Growing Pains
Mark Savaya of Future Grow Solutions.
Michigan marijuana business remains a perilous pot of gold
By Paul Natinsky
Editor’s Note: This article is part of a series called Great Michigan Stories. It examines the legal marijuana industry in Michigan and the large part that Chaldean entrepreneurs have had in creating it. They invested early in the fledgling industry, seeing the opportunity to make considerable profit by getting in on the ground floor. Savvy business people like Justin Elias of Puff Cannabis Company, his partner Nick Hannawa, and Mark Savaya of Future Grow Solutions have made a fortune off the product. Mike Bahoura is one of many Chaldean attorneys who specialize in licensing and cannabis issues.
History
Even before the 2020 election that featured a national explosion of approval for ballot proposals legalizing marijuana production, processing and sales, the industry had taken off, with Michigan among the most lucrative states for cannabis crop sales.
However, the lure of marijuana money comes with expensive federal tax headaches, restrictions on trade across state lines, and a depressed market overcrowded with licensees.
In November 2018, a ballot proposal made recreational marijuana sales legal in Michigan. Prior to that, medical marijuana sales were legal through a “caregiver” program that evolved into legalized medical marijuana dispensaries. But the true boom came with the 2018 ballot proposal. The first recreational businesses opened after a year of regulatory ramp-up.
A New Industry
We interviewed several sources for this story in early 2022. In the short time since then, the marijuana industry saw a boom in licensees and a market oversaturated with product and plagued by freefalling prices. The price drop put a number of growers at risk of failing and sent ripples throughout the Michigan marijuana industry.
On the bright side, the cost of licenses and land decreased and the rush of licensees—including many poorly qualified and capitalized entrants—slowed.
Through a name change and byzantine series of rules, regulations and legislation, the Marijuana Regulatory Agency emerged as the administrator of all things marijuana in Michigan. The MRA created a board of five members that considered medical marijuana applications. Since we last wrote about the industry, the agency’s name has changed to the Cannabis Regulatory Agency (CRA) to cover the wide array of cannabis products, including oils and edibles.
Licensing
Mike Bahoura is an attorney who specializes in cannabis licensing issues. He closed a marijuana dispensary in the city of Lapeer and opened two stores in New Baltimore and Monroe since we last talked to him in 2022, when he said, “It wasn’t an easy process. They were throwing out denials left and right, so it wasn’t easy to get approved.”
The board considered a broad range of criteria from applicants, including litigation history, criminal history, bankruptcy history and moral character. “The most memorable denial that was issued was Calvin Johnson of the Detroit Lions getting denied because of some unpaid parking tickets in Georgia like a decade prior,” said Bahoura.
The MRA dissolved the board at the end of 2019, holding its last meeting in December of that year. With the approval of recreational sales, the process has evolved from being very restrictive to being more like applying for a liquor license. “They started granting approvals unless you had something on your record,” said Bahoura. “They were looking for ways to approve you rather than ways to deny you.”
Bahoura says the CRA has made strides toward effective regulation on the licensing end, but is still inconsistent and capricious when it comes to doling out discipline. Fines and penalties are case-by-case and very arbitrary, he says.
Operating Challenges
With the loosening of the state licensing process came the rush for real estate. The state grants licenses, but city governments establish the zoning rules governing where marijuana growers, processors and retail dispensaries can operate, and under which conditions and caveats.
Outrageous real estate prices have since plummeted, with relaxed government attitudes toward the marijuana industry. Still, local regulations vary wildly. As of 2022, Harrison Township does not allow retail sales, but permits growing and processing facilities. Ferndale allows retail sales, but not growing and processing.
There are also conditions attached to where marijuana operations can do business. Restrictions on how close the facilities can be located to schools and neighborhoods are not uncommon. And grow and processing operations are often restricted to areas of cities zoned for industrial activity.
As convoluted as all of this sounds, it is better than the contentious process that preceded it, in which applicants were scored on a point scale and the top scorers were awarded licenses. A spate of lawsuits against municipalities brought the current system—and the subsequent rush of applicants.
Growing Green
It also brought city treasuries and state coffers a lot of money. License fees are limited for cities to $5,000 per year. State licenses correspond to a fee schedule and depend on the size of the operation and in which part of the process—cultivation, processing, retail—the licensee works. Bahoura says state license fees range in cost from $7,000 to $24,000, and that money flowing to the CRA far exceeds that of any other state agency of its kind.
