MI: Pot Goes Pro – Marijuana Business Pulls In People Who See A Big Opportunity

Photo Credit: Larry Peplin

Precision Extraction Corp.’s Troy plant looks like another one of the many small manufacturing operations in the city.

Inside the 18,000-square-foot building, workers fit hoses and nuts and gauges to stainless steel vats. Lab equipment and high-pressure vessels filled with solvents and other potions come together to form precise machinery with names like “The Judge,” “The Predator,” and the “The Executioner.”

Those names might be a hint that the machinery isn’t tooling used to stamp bumpers or gearshifts. Royal Oak-based Precision manufactures equipment to extract oils from one very specific product — marijuana.

Once a seedy underbelly that has now morphed into a gray economy, Michigan’s marijuana industry is quickly professionalizing, thanks to new state regulations for medicinal use.

Michigan is now the second-largest medicinal marijuana state by registered card holders, behind California. The size of that market, and the potential that voters might legalize recreational use in November, are drawing experienced professionals and business savvy to the industry.

That’s starting to create a robust supply chain typically reserved for more mature businesses.

Precision was founded in 2015 by Birmingham private practice attorney Marc Beginin and founder and president of Med Grow Cannabis College, a trade school for state-licensed medical marijuana growers and caregivers, Nick Tennant. Tennant was a 2010 Crain’s Twenty in their 20s honoree for creating the trade school.

Beginin was introduced to Tennant, who had the idea of creating extraction machinery for the marijuana industry, in 2012 but was hesitant to get involved.

“The big thing for me was the leaf. I wanted no part of it,” said Beginin, who remains a licensed attorney but hasn’t enter a court room in a few years. “But what Nick showed me: It was a chemistry set. It’s manufactured product. We don’t touch the leaf, we make the shovels,” — a reference to the companies that supplied products, like shovels, and services during the California gold rush. Those businesses ultimately made far more money than those panning for gold.

Precision, which employs 25, is expected to generate $20 million in revenue in 2018, continuing its trajectory of 200 percent year-over-year growth, Beginin said.

Entering new phase

For market entrants, it’s not gold they’re after, but green.

Michigan’s marijuana industry, which is legally limited to only to the roughly 250,000 medical marijuana card carriers, is expected to generate more than $694 million in sales in 2018, according to Washington, D.C., analytics firm New Frontier Data. That figure is expected to eclipse $755 million by 2020 — strictly from medical use.

The Coalition to Regulate Marijuana Like Alcohol, a grassroots committee formed to legalize adult use of marijuana in Michigan, submitted 365,000 signatures as part of a ballot drive to the state in November. That could put the issue in the November 2018 elections.

If passed, people 21 and older could possess up to 2.5 ounces of marijuana and grow up to 12 plants for personal use. The proposal also calls for a 10 percent tax on marijuana, on top of the 6 percent state sales tax.

If voters approve the measure, Michigan would become the 11th state to legalize recreational marijuana.

New Frontier projects Michigan’s marijuana industry would generate between $1.5 billion and $2.3 billion in sales by 2020 if it passed a well-regulated adult use program.

Giadha Aguirre De Carcer, CEO of New Frontier, said 2018 is the beginning of the third phase of the U.S.’s marijuana industry, transitioning from users turned business operators to middle-management entry into the market to now public investor funds and top executives leaving their perch in traditional business to join the industry.

“These new companies are not only surviving and getting more capital, they are getting executives with major experience,” she said. “It’s not complicated, it’s a numbers game. There’s demand and a monetizable business model, and the companies are maturing, which has attracted more mature money and talent.”

Canada, which is expected to legalize recreational marijuana on June 1, already has several public companies operating in the space, including Canopy Growth Corp., the first publicly traded cannabis company in North America. Canopy sold more than a metric ton of cannabis oil in its second fiscal quarter, which ended on Sept. 30, 2017, and has a market cap of more than $6 billion.

Founder Bruce Linton previously served as president of Ottawa Internet company webHancer Corp. In October, New York-based Constellation Brands Inc., which sells Corona beer and Robert Mondavi wines, said it plans to acquire a 9.9 percent stake in Canopy for roughly $199 million.

But the industry is ramping up more slowly than expected in Michigan, partially due to complex regulatory framework, said Alan Rogalski, licensed clinical pharmacist and attorney for Warner Norcross + Judd LLP in Southfield.

But early entrants with business know-how will line their pockets, he said.

“The first ones to the playing field will control the playing field,” said Rogalski, who co-chairs the firm’s life sciences practice and is the lead attorney on the marijuana industry. “There is going to be a stampede, because we have such a huge population of medical users. The money is going to talk. Those with business sophistication and the ability to raise funds have the ability to plug and play very rapidly.”

As of late January, only 14 state license applications for growing facilities, processing facilities, provisioning centers and compliance facilities had been submitted to the Michigan Department of Licensing and Regulatory Affairs. However, roughly 600 applications are in the prequalification stage or are in process, according to data provided by David Harns, public information officer for LARA.

