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The BUSINESS of

CANNABIS 4 tips for successfully constructing a cannabis facility

How will legal recreational marijuana impact employment law?

Take these 5 steps before launching a cannabis business

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Legal marijuana: The other green new deal

It’s not often that Illinois starts a new year by creating an industry projected to drive multi-billion-dollar revenues when it reaches maturity.

and employment projections in Illinois as well as other data relevant to anyone considering investing in or providing services to the industry.

Such scenarios are always exciting, but they hold both promise and pitfalls for participants. The trick is to fully realize the promise while avoiding as many of the pitfalls as possible.

Read on for expert industry perspectives from:

With this first-ever Business of Cannabis special advertising section, Crain’s Content Studio has enlisted knowledgeable sponsors from the legal and real estate sectors to share their expertise on everything from managing construction of cannabis facilities and the top considerations cannabis startups should factor into their business blueprints to how organizations in all industries can begin to navigate the impact of legalization on employment law.

To help put the prospects of this nascent industry into perspective, we also present a by-the-numbers guide to legalization that rounds up cannabis revenue

• Bryna Dahlin, a Benesch Law partner who advises businesses involved in all aspects of the cannabis industry as well as companies impacted by cannabis law; • David Graff, EVP & managing director of project services at MBRE; and • Adam Fayne and Jonathan Havens, partners & co-chairs of the Cannabis Law Practice at Saul Ewing Arnstein & Lehr.

If you or your organization are interested in providing thought leadership for upcoming editions of this sponsored guide or other Crain’s Content Studio products covering the cannabis industry, please contact Kate Van Etten at kvanetten@crain.com or 312-649-5492.

Legalization Will Not Be For Everyone The Employment Loophole

Bryna Dahlin

Partner Benesch Law (312) 624-6340 bdahlin@beneschlaw.com

In its preamble, Illinois’ Cannabis Regulation and Tax Act recognizes that cannabis should be regulated like alcohol. This was in fact the recommendation of the federal commission appointed in 1970 to study cannabis use and its effects. That treat-it-like-alcohol proposal was ignored by the Nixon administration, which instead placed cannabis in the most restrictive category of controlled substances.

Illinois’ new law goes a long way to correct the problems that have flowed from the decision to treat cannabis as more dangerous than cocaine, opioids, and crystal meth.

Consistent with its mandate to regulate cannabis like alcohol, the new law added cannabis to the Right to Privacy in the Workplace Act, which prohibits employers from taking actions against employees for off-premises use of lawful substances.

However, the law treats cannabis differently from alcohol in one important respect: Employers cannot fire an employee for using alcohol in the privacy of their own home. Yet they can arguably fire employees for using cannabis in the same way.

Section 10-50 of the law states that employers may adopt “reasonable zero tolerance or drug free workplace policies, or employment policies concerning drug testing, smoking, consumption, storage, or use of cannabis in the workplace or while on call provided that the policy is applied in a nondiscriminatory

manner.” A drug-free workplace policy that attempts to prohibit off-hours use of cannabis would be unreasonable under Section 10-50, just as a policy that prohibits off-hours alcohol use would be unreasonable.

But there is a loophole: Section 10-50 says that employers can maintain drug testing policies for cannabis, and they can fire employees for violating those policies. Drug tests for cannabis do not test for intoxication. They only test for the presence of the cannabinoid delta9-tetrahydrocannabinol (“THC”).

Unlike alcohol, THC will remain in one’s system for days and weeks after the intoxicating effects have worn off.

A drug test that tests only for the presence of THC does not indicate that the employee is (1) intoxicated or (2) violated a drug-free workplace policy. The employee can test positive for the presence of THC based on off-hours use, use which is protected by the Rights to Privacy in the Workplace Act. Thus, there is tension between the employee’s

THE BUSINESS OF CANNABIS

right to use cannabis outside of work hours and an employer’s right to terminate an employee for failing a drug test.

This apparent conflict means that the courts will likely decide how far employers can go in prohibiting employees’ cannabis use when not at work. All employers should be thinking about how they will treat cannabis use, including drug testing.

