Recreational Marijuana Rules

What Michigan’s Recreational Marijuana Rules Mean for Microbusinesses

The Emergency Rules issued by the Marijuana Regulatory Agency under the Michigan Regulation and Taxation of Marijuana Act (“MRTMA”) were released on July 3rd, 2019. These eagerly anticipated emergency regulations set forth the rules of the road that Michigan microbusinesses must comply with when operating a marijuana microbusiness facility. 

One of the biggest takeaways is that each part of the microbusinesses’ operation will be regulated as if it was a licensed marijuana facility in the same way as the equivalent recreational licensee holder. To illustrate, the rules applicable to recreational marijuana retailers—also known as dispensaries—are also applicable to the marijuana retail portion of the microbusiness. In other words, there are no special exceptions or special treatment for microbusinesses. This is in contrast to the special treatment given to larger cultivation facilities, who are able to obtain an “excess marijuana grower license” that excepts them from the 5 Class C limitation found in the MRTMA statute.

The practical effect of treating microbusinesses like the other license types is that the costs to start up a microbusiness will be significant.  Because they have to comply with all requirements applicable to the licensed activities they are engaging in, compliance costs will include not just legal and licensing fees but also substantial property buildout costs. The costs of adding fire-rated walls, expensive HVAC systems, commercial locks and more will be substantial and will serve as a barrier to entrants that are not able to raise or obtain enough money or financing to comply with these requirements. This will also likely mean all but the most well financed marijuana microbusinesses will not immediately start processing marijuana due to the substantial costs associated with starting up an MRTMA-compliant processing facility. 

These rules answer many of the unanswered questions on what a Michigan microbusiness can and cannot do. While many of these rules came out as expected, there were some deviations and nuances that warrant further exploration. Below we have outlined six additional takeaways from the MRTMA rules that could effect your plans to open up a cannabis microbusiness here in Michigan. 

Delivery is Allowed

The MRTMA allows persons to place deliveries, pay for product online, and allows deliveries to home residences and designated consumption areas. While Michigan microbusinesses must comply with all of the regulations that are applicable to retail sales by a marijuana retailer (which is what the MRTMA calls dispensaries), they also get some of the privileges given to retailers. Likely the biggest benefit is delivery, which will be an important aspect of many microbusiness business models, if not the entire business model. 

The MRTMA allows a retailer or microbusiness to establish a delivery program that is subject to review and approval by the MRA similar to the MMFLA’s delivery program. One item of note is that under the MRTMA Emergency Rules applicable to delivery, microbusinesses will not be able to share delivery drivers with other microbusinesses or retailers. This will make it difficult for microbusinesses to pool their resources together for a delivery program, as each will have to have their own separate drivers. 

Application Costs

Our firm has been asked some variation of “how much will it cost to apply? or “how much will a license cost?” by almost every aspiring microbusiness company that we have consulted with. Now, we finally have the answer—it will be a $6,000.00 application fee, and an $8,000.00 microbusiness license fee, which is in line with what we were expecting.

The fee for renewing your microbusiness may vary from this initial $8,000.00 fee since it is based on total revenue generated by the facility, though not by much. The $8,000.00 assessment will represent the median amount paid by a microbusiness licensee, with the bottom 33% of microbusinesses by revenue paying $6,000, the middle 33% paying $8,000, and the top 33% paying $10,000.

Must Operate from One Facility

The Rule on Microbusinesses states that a “marihuana microbusiness shall not operate at multiple locations.” This was certainly a disappointing inclusion as the MRTMA was drafted specifically not to require that retail activities take place in the same facility as your cultivation and processing operation.

