Experienced attorney says fundamentals of business success apply — location, good lease terms, industry knowledge
The Carnation connected with attorney James Smith, a partner with Smith, Costello & Crawford. Smith has been a practicing attorney for over 30 years, representing clients in energy, offshore wind, biotech, broadcasting, marijuana policy, gaming and more. He was a primary advocate for Massachusetts’ nation-leading medical use of marijuana regulations. Now that some 260 retail cannabis stores have opened, he’s seen major changes in the landscape.
Smith has no financial or legal interest in any of the Tewksbury proposals. Here is our Q&A, edited for length and clarity.
Tewksbury Carnation: As you may know, Tewksbury has three retail cannabis licenses available. What can the town expect as it moves ahead in terms of revenue and the host community agreement?
Jim Smith: There is a 3% tax, which is taxed just like any other tax — it’s non-negotiable. So that’s the primary benefit to the community besides economic development, jobs, increased activity on Main Street, things of that sort. Many communities would like to have more folks shopping in the retail area. So those are the real benefits.
The host community agreement is under some assault as it’s been abused in terms of impact fees.
Ed. note: Smith is referring to the impact fees that the legislature allows communities to charge cannabis establishments for, for example, police details, traffic impacts or education initiatives. These are over and above the 3% tax. In the early days, when there were only a few locations, there were significant traffic impacts. He says that’s no longer the case.
The initial statute and the new statute both say these impacts must be reasonably related to the existence of the business. Now that we’ve got a few years experience, we know that there’s more impacts with a 7-Eleven or a Dunkin Donuts than a cannabis location. People hanging around, more litter, more traffic. Those don’t happen at cannabis shops. So the legislature recently changed the law because of, frankly, the abuses of the communities.
There are no kids hanging around a cannabis store. In fact, with the regulatory scheme that’s been set up by the Cannabis Control Commission, there are cameras looking up and down the street. I mean, there’s no way to get away with a crime near a cannabis store. You’re on camera the whole time. So certainly the impacts are pretty minimal.
TC: The main concern from residents is traffic — our main roads are pretty congested, and the applicants are talking about a fair number of car trips.
JS: We’d love the traffic! We wish we had parking problems. There’s very little evidence that a cannabis store is going to have a lot more traffic than most any other retailer. In fact, with so many stores open now, traffic is is not really an issue any any longer.
TC: Makes sense. We saw the first cannabis store close recently, right?
JS: Seven have closed — they’re closing rapidly. Two closed last week. We are by nature, I guess, optimistic people though — the fact that there are eight licensees seeking three licenses in Tewksbury. You know, there are stores for sale. You could probably buy one a lot cheaper than it would cost you to build one out these days.
TC: Is New Hampshire on the verge of legalizing as well, which would presumably add pressure?
JS: [NH Governor Chris] Sununu has come around [see his recent statement here.] So I think New Hampshire will join as well, which will really affect the stores in the Merrimack Valley.
It’s $1.7 billion industry — that’s a lot of money, but spread over 300, 400, 500 stores?
TC: Is the state looking at that and making any tweaks to laws?
JS: One area of focus is the illicit market. This is the only industry where our primary competitor is the street corner. And that makes it very challenging because our industry is so heavily regulated, which adds so much overhead.
We also grow too much. In Massachusetts, there’s no caps on cultivation. So there’s so much product available. Prices have come way down, from around $4,000 a pound to under $2,000. We’ve gone down about 60% from their peak a couple of years ago, when it was brand new and there was a shortage of product available. I think the CCC needs to look at regulating the amount of product cultivated, which will help, but the prices are very low right now.
I don’t think people should anticipate traffic being a problem. I think lack of business will be the ultimate problem in a couple of years when those doors open and they join, by that time, probably 500 other stores in the Commonwealth.
TC: We have some proponents that are looking to use existing locations in town, while others are seeking to build new. Do you see other towns favoring existing locations? What are some of the consideration that you see licensing authorities focus on now?
JS: Typically, in retail, they use existing space. New builds are rare. That costs more, which again puts the pressure on the licensee, because this is a very challenging business right now. The majority, the overwhelming majority, turn pre-existing buildings into shops — flower shops, restaurants, banks, vacant retail space. It takes a lot of capital to open one of these even in a rebuilt space. You’re looking at well over a million dollars; if you build, you’re looking at close to $2 million. That’s a lot of capital upfront in a tight business environment right now.
These proposals, for the most part, really want to show control of the space. People are already paying rent on some of these spaces. That’s a huge impact. Probably they prepared proposals, which is not inexpensive, and they have hired architects and lawyers just to get in front of a board.
TC: And even without a buildout, it takes a good bit of time to open, right?
JS: At least a year from an agreement — and that’s optimistic these days. So maybe more like 15 months, and again, you’re paying rent the whole time. You’re obviously putting out a lot of capital, you can’t borrow from banks. So either someone who’s very rich or somebody who’s borrowed money from friends and family, probably at a very high rate. It’s a very tough business.
TC: Some of the proposals are from existing cannabis operators. So presumably for them it’s a bit less expensive because they have economies of scale.
JS: Exactly. People who’ve done it before. This is not unique to the cannabis space. This is any business — you’ve got some experience and experienced people, you’ve got some cash flow. That’s a lot easier than a cold startup. First time out of the gate.
I wish people well, but it’s really hard. I mean, they may well be terrific at it. But it’s a lot of expense.
TC: What advice do you give your clients now, if you were working for a town doing initial licensing? What can they look for in these applications to pick the best proposal that will stay in business as long as possible?
JS: A lot of communities have gone out of the way to support local people, which is good, and that helps sometimes to generate customers. And I hate to be a traditionalist and just say, you know, ‘the most money, the most experience.’ Good lease terms are really important. If you own the building, that’s rare, but huge.
Landlords hear ‘cannabis,’ and they jack the rent up. The key is you want them to survive. Fair rent, good location, accessible by foot or car, good retail area. Cannabis experience, or at least some experience in retail.
TC: Do you see litigation happening for companies that were turned down for licenses?
JS: Maybe two years ago. I mean, the cost of litigation is so high, you can go buy a license someplace else. Look, boards can pick whoever they want to pick, as long as there are no financial kickbacks or anything. So I don’t think it makes any sense to litigate.
A lot of retailers are for sale, right now. A lot are for sale. I think people don’t want to be litigating against communities. It’s hard to win. And a lot of people have spent a lot of money on spaces they’re never going to use. It’s a tough business. It’s not a gold rush.
TC: In one of the proposals, the projection is $8 million gross in the first three years. Does that seem reasonable?
JS: I guess it’s possible. It’s challenging. It’s doable, but it’s challenging. I would take the under on that one. If there are three stores in town, could those three stores in Tewksbury do $15 or $20 million total annually? I would not think so.
TC: Would it then make sense for the board to not give out all three licenses?
JS: The statute says, if Tewksbury’s going to open up for adult use, there’s a mandatory minimum; there’s no cap. There’s a minimum of 15% of the package store licenses, and I assume that math is three.
Now, Boston is at 52 as a minimum, they’re not even halfway there. There’s no timeframe. But over time, the statute would mandate you do three. There are no court cases. No doubt somewhere, somebody will litigate. But I don’t think Tewksbury needs to worry about that.
TC: What didn’t I ask?
JS: You asked me a lot. I told you way too much. Look, there’s no surprises here. This is a tough, competitive business. If Tewksbury opened up three donut shops, maybe all three wouldn’t survive.
It’s like any other business. If it was really easy, we’d all be in it. Good locations still work. Some small places have done very well. You can make money in this business, but it’s not a get-rich-quick scheme anymore.