Will governing employees’ conduct off-hours through drug testing be worth the potential cost of a lawsuit?

Is there an actual reason to govern employees’ conduct off-hours in this way? If not, it may be time to update policies accordingly.

Bryna Dahlin advises businesses involved in all aspects of the cannabis industry, as well as companies impacted by cannabis law.

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ILLINOIS CANNABIS LEGALIZATION by the numbers With legal recreational marijuana sales only a calendar flip away in Illinois, here are the key numbers to keep in mind for anyone looking to invest in or provide professional services to the state’s blossoming cannabis industry.

Jan. 1, 2020

The date on which medical cannabis dispensaries and cultivators already operating in Illinois can begin selling recreational pot to customers age 21 and above.

55

The number of existing medical cannabis licenses in Illinois that will be allowed to sell recreational marijuana next year.

75

The number of new dispensary licenses Illinois plans to issue by May 1, 2020.

$14.2 billion The amount of investment capital raised by the marijuana industry nationwide in 2018, according to Viridian Capital Advisors.

Managing Construction of Cannabis Facilities Tips from an Industry Leader

David Graff

EVP & Managing Director of Project Services MBRE (312) 558-3870 dgraff@mbres.com Cannabis is a topic you don’t stop hearing about that has implications for service providers of all kinds, especially commercial real estate.

For the last 18 months, MBRE’s Project Services team has been a leader in cannabis real estate and currently manages construction of marijuana cultivation and processing facilities in five states. While each facility has unique physical and regulatory concerns, our team has noticed general trends and issues

common amongst most projects of this kind. In our piece, Cannabis Facilities in Commercial Real Estate, published last November, we discussed construction management challenges for this emerging market.

In this article, we’ll share four tips based on what we’ve learned in the last year that cannabis professionals and their development partners should take into consideration for future operations.

Expect the Unexpected

Large-scale cannabis cultivation and processing centers in the U.S. are still in the early stages of development, so design, engineering, grow settings/techniques and processing requirements are constantly evolving.

This may be the biggest challenge facing developers, owners, and operators until the industry is more established because standards and best practices may change halfway through construction of your new facility. Establishing and sticking to the project program and basis of design (especially engineering) is key to a successful project.

Sudden changes in expectations or requirements for a facility can

significantly redirect a project mid-course, delay delivery, and/or increase costs.

Prioritize Speed to Market

Speed to market is critical, especially in an industry as competitive as cannabis. Once a project is given the green light, the facility needs to be built as quickly as possible, keeping in mind that licenses are often tied to completion deadlines. One way to ensure construction isn’t lagging behind is to order long-lead items early. Making sure coordination and communication between the general contractor and greenhouse vendor is seamless is also essential to staying on budget and schedule.

Pick the Best Team

Another area where projects face potential issues is in the division of labor and coordination between the general contractor and greenhouse vendor. In addition to expecting the unexpected and staying flexible, it’s crucial for project managers to assemble a team that works seamlessly together in order to maintain costs, stay on schedule, and ensure a quality product. At MBRE,

THE BUSINESS OF CANNABIS

we champion a design-build turn-key strategy for certain projects.

Know What Makes Sense for Your Client

In the search for the highest quality agricultural methods, the merits of warehouse versus greenhouse growing have quickly become a hot topic. With more and more ownership of facilities being held by REITS, we are seeing a lean toward warehouse growing in certain markets. However, the amount of capital you have, local climate, and regional/state taxes and regulations can all play a determining factor in which type of facility makes the most sense for your client.

The most important considerations to make when constructing cannabis cultivation and processing facilities evolve as quickly as the industry itself, but the tips outlined above will almost certainly have staying power.

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$1 million

The ballpark amount of capital investment required to start a marijuana dispensary, according to industry leaders participating in a recent roundtable hosted by the American Bar Association.

$10 million to $20 million

The amount of capital required to create a large marijuana cultivation operation, according to those same roundtable panelists.

500 MG

When it comes to cannabis-infused edibles, such as candies and sodas, Illinois residents will be able to purchase and possess products containing no more than 500 total mg of THC. Nonresidents will only be able to purchase half as much.