The practical effect of this rule will be that there will be a limited number of “prime” microbusiness locations for potential applicants to choose from. This is due to the fact that a location must be chosen for two, somewhat contradictory traits—high traffic retail and low cost cultivation and processing space. In other words, not many prime retail locations will also have access to sufficient low cost space for cultivation, and low cost cultivation space will likely not be in high traffic retail locations. Each microbusiness will have to find the appropriate trade-off between these two traits, while also ensuri-ng compliance with municipal zoning requirements

For delivery and destination microbusiness concepts, this won’t be that big of a deal. Microbusinesses focused on delivery probably don’t want to be in high traffic retail areas—road and highway access will likely be more important factors when choosing a location. For microbusinesses that are relying on the microbusiness dispensary model, the location of the microbusiness dispensary will be key. However, as discussed in the next takeaway, there are some exceptions to this rule that microbusinesses will be able to take advantage of with respect to outside sales. 

Microbusiness Farmer’s Markets and Event Sales

Temporary event sales could become a key component of microbusiness sales and could spurn its own industry of regular marijuana events similar to seasonal farmer’s markets found in many Michigan cities. Here, an example comes to mind that illustrates the potential power of the new “marijuana event organizer” and “temporary marijuana event” licenses.

That example is in the infamous nightclub Studio 54.  The story goes that Studio 54 was waiting to obtain a liquor license in New York City—yet the club was open during this time and plenty of liquor being served up at Studio 54. How was this possible? Well, Studio 54 was continuously applying for temporary one day event licenses that allowed it to serve liquor for that day. They were able to rack up a significant amount of liquor sales through these temporary licenses before this loophole was eventually closed by the State of New York.

While I am not recommending that you open up a separate storefront and indefinitely apply for temporary event licenses—like what happened with Studio 54, that is probably not sustainable over any significant amount of time—what I am suggesting is that this could be used on a regular basis for a marijuana farmer’s market or similar arrangement. These type of events could be a regular part of a microbusinesses sales, or in some cases, a microbusiness could be able to subsist just on event sales without ever needing to open up a storefront or develop a delivery program. 

Similarly, certain annual or one-off events could become a big part of a marijuana microbusiness’ revenue. While Electric Forest announced that it was not going to allow marijuana at its 2019 festival, this will likely change as there is “high demand” (see what I did there?) for marijuana at these types of events. I could easily see a two or three day festival such as Electric Forest or Movement generating sales that would otherwise take months to generate from a traditional storefront. Stringing together several of these festivals and concerts could allow microbusinesses to survive solely on event sales. As a result, a microbusiness could base their entire business model merely on catering to these types of events.

Here Comes Cannabis Lounges

Yes, cannabis lounges are coming to Michigan! MRA decided to step into the regulatory fold and will be regulating public use establishments, as opposed to simply leaving this issue to the municipalities to decide. MRA doesn’t exactly call them “cannabis lounges”—the term they use is “designated consumption establishments”, but you get the drift. 

Regardless of what you call them, you will be able to open up a cannabis lounge in Michigan by early next year, assuming your municipality is on board. However, you cannot sell marijuana from within the designated consumption establishment, meaning you would likely have to have a separate neighboring facility or otherwise partition the building such that there are separate entrances and exists for the microbusiness and cannabis lounge. A microbusiness also has the ability to deliver directly to the consumption area if you are not able to site your microbusiness in the same building or right next door to your cannabis lounge. 

Michigan Residency Requirement and Capitalization

We knew that microbusiness applicants needed to be Michigan residents for the first couple years of the program, but what we didn’t know is if there will be a certain length of time they needed to be a resident prior to receiving a microbusiness license. We now know that as long as a microbusiness licensee is a resident of the State of Michigan when they apply, they will meet this requirement. This is good news to out-of-state residents who were eyeing the Michigan recreational market’s Class A and microbusiness licenses.

Another piece of good news is that there are no “capitalization requirements” for recreational marijuana microbusiness licenses. However, as discussed above, that doesn’t mean you will be able to start up a microbusiness on a shoestring budget. Since microbusinesses will still need to comply with all rules applicable to each activity it engages in, potential microbusiness owners will need substantial capitalization in the form of debt or equity in order to build out a fully compliant cannabis facility.

Scott F. Roberts is the managing attorney of Scott Roberts Law, a boutique cannabis business law firm servicing the Michigan marijuana industry. More information is available at www.scottrobertslaw.com.