Last week, we wrote about new application materials released by the Marijuana Regulatory Agency (MRA). These newly released materials serve to assist applicants with changing a facility’s ownership or on how to purchase a licensed cannabis facility from another operator. This week, we’ll discuss the practical steps involved in positioning your company so that you qualify to engage in a purchase or transfer.
Before discussing a license transfer, we need to understand what elements of a cannabis facility can be transferred. A cannabis facility is a fixed location, licensed by both the MRA and the municipality to operate. When we evaluate a license acquisition project, there are two elements we need to consider: the assets and the approvals.
Real Estate Acquisition
The most important “asset” to consider is the company’s property interest in its location. The MRA issues a license to a specific location, and that location cannot change. This means that control of the facility’s location is paramount to a license acquisition project. While other assets such as stock, equipment, IP, etc. are also valuable and crucial for consideration, a marijuana facility must maintain legal possession of its location in order to operate.
Whether the company owns its property or leases from a landlord, a purchasing company will need to acquire possession of that location. Additionally, a cannabis acquisition project will typically start with a plan to facilitate this acquisition.
When you are evaluating the real estate acquisition portion of a project, you will need to be sensitive to the timelines involved in updating approvals for a transfer. Typically, a due diligence period on a real estate purchase agreement will place the purchaser on a tight timeline relative to the time it takes to obtain MRA and municipal approval for the license transfer. Similarly, if you plan to assume a lease or land contract, you’ll want to consider when your company will be in a position to assume these agreements.
Next, we’ll consider the approvals needed to operate: cannabis licenses. There are three cannabis approvals all operators need in order to qualify for or operate a licensed facility:
- Municipal approval,
- Prequalification, and
- Facility approval.
These approvals are typically not transferable. At least, not without updates and approval from both the municipality and the MRA. Furthermore, to position your company to purchase a new marijuana license, you need to ensure your company can update all approvals accordingly.
While a license can be “purchased” conceptually, the approvals necessary to maintain a license are specific to its operators.
At the state level, the business proposing to operate a cannabis facility must be the business that obtains prequalification approval. When a new company seeks to purchase a licensed cannabis facility, that new company would also need to obtain its own prequalification. If you are purchasing an open and operating licensed facility, you will not be allowed to operate that facility until the purchasing entity obtains its prequalification.
While you can purchase or transfer a license to a company that has not been prequalified, prequalification is not a step that can be skipped. If you are going to consider obtaining a license, you should have a good understanding of when and how your company will obtain prequalification. As I’ll discuss below, prequalification may be a necessary step to obtain municipal approval as well.
When one prequalified entity seeks to purchase or acquire another, the purchasing company also needs to consider capitalization. The capitalization requirements are license-specific. For example, if your company is prequalified but submitted capitalization to support the operation of a Class A license, your company must amend its application and demonstrate additional capital before it can purchase and be approved to acquire a new license type.
Consider the following: the Capitalization requirement for a Class A is $150,000. A Provisioning Center is $300,000. If the purchasing company no longer intends to operate the Class A, it needs to come up with an additional $150,000 of capitalization. If the company intends to operate both the Class A and the new Provisioning Center, it would need to demonstrate an additional $300,000, for a total of $450,000. Enough for both licenses.
Amending capitalization is a straightforward process, assuming your company already has access to the required capital. If your company doesn’t have the capital to meet the minimum capitalization requirements, you need to find new lenders or investors to demonstrate your ability to operate both facilities.
You company will need to update its CPA Attestation Letter to reflect the new funds, and provide any new supporting documents to the MRA for approval. This would include evidence of new/amended assets or loans, new or updated Statement of Money Lender Forms, and proof that the new funds claim exist and are titled to your company or your lender.
The second portion of the state approval process is what we refer to as the facility license application or Step 2. Just like with prequalification, a new or updated owner of a facility license is responsible for submitting a new set of facility application materials. Purchasing an operating facility is not enough.
Unlike prequalification, which entails a background check specific to the owners and operators involved, several of the facility application materials can be purchased or transferred from an acquired entity. However, just because you can transfer some of these materials doesn’t mean there isn’t work involved in updating your facility application to contemplate a new owner.
The facility license application requires applicants to submit several key business plans including your facility plan, technology plan, staffing plan, marketing plan, and inventory/recordkeeping plan. If the purchasing business intends to operate the facility differently, all of these plans will need to be updated to reflect these changes.
Further, there are several items that practically need to be updated. For example, a new business will need to obtain its own insurance, acknowledgments of municipal approvals, and proof of facility ownership. Even if a company is entering into the shoes of the purchased facility license, all of these materials must be updated and approved by MRA before operations can continue.
Every municipality will have its own rules that govern the ability to purchase or transfer a licensed facility. In several cases, the municipality may not have contemplated a transfer in its ordinances, or the ordinance may outright prohibit the transfer of a license to new owners. Before your company moves forward with a potential license acquisition project, it is imperative that you understand the municipality’s role in that process and evaluate the steps necessary to obtain approvals for your acquisition.
In general, municipal approval typically requires the submission of a municipality-specific application. This application will often entail special use, site plan, and other local approvals specifically designed by the municipality where the facility is located. In addition to approvals specifically about your facility’s location, most municipalities will require applicants to submit a business license application or other disclosures designed to assist the municipality in evaluating the applicant and its owners.
Some municipalities will require background checks similar to the prequalification process, others will only accept applications from applicants that already hold prequalification. Regardless, most municipalities will require applicants to participate in some form of a background check. It is important to note that this background check may impact owners, managers, and employees differently than the prequalification process.
Several municipalities created ordinances prior to the enactment of Public Act 3 of 2019, which amended the definition of “applicant” to provide for our 10% rule. So, even if your company has already obtained its prequalification, your company’s owners and employees may need to participate in this process, even if they were not included in prequalification review.
Finally, some municipalities will not allow the transfer of a license to a new company at all. When this occurs, this does not necessarily prevent a purchaser from obtaining the company. Instead of shifting the municipal approval from company 1 to company 2, you may need to acquire the cannabis facility by purchasing the company, not its assets.
In these situations, a new owner will be purchasing all of the ownership interest in a municipally approved company. This way, the approved company will not technically change, but you can still purchase a licensed facility by replacing that company’s owners. Again, this process will still trigger the need for municipal approval, and is not always an available option in some jurisdictions.
In general, limitations on your ability to acquire or purchase a licensed cannabis facility will often start with and die at the municipal level.