Medical Marijuana Companies In Illinois Battle Growing Pains

By Ally Marotti
Chicago Tribune

WWR Article Summary (tl;dr) Marijuana entrepreneurs are learning just how hard it is to do business and shake off the stigma attached to a substance the federal government puts in the same class as heroin and LSD.

Chicago Tribune

It should be a routine call, scheduling a visit from the cable guy to set up internet access. But nothing’s routine when you’re running a medical marijuana company.

“There’s this flurry of activity that starts with the account manager with a headset on in a cubicle,” said Jeremy Unruh, general counsel and compliance chief at PharmaCann, which operates two cannabis cultivation centers and four dispensaries in Illinois. “‘Can we do it? Can we not do it? How do we contract with a marijuana company?'”

Unruh has grown used to the uncertainty, the “let me ask my manager” responses. The cable company ended up working with PharmaCann, but Unruh said the extra steps it took are an illustration of what it’s like building a new industry, one that used to have to operate in the shadows.

“Engaging in normal business activities is made that much more complicated by the subject matter of what we do for a living,” he said.

State lawmakers approved Illinois’ pilot medical cannabis program in 2013, and dispensaries started opening two years later.

Despite generating more than $42 million in retail sales so far, the nascent industry in Illinois is going through more than the normal growing pains of new companies. It’s marijuana, after all, and entrepreneurs are learning just how hard it is to shake off the stigma attached to a substance the federal government puts in the same class as heroin and LSD.

Illinois companies also are grappling with slower-than-expected growth of patient numbers, so while they wait for demand to increase here, they are eyeing other states for expansion.

And beyond all those nuts and bolts is the overarching fear the new administration will nullify the industry’s progress.

President Donald Trump showed support for medical marijuana on the campaign trail but Jeff Sessions, Trump’s attorney general nominee, has criticized the drug’s legalization, saying he won’t commit to disregarding federal law.

The challenges begin where they do for any startup: With capital.

The U.S. Department of Treasury has given banks the green light to work with legal marijuana entities under some conditions, but most lenders still hesitate. Elected officials, including Illinois State Treasurer Michael Frerichs and a group of U.S. senators led by Massachusetts Democrat Elizabeth Warren, are pushing to make it easier for banks to work with companies in the $7 billion industry.

In Illinois, there are just a few banks willing to take on medical marijuana companies as customers, which means no ready access to lines of credit or loans. One bank that medical cannabis business owners said they work with declined to confirm on the record that it operates in the industry. Another did not return requests for comment.

Entrepreneurs frequently find themselves looking elsewhere for their financial lifelines.

The founders of Cresco Labs, which operates three cultivation facilities in Illinois, first tapped friends and family for startup funds, and then other investors. A bank loan helped Cresco secure and construct its facilities.

“A lot of companies use lines of credit to smooth out cash flow,” said Charlie Bachtell, Cresco’s CEO and co-founder.
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But in the medical cannabis industry, companies need “to have cash in the bank,” he said.

Most dispensaries cannot accept credit card payments from customers, and all that cash on hand can tempt criminals. A bank account also lets companies write checks to vendors, and employees receive paychecks instead of envelopes stuffed with cash.

But those little victories come at a cost. Banks pass along the cost of the extra compliance work it takes to do business with companies in the space — like paperwork to prove money isn’t being laundered.

A bank told New Age Care in Mount Prospect last May that its monthly servicing fees were going to almost double, to $600, a sum that pushed the dispensary to drop day-to-day banking operations and start dealing mainly in cash or money orders, said co-owner David Knapp. The company hired a security firm to transport funds, adding another expense to its accounts payable ledger.

Rule No. 1 in the medical marijuana business, Knapp said: Always have a backup plan.

If fluctuating expenses haven’t reinforced that rule, the stunted growth of the program has. Illinois’ program has about 16,000 qualified patients, a number 10 to 12 months behind projections made in 2014, said Cresco’s Bachtell.

“All of our revenue projections are driven by patient population,” Bachtell said.

The limited number of conditions medical marijuana can be used to treat has contributed to the low patient numbers.

Illinois launched its program 14 months ago with 39 qualifying conditions, and today there are 41. Some pioneering states, such as Colorado, grant medical marijuana cards to patients based on broad definitions of symptoms and conditions.

Lawmakers signed a bill last summer that pushed back the end of the pilot program to 2020, but it also changed the way qualifying conditions are approved. Originally, an advisory board composed of patients, medical experts and advocates vetted the conditions that people petitioned to be added, then the director of the Department of Public Health decided whether to approve them.

The legislation eliminated the board’s role in the process, putting approvals solely in the hands of department Director Nirav Shah, who hasn’t approved any additional qualifying conditions. Post-traumatic stress disorder and terminal illness were added to the original list of 39 conditions as part of last summer’s bill.

There are seven lawsuits pending in court seeking to add conditions such as irritable bowel syndrome and osteoarthritis to the list.

Department of Public Health spokeswoman Melaney Arnold declined to comment.

The new approval process has come under fire, but many cannabis business owners agree that strict regulations are necessary to make the pilot program successful. The rules help fight the image that pops into many people’s heads when they hear the word marijuana, and has drawn operators accustomed to highly regulated industries, including former lawyers, commodity traders and real estate professionals.

With slow growth in Illinois, entrepreneurs are expanding their business to other states.

PharmaCann operates a cultivation facility and four dispensaries in New York, has been awarded a dispensary license in Maryland and is developing a cultivation center and dispensary in Massachusetts. Cresco won a license in Puerto Rico, is about to partner with a group in Massachusetts that has a license already, and is eyeing opportunities in four other states. Other companies are formulating plans beyond Illinois’ borders as well.

But there’s still work to be done to combat the stigma surrounding marijuana and to increase understanding of the drug, business owners say. Parts of the state law can inhibit that and make business operations more difficult.

Regulations restrict cultivation centers from advertising their products to the public. Mark de Souza, interim CEO for Revolution Enterprises, which has two cultivation facilities in Illinois, partially blames that rule for the program’s slow growth.

A rule for how to dispose of cannabis plant waste — like the stocks and roots — amounts to another huge expense. Unruh likens the process to disposing of “weapons-grade plutonium.”

And the struggle to find vendors willing to work with marijuana companies seems constant, said Zachary Zises, one of the owners of Dispensary 33 in the Uptown neighborhood.

The electronic security monitoring company that covered the building on bustling North Clark Street dropped its service, Zises said. The company that first provided general liability insurance to Dispensary 33 for the dispensary also exited the cannabis space. Less competition among vendors translates to higher rates.

“The risk-reward isn’t there with any of these providers,” Zises said.

Finding a property to house a dispensary can be a search of needle-in-a-haystack proportions. State laws mandate that dispensaries must be 1,000 feet from the property lines of schools or day care homes, for example. And good luck finding a landlord willing to work with a cannabis company, said Knapp at New Age Care.

“It was almost like dating again,” he said. “There was just a ton of rejection.”

Things change constantly as the industry grows and works to become established, but one thing is for sure, Knapp said.

“It’s been a wild ride.”

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