Too Few Licenses Impacts Oregon Cannabis Market

indoor under the lights

 An Analysis of the Office of Neighborhood Involvement Marijuana Program Statistics

By Beau R. Whitney, Whitney Economics

Highlights

  • 19 out of 355 recreational licenses (or 5.4%) submitted to the City of Portland’s Office of Neighborhood Involvement have been issue in 2016
  • This represents an impact of $22.25M of monthly revenue to all Portland based cannabis businesses
  • Based on a 3% rate, the impact due to the lack of retail operations is approximately $232,500 in potential lost tax revenue for the City, and $1,317,500 in potential lost state tax revenue (based on 17%) each month
  • Although the OLCC is processing over 900 licenses state wide in order to get them licensed by 12/31/2016, the 336 city businesses impacted by this issue will not be allowed to operate if they do not also have a City of Portland Marijuana license.
  • This will drive more businesses to lay off employees and shut their doors. It will also drive the demand across the border to be satisfied by Washington Cannabis retail outlets or on the black market

Summary

In addition to the state licensing requirements by the Oregon Liquor Control Commission (“OLCC”), the City of Portland implemented additional local licensing requirements. The City of Portland has received in excess of $250,000 in application fees and stands to receive close to $2.0M in licensing fees related to its Marijuana program. As of 12/05/2016, the City of Portland Marijuana licensing dashboard ( http://www.portlandoregon.gov/oni/67575)  has listed only 19 out of 355 recreational cannabis business applications have been licensed. The lack of licensure so far has cannabis business owners concerned about whether or not they can last through the licensing process. Taking very conservative revenue numbers of $100,000 per month for processors, $50,000/month for retailers and $100,000 month for producers, the lack of licenses represents a total of $22.25M in potential lost revenue for the cannabis businesses on a monthly and a potential loss of $89.0M in economics activity to the city and state.

Background

Whitney Economics has consulted for firms in the process of starting a cannabis business inside the city limits of Portland. Unlike the OLCC process, the city process involves multiple touches and handoffs between various city agencies. Without sign off from each of these agencies, the city will not allow a business to begin operations. According to the ONI administrative rules, there is no mechanism to allow for any waivers or deviations from the process. Everything is done serially. For example, a site inspection cannot be scheduled by the city prior to having all documentation submitted, all permits finalized and signed off on and public improvements to the outside of the building completed. Given the serial nature of the process, and the huge demand for marijuana licenses, permits alone are taking 8 – 12 weeks to be reviewed, even longer if there are proposed changes. If the project involves improvements that are valued above approximately $150,000, this will trigger addition improvement requirements to the outside of the building, such as adding sidewalks, bicycle storage facilities, parking spaces and trees. These improvements must also be permitted, potentially adding another 8 – 12 weeks to the project. This also adds a minimum of 10% of the cost of the improvements to overall spends for the project.

The lengthy processes are driving companies out of business.

One business rented a 10,000 square foot warehouse that was just bare walls, was zoned for agriculture, distribution or manufacturing. The owners submitted a permit request to build out some grow rooms and after realizing how long the process was going to take, made a request to the city to allow them to grow inside the facility using tents and requiring no structural changes. The company feared that they would run out of money before they would be able to generate cash flow and lose their $1,000,000 investment and then be on the hook for years on personal guarantees for rent and other items. The short termed growing solution would allow the company to generate revenue until the permits were approved, then would allow them to bridge the period when they would cease operations during the construction phase. The question from the business owners were, does it make sense to restrict a business operation, when no work needs to be done to get up and running in an appropriately zoned facility?

Another processing company with whom Whitney Economics interfaced with during a recent conference, has obtained their processing licensed by the OLCC, but is anticipating an additional 8 – 12 weeks of non-operation due to a last minute notification by the city’s Bureau of Developmental Services (“BDS”) that bicycle storage and trees needs to be added to their project in addition to parking spaces. This is costing the company millions of dollars in monthly revenue and the company is considering moving out of the city.

After hearing story after story of businesses not being able to navigate through the regulatory bureaucracy the city has set up, Whitney Economics decided to look into the licensing process to determine how many licenses have actually been issued. So far, 19 out of 355 recreational applications have been granted licenses. This makes up on 5.4% of the total applications. Although some retail applications are dependent upon the OLCC and that some of those retailers are holding off on obtaining their OLCC license due to market issue, even after adding in the 29 retailer applications pending payment at the OLCC, assuming they are all in Portland, this would only increase the number of issued licenses to 13.5%.