The state began accepting applications in December on its newly designed regulatory framework, nine years after residents voted to legalize medical marijuana.

Crain’s spoke with several high-volume growers, those expecting to grow tens of thousands of plants, but none agreed to speak on record until licenses are approved by the Medical Marihuana Licensing Board. The first batch is expected to be presented to the board in March or April, Harns said in an email.

But it’s the establishment of the supply chain that’s occurring right now, said Margeaux Bruner, executive director of marijuana consulting firm Quantum Mechanic Services LLC.

“This is different than building an engine, but you still need outside suppliers, packaging experts, labeling compliance, benchmarking, etc.,” said Bruner, a former contract project management analyst for Ford Motor Co. “Everything we’ve learned in the automotive industry is very useful in this one. This is the middle of a perfect storm, where we’re witnessing the end of prohibition and there’s immense opportunity for professionals. We’ve only just begun the professionalization of this industry. It’s going to need specialty skills from real estate brokers to educators to CPAs to all the other necessary infrastructure to build a viable industry.”

Rogalski said it’s the external investors playing the market on the periphery that are enjoying the market growth in Michigan.

“People who own the land, get the municipal approval with an ability to build the facility; those are the guys getting paid regardless if the seeds sprout,” Rogalski said. “All that makes money with little to no risk. It’s a calculated industry right now. The continued flow of money is eventually going to drive more change and sophistication.”

Real estate has likely been the most active part of the pot equation in recent years. Lansing real estate magnate Ron Boji, president of The Boji Group, is already developing space for medical marijuana growers. Boji previously told Crain’s he expects a lofty profit by leasing space in up to seven of his approximately 25,000-square-foot industrial buildings across the state.

Jeff Donahue, another private practice attorney, and investors acquired 130 acres in Windsor Township, 10 miles southwest of Lansing, to develop for marijuana growers specifically.

Donahue’s Harvest Park Development LLC industrial park sold out all 10 lots, which are expected to house 15,000- to 80,000-square-foot grow buildings, of its first phase that came on the market in November six months ahead of schedule. It’s recently opened up development on the second 67-acre phase.

“We were looking at the industry migrating from that weed shop, ‘Reefer Madness’ concept to a more traditional equity market,” Donahue said. “We saw an opportunity.”

However, few communities in the state remain open to marijuana grow operations or dispensaries, which makes developments like Harvest Park more valuable, Donahue said. Brokers and legal experts have pointed to communities like Warren, Troy, Commerce and Shelby townships, Livonia and Detroit as being prime targets for growers in Southeast Michigan.

“From a pure park development standpoint, you can get acreage that’s decent,” Donahue said. “But when it comes to cannabis, having infrastructure, zoning and ordinances and a municipality that’s friendly … That’s rare, so this ended up being a prime piece of property that we’re able to sell at a premium.”

Donahue said his investors are considering another development in West Michigan as the industry matures.

There are still limits to how much like any other business marijuana operations can be.

Banks can’t lend to marijuana growers and sellers because it’s considered a Schedule 1 narcotic, according to the U.S. Department of Justice, and banks would be in violation of federal money laundering laws.

States seeking a tax-collection infusion from marijuana sales are left relying on the trusting nature of the industry’s operators. Because of banking rules, most marijuana businesses pay taxes in cash.

As the San Francisco Chronicle wrote on Jan. 28: “Bay Area marijuana retailers who went fully mainstream this month were forced to act like gangsters anyway as they rumbled down freeways and across bridges in sport utility vehicles and sedans and, in at least one case, a Tesla, bearing cash piled in shopping bags and suitcases.”

An estimated 70 percent of the more than 1,600 recreational and medical dispensaries in California, which legalized recreational marijuana use at the beginning of the year, are still dealing in cash.

Rogalski expects this to stimulate change at the federal level, regardless of who is in office.

“They are going to have to walk into the treasury with a bag full of dimes; It’s onerous,” Rogalski said. “That’s the only system that currently exists — having the equivalent of a Brinks truck, two guys with Glocks on their hips and ex-military personnel walking in bags of large deposits for taxes into the treasury. That can’t continue. Revenue is generated, taxable revenue, and certainly the IRS expects to be paid taxes, so that’s going to change and I think it’s going to change in the next 12 months.”

For Precision, none of these rules matter. It’s dealing in manufactured products. Expensive products, ranging from $43,000 to $1 million, that are in demand. It’s the only extraction product supplier in the state and is looking to expand globally in the coming years, Beginin said.

“For Michigan, it was always a question of whether the end product was legal. Now the Legislature has answered that, which I like,” Beginin said. “Right now we’re the only manufacturer East of the Mississippi (river), and our biggest market is California. The industry is getting bigger and bigger, and we’re looking to grow with it.”