With marijuana startups, a green thumb comes at a cost

Vying for a spot in the medical marijuana industry comes with a large buy-in.

Before a state application can be considered, these entrepreneurs must secure a location, assemble investors – because they can’t get a business loan – develop a medical team, hire an architect to create renderings of their potential business, determine a security plan for the high-dollar products and complete the application paperwork – or hire someone else to do it. That alone could cost $60,000-$100,000 a pop.

Then, they pay the $6,000-$10,000 application fee, depending on the license sought: dispensary, cultivation or infused-product manufacturing.

And that’s just the beginning.

Though medical marijuana may be a lucrative business, those with their eyes on the Springfield market know the return on investment is slow and the profit margins of 10%-20% is less than some expect.

Jamie Tillman, owner of CBD operator CannaBliss LLC, hopes to open three medical marijuana dispensaries in 2020. After her dispensary is built at 1109 E. Battlefield Road, Tillman will have invested $1 million along with her two silent partners in the application process.

Tillman says she expects her profit margin to be about 20% after the many factors she anticipates taking their piece of the pie.

So, what are the financials behind a medical marijuana business?

Operating costs
A medical marijuana business, like a dispensary, incurs similar operating costs as other companies – just on a larger scale, said Marshall Marquardt, chief operations officer of Colorado-based Apothecary Farms. The company applied for 11 licenses in Missouri, according to past Springfield Business Journal reporting.

Marquardt said labor for an Apothecary Farms dispensary costs over $250,000. That covers 10-15 employees, an assistant manager and manager, he said.

Tillman said the Missouri application required her to have a medical team in place outside of her planned employees.

“You have to have a pharmacist, a medical director, a security adviser, and then anything else you can round up is perks,” Tillman said. “Usually, to get these people on your team, you have to give them a percentage of your business, which is what a lot of people have done – or you pay them.”

Marquardt said another large portion of the company’s operating cost goes to the security systems, noting each dispensary has over 100 security cameras, running off Wi-Fi. He cited security costs of over $100,000 per site.

“There’s a lot of other industries that will be positively impacted by cannabis,” Marquardt said, citing security and power companies.

Wendy Coy, chief operations manager at Midwest Security Inc. in Springfield, expects the burgeoning industry to be good for business. She said at least a dozen applicants have asked for a quote from Midwest Security for a 24-hour security guard. Many of these entrepreneurs are hopeful to open multiple locations across the state, Coy said.

“Most of the applicants will need one guard at a time, depending on the alarm systems that they will have in place,” Coy said. “Figuring 24-hour shifts, it would be around $219,000 a year per location.”

Then, there’s the product.

If she receives a license, Tillman said she’s budgeted close to $400,000 in furnishings, like display cabinets, and expects the initial marijuana product to cost $350,000 per dispensary location.

She said it’s likely that her budget will change once product is grown in the state.

“No one knows what the going rate will be, because no one knows what our surplus will be because cultivators aren’t here,” Tillman said. “This is just throwing a dart at the board.”

Cultivators also have to fund the laboratory setting required by the state. According to past SBJ reporting, it could cost organizers of Springfield-based The Wholesome Bud Co. LLC about $70 per square foot of a cultivation building to create the laboratory – including lights, tables and HVAC. They’ll also need video cameras with two views on every plant.

The Wholesome Bud team projects an investment of $3 million-$5 million by the end of 2020 with help from angel investors to meet their business plan.

Banking and marijuana
As to how and where the marijuana business income will be processed, Tillman has to laugh: “That’s to be decided.”

That’s because it’s technically illegal for a bank to do business with a company that sells a Schedule I drug, said Shaun Burke, president and CEO of Guaranty Federal Bancshares Inc. (Nasdaq: GFED). It signals money laundering, he said.

There could be regulatory relief soon, however. The U.S. House of Representatives recently passed the Secure and Fair Enforcement Act, which would help regulate relationships between banks and marijuana-related businesses. It’s now awaiting approval from the Senate.

Until then, most Federal Deposit Insurance Corp. insured banks won’t do business with marijuana companies, Burke said. The few that do, however, can name their price.

“The reality is that some banks are banking (marijuana-related businesses), and they’re just not saying it,” Burke said, drawing on his experience as past chairman of the Missouri Bankers Association. “There are banks choosing to do it because right now they can charge anything they want to.”

Marquardt said it can cost $5,000-$15,000 to open a checking account with a bank in Colorado. Burke said he’s heard of other banks charging upwards of $10,000.

On top of that, Marquardt said Apothecary Farms is charged $2,500 a month just to keep an account open.

The limited access to banking also means many state-legal marijuana businesses nationwide are having to operate as a cash-only enterprise. Marquardt said that requires businesses to hire armed car services to transport money, which could cost as much as $100,000 a year, based on frequency.

“You don’t want a team member driving $50,000 to a bank every week,” Marquardt said.

Wentzville-based Triad Banking CEO Jim Regna said the bank will offer depository services to marijuana businesses in the St. Louis area. He cited the U.S. Department of Justice Cole Memorandum for guidelines the bank is following.

Burke said about 300 of the 6,000 banks nationwide are participating in the marijuana banking business, many of which cite recommendations through the Cole Memo.

“We need clarity. It presents all kinds of risk when any industry does not have access to the financial system,” Burke said.

Business loans also are untouchable for marijuana-related business owners under current regulations.

Tillman said that eats into the individual profit margin, too.

“You can’t get a bank loan for your product or for your lease, so you have to invite more investors to join your business,” Tillman said of splitting up the equity.

The tax code
Under Section 280E of the federal tax code, marijuana businesses – medical and recreational – are unable to deduct ordinary business expenses. That’s because marijuana is legally considered a Schedule I drug, and the trade is seen as drug trafficking.

This means marijuana-related ventures are required to pay income taxes on gross profit, said Rod Link, an accountant with Nixa-based Professional Accounting and Tax Services.

Link said a legal business would be able to deduct ordinary operating costs, like rent, employee salaries and utility bills, while an illegal business cannot.

Therefore, the effective income tax rate for a marijuana-related business could soar as high as 90%, according to an article by The Tax Adviser, a monthly publication of the American Institute of CPAs.

“All of your employees are paid out of your pocket,” Tillman said. “Lights, rent – all of that is not tax deductible. And any of the stores are going to have at least 10-15 employees.”

Marquardt said this has an impact of at least $200,000 on Colorado-based Apothecary Farms.

“That’s a big piece of your profit margins being at 10% to 20%,” Marquardt said. “There’s a lot of people out there that think cannabis businesses are profiting 50%-60% and that’s just not accurate.”