The OLCC is putting forth a concerted effort to issue both retail and processing licenses by the end of the year by ensuring over 900 applications are assigned to investigators so that they can be processed by the end of the month. The main issue driving this effort is a law from the 2016 Oregon Legislative Session that mandates that in order to produce extracts and edibles, a business must be licensed by either the OLCC or the OHA. If businesses are not licensed they cannot operate in the state. Although a company is issued an OLCC license, a cannabis business in the Portland city limits still cannot operate unless also licensed by the City of Portland. If the City does not license significantly more cannabis businesses in December, this could have a profound effect on the overall Oregon Cannabis Market.

By the numbers:

Overview:

  • 19 out of 355 licenses submitted to the city of Portland have been licensed (5.4%).

o   This compares to 514 out of 1760 applications at the OLCC (29.2%), however by adding in the 906 assigned applications for the December push, this increases the OLCC total to 80%

  • A total of $22.25M is lost monthly revenues are impacting the not yet licensed businesses
  • With a 4x multiplier, this represents $89.0M in lost economics activity for the city of Portland and for the state of Oregon

Retailers

  • 13 out of 168 retailers have been issued licenses
  • At a very conservative average of $50,000 per month in revenue, this implies that there is approximately $7.75M in lost monthly revenues for these businesses

o   Note: This is conservative since there was over $79.0M in total sales in Q3 in Oregon. If spread out over 400 outlets, this is an average of $65,833 per month

  • At 17% tax, this is impacting the state tax revenues by $1,317,500 per month and the City of Portland by $232,500 per month (based on 3%)

Processors

  • 0 out of 74 processor applications in the City of Portland are licensed.
  • At a very conservative average of $100,000 per month in revenue, this implies that there is approximately $7.4M in lost monthly revenues for these business

Producers

  • 3 out of 74 producers have been issued licenses.
  • At an average of $100,000 this represents a total of $7.1M in potential lost monthly revenue

Note: The tax impact does not include any taxes associated with labor, income or other business taxes.

The Data:

screenshot-2016-12-15-10-22-29

Source: http://www.portlandoregon.gov/oni/67575

screenshot-2016-12-15-10-23-12Source: http://www.portlandoregon.gov/oni/67575

screenshot-2016-12-15-10-22-49Source: http://www.portlandoregon.gov/oni/67575  OLCC license data as of December 7th, 2016

What can we extrapolate from this data?

How to Balance Public Safety with Economics Growth

The City is in a tough spot. The question is how to balance public safety with economic growth. With the amount of revenue being impacted on a monthly basis, does this meet with objective of the City of Portland and Office of Neighborhood involvement of supporting economic development? How does the current process insure neighborhood livability? Is the industry being served given the fact that they have already paid approximately $250,000 in fees alone, with a process that may drive them bankrupt even before opening their doors? The Mayor of Eugene recently spoke at a Portland City Council meeting on the topic of marijuana regulation and stated that their low touch model has been very successful in limiting the impact on the community, while enabling economic growth. Perhaps more can be gleaned from other cities in Oregon

What is the impact to the cannabis industry if this logjam persists?

A majority of the processing and edible businesses are located in the Portland area (37% of the processor licenses are from Portland… 74 out of 199 applications). If these companies are not licensed by the end of December, then there will be a profound effect on the entire Oregon cannabis market. The impact will be similar to how the recent test capacity issue hurt the Oregon Cannabis industry, with layoffs and businesses shutting their doors. The lack of processed oils will also hurt the local retail system due to a lack of available products. Already Washington is seeing a spike in sales based on the Oregon supply constraint. This will only increase the level of cross border cannabis activities as well as other black market activities.

The Tax impact:

As stated above, once in operation, both Portland and Oregon stand to benefit greatly from the cannabis industry. By not licensing these businesses, the city and state lose precious monies that would otherwise go to support education, drug awareness and treatment and law enforcement. It seems contrary to the mission of the Office of Neighborhood Involvement to ensure livability, by not doing more to get these businesses operating sooner.

Conclusion

The City of Portland and Office of Neighborhood Involvement have developed such a bureaucracy in its marijuana licensing process that it is literally driving the applicants out of business. A lower touch model in Eugene can serve as a guide to balance public safety with economic growth. The employees of the Office of Neighborhood Involvement are doing an exemplary job trying to manage the program within its current constraints, however without more flexible policies and a provision to get businesses operating sooner, both the City and the Oregon cannabis industry will see the devastating effect that these policies will have after January 1, 2017. Processing and edible operators will cease operations in the city and may not recover when the licensing constraint is resolved.

Comments

  1. Byron Delaney says

    It’s just as difficult to get a brewery or distillery approved. Probably much more difficult in many cases. Simply meeting commercial electrical codes is a huge, expensive task. There’s health codes and all manner of codes and such. It’s standard stuff for the OLCC, and there’s no way around it.

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