Should I get into the New Jersey legal cannabis market?
Anyone considering this opportunity should be aware that it is not for the faint of heart. The ground rules are not yet set and even after legislation is passed, it will be quite some time before the required state regulatory agency is set up and operational. Another wildcard at this point is how the license application process will be handled and how much they will cost. As of now, the number of licenses (of each type) to be issued in New Jersey has not been established. Nor, how the number of licenses my may change over time. The federal government may also greatly affect the future of the cannabis industry in New Jersey.
What kinds of opportunities will the legal recreational marijuana market bring?
There are two groups that can benefit from legalization in New Jersey:
- There will be opportunities for licensed businesses to grow, transport, test, manufacture, and sell cannabis-based products. Although there is no historical NJ data from which to draw to estimate the size of these opportunities, we can gain some insight from companies in other states already in operation.
- There will also be opportunities for cannabis-related businesses – some of which are already in operation, and others that will be created to take advantage of this new industry. These include many types of businesses that will serve the needs of licensed businesses including attorneys, accountants, consultants, etc. Also, companies to facilitate the operations of licensees, e.g., providers of fertilizer, irrigations systems, accessories, etc. will be required. It is estimated that these types of businesses will earn more than the cannabis-licensed businesses.
What are the capital requirements?
This is another question that cannot be answered in specific terms until the New Jersey legislation is finalized and the actual rules regulating the industry are published. However, a rule of thumb that is often used is that a retail establishment will require a capital investment of approximately $500K, while a grower will require $1M. Of course, the actual amount for you will depend on other factors such as the cost of real estate in the area you have chosen, the products/services you intend to provide, staffing, etc.
What are the biggest issues for starting a cannabis business?
- Successfully navigating the application process. Whatever is decided regarding the number of different cannabis licenses, fewer licenses will be granted than applicants. Those vying for those licenses must be ready to move when the gate opens and be ready to submit the most attractive application possible.
- Raising capital – New Jersey banks will probably not provide loans for cannabis-related businesses. In fact, a local bank will not even open a checking account for any business that is related in any way to cannabis (even consultants). This may change over time, but for now, they are not a source of loans or banking services. The governor has suggested opening a state bank to provide funding, but this is still in the discussion phase. If/when it becomes a reality is anyone’s guess.
- Finding a suitable location. Many towns have already gone on record as rejecting any cannabis retail establishment or farm. The application process may very well take this position into account, so finding an acceptable location is very important. Thus far, two towns have indicated a willingness to host a cannabis business: Jersey City and Asbury Park.
Does the federal government pose a challenge?
Indeed, it does - from two different perspectives – legal and financial.
From a legal perspective, cannabis is considered a federal Schedule I drug. Therefore, anyone in possession of cannabis is subject to arrest and prosecution, even if/when it becomes legal in New Jersey. However, this issue is constantly under review and subject to change. At this time here are 37 federal bills regarding cannabis being considered by the federal government.
From a financial perspective, Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act. Therefore, cannabis businesses must pay taxes on gross income.
I don’t understand. What is the actual difference for a cannabis business?
Cannabusinesses may pay tax rates that are 70% or higher because of the way their taxes are calculated versus other businesses.
- Calculations for other businesses: start with gross income, subtract costs of goods sold and business expenses to calculate taxable income, and then pay taxes on this amount.
- Calculations for cannabis-related businesses: start with gross income, subtract costs of goods sold to calculate taxable income, and then pay taxes on this amount.
What kinds of expenses would I not be able to deduct?
Employee salaries, utility costs such as electricity, internet and telephone service, health insurance premiums, marketing and advertising costs, repairs and maintenance, rental fees for facilities, routine repair and maintenance, payments to contractors, licensing fees, rent, property taxes, and more.
What about business compliancy?
As the owner of a corporation or LLC, you need to know and understand the legal aspects of starting and running a business. Compliance refers to all the federal, state, and local rules required to keep your corporation or LLC in good standing where you conduct business.
