that has already been issued. However, this would significantly inflate the finances required, as mentioned above.

Kimberly Cargile, CEO of Sacramento retailer A Therapeutic Alternative, told Marijuana Daily, “Since all of the regulations went into place, now it takes a few hundred thousand to a few million to start.”

While some business owners can navigate these financial difficulties, many are forced back into the black market. One grower in Calaveras County, northeast of San Francisco, also told Marijuana Daily that his family sunk more than $200,000 into getting local and state licenses before the county decided in early 2018 to ban all cannabis cultivation. Since then, he can’t afford to move his operation and will need to start selling illegally.

One of the best ways to get past these financial difficulties is by working with expert legal services with experience in the cannabis industry. Together, you can navigate your finances, permits, regulations, and more. Connor & Connor PLLC is a Nevada law firm that focuses its practice on business law, litigation, transactions, licensing, and land use with a particular focus on Nevada’s complex marijuana laws and regulations. Our attorneys are licensed to practice law in all Nevada state and federal courts.

 For more information regarding cannabis dispensaries and additional help starting your own, contact the experts here at Connor & Connor PLLC.

 

Sources

[1]https://www.thecentersquare.com/nevada/nevada-marijuana-sales-set-gold-standard-for-nation/article_57bf06da-bac2-11e8-9ce6-c31893df6c82.html; https://www.rgj.com/story/news/marijuana/2018/07/03/legal-marijuana-recreational-pot-use-nevada-impact-one-year-later/723963002/.

[2] https://www.pewresearch.org/fact-tank/2019/06/26/facts-about-marijuana/ft_19-06-26_marijuana_us-public-opinion-on-legalizing-marijuana-1969-2018/

[3] https://norml.org/laws/item/federal-penalties-2

[4] Nevada Administrative Code 453D.968

[5] Nevada Revised Statute 453D.210(5)(d)

[6] Nevada Administrative Code 453D.165Nevada Administrative Code 453A.704

[7] https://thenevadaindependent.com/article/nevada-cannabis-industry-breaks-100-million-mark-in-annual-tax-payments

[8] 26 United States Code § 280E

[9] https://www.forbes.com/sites/thomaspellechia/2018/03/01/double-digit-billions-puts-north-america-in-the-worldwide-cannabis-market-lead/#43e3a62e6510

[10] https://www.forbes.com/sites/thomaspellechia/2018/03/01/double-digit-billions-puts-north-america-in-the-worldwide-cannabis-market-lead/#43e3a62e6510

[11] https://www.forbes.com/sites/thomaspellechia/2018/03/01/double-digit-billions-puts-north-america-in-the-worldwide-cannabis-market-lead/#43e3a62e6510

[12] https://www.forbes.com/sites/thomaspellechia/2018/03/01/double-digit-billions-puts-north-america-in-the-worldwide-cannabis-market-lead/#43e3a62e6510

[13] http://www.nvdispense.com/mission-statement/

[14] Nevada Revised Statute 453D.210 (5)(d); Nevada Revised Statute 453A.324

[15] https://www.sba.gov/writing-business-plan

[16] https://www.newcannabisventures.com/flower-one-sells-nevada-indoor-cultivation-and-production-facility-to-cannabis-reit-for-20-million/; https://www.newcannabisventures.com/ianthus-to-buy-northern-nevada-cannabis-operator-for-27-6-million/; https://www.rgj.com/story/news/marijuana/2018/07/19/heres-why-canadian-company-bought-nevadas-oldest-pot-dispensary/792957002/; https://www.prnewswire.com/news-releases/curaleaf-continues-its-aggressive-expansion-west-through-strategic-acquisition-in-nevada-300813834.html; http://investors.acreageholdings.com/file/Index?KeyFile=397567989; https://www.globenewswire.com/news-release/2019/06/05/1864540/0/en/Green-Thumb-Industries-Inc-GTI-Closes-on-Acquisition-of-Integral-Associates-Scales-Brand-Distribution-in-Nevada-and-Enters-the-California-Retail-Market.html.

[17] https://www.covasoftware.com/blog/the-true-cost-of-opening-a-cannabis-dispensary

[18] https://www.covasoftware.com/blog/the-true-cost-of-opening-a-cannabis-dispensary

[19] Nevada Revised Statute 453D.210(5)(c)(1); Nevada Revised Statute 453A.322(3)(a)(2)(II)