Despite the economic boon marijuana brings to the state, Bahoura said larger, national banks still won’t accept marijuana industry deposits. Marijuana is still an illegal controlled substance under federal law, so federally regulated banks and credit card companies cannot work with those growing, processing or selling marijuana. It takes bank loans off the table and makes marijuana a cash-only business, forcing businesses to transport large amounts of cash and face the attendant security risks.
Bahoura said building costs of $1 million with build-out costs of another $1 million are not unusual for grow operations. That is not inclusive of added costs for water, light, and equipment or operating expenses. If a crop becomes infested, fails to pass inspection, or other difficulties occur, an entrepreneur can sink very quickly. On the retail side, a busy store requires upward of $1 million in inventory to remain competitive. Retailers are also hampered by IRS Code 280E, which classifies marijuana retailers as controlled substance sellers and takes away the standard expense deductions available to other businesses.
Despite the increasingly mainstream culture forming around the marijuana industry, vestiges of its outlaw roots seem buried everywhere. Future Grow Solutions owner Mark Savaya says his company cannot transport or test its own product. By law, those services must be outsourced.
For those who met the buy-in threshold, navigated the regulatory minefield, and shined the tarnish off a once illegal industry, gold did indeed appear at the end of the rainbow. Nagging legacy regulations and major tax hassles have not stopped the industry from maturing and growing. Some companies have formed a rather large footprint.
Justin Elias is president of Puff Cannabis, a business that operates 10 locations of cultivation, processing, and retail operations in Michigan. Puff has expanded substantially since forming in 2009, from its original nine employees to its present roster of 500. Elias says Puff had revenues of $7 million in its first year, charted $150 million last year, and expects to see $250 million next year.
When we talked to Elias and Co-owner Nick Hannawa, Puff was doubling its staff and planning to move into a new 20,000-square-foot headquarters in Troy.
Future Grow Solutions owner Mark Savaya made the move from the convenience store industry to marijuana a few years ago, when “caregiver” operations were permitted to grow a limited number of plants. Before dispensaries. Before recreational sales.
Savaya saw the potential in the industry and moved to North Carolina to learn about hydroponic towers that feature vertical towers to maximize space, water recycling and no soil. The grow operations locate in repurposed industrial spaces, much like standard indoor agricultural set-ups, but the towers allow for about eight times the number of plants in a standard configuration, taking advantage of the building’s cubic (three-dimensional) space rather than just is square footage, or floor space.
His business has grown, from a single location as of 2022 to three as of November 2023, with another five readying for business early this year. He says he also owns seven growing locations.
Savaya now employs 300 people, each earning $20 to $50 per hour; he said he planned to add benefits to the mix early this year. He often hires employees convicted of non-violent marijuana crimes. He says this gives them a second chance and provides him with a workforce familiar with the product.
Despite the prohibitive costs and regulation endemic to his industry, Savaya has found creative ways to meet his business goals. In 2022, his tower growing arrangement allowed him to grow 12,000 plants in a physical space that historically accommodated 1,500 plants, with the attendant savings on water—90 percent of which he said constantly recycles—and electricity.
Savaya also found creative ways to administer payroll and deal with the cash-only nature of the marijuana business. While many in the industry have turned to credit unions—which are not federally regulated—to do their banking, Savaya formed an employee leasing company and “leases” employees to his multiple dispensaries and grow operations. He manages the huge amount of cash his businesses generate by paying contractors who build out his facilities in cash.
Risky Business
As the industry adapts and matures, it continues to face issues preventing it from operating under the same rules as other industries. 280E, the tax code law, has become the front-and-center issue for licensees. As the businesses scale, they are forced to remain cash-only entities, not eligible to deduct their considerable business costs from their tax bill and not permitted to engage in interstate commerce—an increasingly important issue as many licensees have multi-state expansion plans waiting on the runway.
Bahoura said the number of people exiting the business has accelerated as new owners discover they underestimated start-up costs. Some of them are selling their businesses at reduced rates, simply to get out. Underscoring his points about prohibitive entry costs and high risks, Bahoura said he has helped about 100 applicants prequalify for licenses, but only about a dozen have gotten to the point where they open an operating facility. He said the big question he always asks his clients is, “Do you have enough money to get over the finish line?”
Despite the patchwork of sometimes conflicting local laws, cultural acceptance seems to have arrived. Bahoura pointed out that dispensaries were considered essential businesses during the most restrictive part of the COVID-19 lockdown. They remained open during the pandemic, even offering curbside service.