$543.1 million

The estimated revenue from Illinois cannabis sales next year, according to a report from Arcview Market Research and BDS Analytics.

5,800

The number of people who currently work in the Illinois medical marijuana sector, according to Washington, DC-based cannabis research firm New Frontier Data.

$1.69 billion to $2.58 billion

The range of annual marijuana sales projected for a fully mature Illinois industry, according to a study by Colorado-based consulting firm Freedman and Kolski. That could happen in the next five years.

63,000

The number of people who will be directly employed in the overall Illinois marijuana industry in 2025, according to New Frontier Data projections. That cannabis workforce will be about half the size of California’s.

30 grams

$443.7 million to $676.5 million The estimated annual tax revenue from a mature Illinois marijuana industry, according to Freedman and Kolski.

35%

The key number to understanding the state’s recreational marijuana sales tax structure. Any cannabis or cannabis-infused edibles with less than 35% THC content will command a base tax of 10% of the retail purchase price. Edibles with more than 35% THC will be taxed at a 20% rate, and cannabis above the threshold will be taxed at 25%. Municipalities can add local sales taxes ranging from .25% to 3.75%.

The amount of recreational cannabis Illinois residents will be able to purchase and possess at any given time. Nonresidents will be restricted to 15 grams.

Top 5 Considerations for Cannabis Businesses

Adam Fayne

Partner & Co-Chair Cannabis Law Practice (312) 876-7883 Adam.Fayne@saul.com

Jonathan Havens

Partner & Co-Chair Cannabis Law Practice (410) 332-8757 Jonathan.Havens@saul.com

1. Business Plan: Launching a cannabis business with a solid understanding of both the industry and how you plan to execute your business plan is a must.

While the cannabis industry can be lucrative, there are many considerations one must take into account in order to achieve profitability. For example, there are very few debt and financing options available to cannabis businesses, which means cash is king. Costs to procure a license, whether through a competitive licensing process or acquisition, are quite high. Moreover, operational costs (e.g., higher rents and IRS Section 280E tax issues) pose significant hurdles to profitability.

2. Choosing the Right Partners: You will need to decide who, if anyone, to partner with in your business. Given that cannabis is a highly regulated industry, partnering with experienced professionals is important. Many outof-state operators look for a partner locally to assist them with geographicspecific needs and/or for the local partner to be a meaningful part of the application, for which state and/or city residency is valued by the regulators scoring the application. When vetting prospective partners, additional considerations include: who will control the operation; what rights will be

given to minority partners; and how will dilution work in the (likely) event additional capital is needed?

3. Choosing the Right Structure: A common question for new industry entrants is: Do you structure your business as a flow-through entity (LLC or S-Corp) or as a C-Corporation?

The considerations involved typically anchor on tax and risk factors. Due to the complexity of the U.S. tax code, some businesses choose to be a C-Corporation to limit shareholders’ tax liability. Even though C-Corporations have higher tax rates than flow-through entities, some businesses would rather pay more in taxes in order to limit exposure.

4. Capital: There are a number of avenues to raise capital as well as invest in the cannabis space.

Individuals, family offices, and funds are doing this through debt, equity, and hybrid debt/equity instruments.

Any person selling an opportunity to invest must make certain disclosures to potential investors.

Utilizing an offering memorandum and a subscription agreement that discuss the opportunity in detail are important aspects of the capital raising process.

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5. Regulatory Compliance: Regulatory compliance is essential. Prospective operators need knowledgeable counsel to navigate the intricacies of state and local regulation. Each state is different and localities may have their own regulatory hurdles. It is important to understand what each jurisdiction requires so that stakeholders can understand how best to position themselves to obtain a license and operate profitably.

Lawyers in Saul Ewing Arnstein & Lehr’s Cannabis Law Practice assist cannabis industry operators of all sizes, along with individuals, family offices, and funds on the best way to invest capital in the space and mitigate risk.

Our team is well-positioned to provide advice on acquisitions, financing and capital raising, business formation and taxes, licensing applications, regulatory compliance, and many other areas of law that cannabis businesses are faced with every day.

www.saul.com