In this case, licensees need to understand and complying with all regulations as set forth by the New Jersey agency that will be put into operation to handle enforcement of cannabis-related regulations. This is paramount – violations will probably be dealt with harshly, including (possibly) the loss of license.
What about background checks?
This, too, will be determined by state regulations. The requirement varies quite a bit in other states:
- Some state laws, including those in California, restrict or prohibit the use of criminal background checks.
- Washington state only allows employers to conduct credit checks if it is “substantially job-related” and the reasons are disclosed in writing.
- Oregon and the city of Seattle both prohibit any inquiry about criminal convictions on the job application or as an initial applicant screening tool.
What type of insurance will I need?
General Liability – If you own a storefront dispensary, you are liable for any accidents that may occur. Therefore, it is crucial to have at least $1M liability coverage.
Product Liability - The business is up and running and you are beginning to grow and buy more equipment! You have just purchased a $300,000 trimming machine and a fire breaks out in the warehouse where it is held. If you are unable to replace it in a timely fashion, your revenues are going to hit a rough patch. Having your property covered is one of the best ways to ensure that your operations will continue uninhibited.
Crop Insurance - One of the most important elements of the business for cultivators is the safety of their crops. Fire, theft, and smoke damage can ruin an entire crop for harvest. Having the proper crop coverage, in conjunction with an equipment breakdown policy, can protect your plants from a wide array of risks. Whether it is indoor, outdoor, or greenhouse, crop protection is a must.
Workers’ Compensation - As in any industry, workers compensation insurance is a crucial coverage in cannabis. It protects the employer from any claims brought by employees regarding bodily injury in the workplace. In a new industry like cannabis, it is important for employers to protect themselves so that an accident in the workplace does not end up bankrupting you because of the claim.
Stock Throughput - Covering one’s cannabis inventory is always a necessary precaution. Businesses who are storing or transporting finished cannabis product encounter the risk of theft or damage in storage/transit. Keeping an updated schedule of the value of cannabis being held is a good way to determine the amount of stock coverage a business will need.
Employee Benefits - The most important component of any business is its employees. Without them, the wheels of industry cease to turn. Providing them with health insurance and benefit plans is a great way to ensure retention and increased performance. Group life insurance for employees is another way in which employers can offer even more beneficial resources to their hardworking staff.
Umbrella insurance policy – Extra liability insurance coverage that goes beyond the limits of your other types of insurance. It provides an additional layer of security to those who are at risk for being sued for damages to other people's property or injuries caused to others in an accident.
If I’m still interested, what should I do?
As we advise anyone planning to enter a new field – do your due diligence.
For potential licensees, this means understanding what you will need to set up and operate your business. The second thing is to develop a professional business plan – whether you need outside financing or not.
Existing or new cannabis-related businesses also need a business plan. Remember, whether you are considering getting involved or not – if your is cannabis-related, some of your competitors will certainly be vying to serve cannabis businesses, so you need to determine how this will affect you and plan accordingly.
How can I learn more about the industry?
Learn as much as you can on the topic:
- Follow organizations advocating for legalization – both in New Jersey and nationwide.
- Subscribe to newsletters, blog, and tweets.
- Attend conferences to hear speakers and visit exhibitor booths.
What are the next steps?
- Develop a professional business plan (whether you will be seeking funding or not).
- Execute the first part of the business plan, secure funding, assemble your team, identify a town and site, start getting your application ready.
- Submit your application.
When should I start?
Now. In fact, one speaker at a recent NJ cannabis conference said that if you have not begun yet, you have some catching up to do.
Developing your business plan will take some time, as will executing the first few steps as noted. Developing your application can take several months. Once approved, you will need to begin construction of your store or farm (including building permits, etc.), lining up suppliers, building inventory, pricing, staffing, marketing, and possibly be subject to a state inspection.