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CHALLENGING THE SYSTEM: Michigan’s marijuana industry evolves along with attitudes, regulations Photo by Katy Batdorff

CHALLENGING THE SYSTEM: Michigan’s marijuana industry evolves along with attitudes, regulations

BY SYDNEY SMITH & JESSICA YOUNG Sunday, July 21, 2019 07:45pm

When Michigan voters legalized medical marijuana more than a decade ago, advocates hailed it as a landslide victory for patients. 

RELATED: POINT/COUNTERPOINT: Lakeshore cities take divergent approach to marijuana business opportunities

But the 2008 vote that was supposed to unlock new medicinal options for people suffering from a range of diseases and create a new industry to serve those patients failed in many ways. While Michigan quickly rose to become one of the top states nationally for medical marijuana card holders, those patients lacked consistent access to their medicine.

The reason: The law established minimal framework for businesses to legally operate in the industry and serve those patients. 

Just ask David Overholt, one of the early entrepreneurs who invested hundreds of thousands of dollars and countless hours establishing a business to supply medical marijuana to patients, only to have his venture come crashing down around him. 

“Everything I did was always scary,” Overholt said. “I was always worried about — and betting on — what to do.” 

In 2009, Overholt set up and operated Grand Rapids’ first medical marijuana dispensary, the Mid-Michigan Compassion Club, in the 900 block of Leonard Street on the city’s northwest side. 

The company operated “without any trouble” for four years, with Overholt helping patients gain access to medication and donating the profits to local churches and community groups. Then, in 2013, the Grand Rapids Police Department raided the operation, seizing cash, medical marijuana products, a computer hard drive and paper records from the shop. 

It was the third such raid Overholt had experienced; two others took place at his home, where he and his wife grew for themselves and a few medical marijuana patients. 

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THE DEEP DIVE: 
The Business of Cannabis

Michigan citizens have twice voted in favor of relaxing statewide rules on marijuana. The latest vote in November 2018 legalized marijuana for adult recreational use, a move that has the potential to unlock a new growth industry for the state. This three-part series will offer a pragmatic examination of the promised “green rush” and the risks and rewards businesses face in the fledgling industry.

Part 1: JULY 22 — Michigan’s approach to legalizing cannabis has left the industry operating in a precarious gray market in which companies remain exposed to political and prosecutorial whims. 

Part 2: AUG. 5 — The supply chain for Michigan’s cannabis industry is emerging as the sector gains a regulatory framework and more legal certainty. 

Part 3: AUG. 19 — Society has come a long way since the days of “Reefer Madness,” but questions remain about the effects legal marijuana will really have on Michigan.

Less than a month before the raid, the Michigan Supreme Court ruled that patient-to-patient sales of medical marijuana did not comply with state law, essentially making retail cannabis dispensaries like Overholt’s illegal. In the ensuing years, Overholt spent close to $250,000 on court cases over his cannabis businesses, the majority of which he eventually won. 

“Cases don’t move forward, things don’t change unless somebody challenges the system,” he said.

Even so, the litigation left him with a felony conviction, which bars him from participating in the cultivation or selling of cannabis that is now allowed under a state regulatory scheme enacted in 2016 to prevent much of the uncertain legal environment in which he operated his business. 

Overholt’s story highlights the challenges that many early entrants faced in the Michigan marijuana industry, particularly on the west side of the state. While the 2008 referendum sanctioned medical marijuana for patients, and set the stage for last year’s legalization of adult-use recreational cannabis, it fueled the creation of an industry that operated largely in a legal gray area, leaving the initial wave of business owners exposed to political and prosecutorial whims. 

Although lawmakers have started to address some of those challenges, the fledgling industry still poses a risky bet for entrepreneurs, many of whom lack the necessary resources to overcome the steep barrier to entry in the marijuana market. 

CHIPPING AWAY 

The political win last year in passing the Michigan Regulation and Taxation of Marihuana Act, which legalized cannabis for recreational use by adults, came about after decades of strategic mobilization and advocacy, according to Chris Silva, a Grand Rapids-based political and business consultant in the cannabis industry.

“This didn’t just happen,” Silva told MiBiz. “A lot of people devoted so much of themselves to this, and this plant being illegal has ruined a lot of people’s lives.” 

Although cannabis had a centuries-long history as an additive to medications, both domestically and abroad, restrictions on the use of the plant began in the U.S. in the early 1900s, culminating in the 1970 Controlled Substances Act, which named cannabis a “Schedule 1” drug — the most restrictive category of control.

Before cannabis was legalized in Michigan, possession or consumption of any amount of the plant was a misdemeanor offense punishable by up to a year in jail and a $2,000 fine. The legal system treated the cultivation or distribution of cannabis as a felony, which carried the possibility of up to 15 years in prison and $10 million in fines, depending on the number of plants grown or the amount of the drug sold. 

But soon after the Controlled Substances Act took effect, progressive cities started to re-examine the treatment of marijuana. In 1972, the city of Ann Arbor — a college town surrounding the University of Michigan — enacted a series of ordinances and referendums that would result in some of the country’s most lenient laws on cannabis possession. Notably, a 1974 voter referendum made possession of small amounts of the drug a civil infraction punishable by a $5 fine, as opposed to a misdemeanor. 

Activists credit the laws as helping set the stage for later decriminalization efforts across the country. 

By the early 1990s, the case for medicinal marijuana use by people suffering from cancer and AIDS had started to enter the mainstream. A 1992 report in the Grand Rapids Press cited a survey that found 40 percent of U.S. cancer specialists recommended the drug to treat nausea associated with chemotherapy. As well, 48 percent said they would prescribe the drug if it were legal.

As acceptance around the therapeutic benefits of marijuana gained steam, states began to take action to legalize its use, including in Michigan. Voters in 2008 approved a ballot measure to make Michigan the 13th state in the nation to legalize the medical use of cannabis. 

The law allowed patients with a physician’s recommendation to possess cannabis for the treatment of certain medical conditions. In lieu of an allowance for dispensaries to operate, the law allowed patients or their caregivers, a person licensed to help patients obtain and administer marijuana treatments, to grow and cultivate up to 12 cannabis plants.

One consequence of the new law allowed sympathetic physicians access to a lucrative new business: Certifying patients at a typical rate of $150 per consultation on top of the $100 state application for a medical marijuana card. As a result, it became “super easy” for anyone in Michigan to get a medical card, according to Silva. 

A 2013 report in Crain’s Detroit Business noted that only 1,900 of the 30,000 active physicians in Michigan at the time recommended patients for a medical marijuana certification. Just 55 doctors in the state were writing 70 percent of all certifications. 

The report cited the example of Robert “Dr. Bob” Townsend, who traveled nearly 50,000 miles in a year to visit two dozen office locations across the state and certified medical marijuana patients. 

“I discovered the medical benefits of marijuana in 2007 when I was doing suboxone therapy for narcotics addiction,” Townsend told Crain’s at the time. “I began to notice that as I was weaning people off of narcotic pain medications, those that were using marijuana illegally, and then with medical marijuana cards after 2008, weaned very, very well.

“I discovered that people were coming off using handfuls of Vicodin a month — high doses of Vicodin every day — strictly through the use of medical marijuana.” 

Another physician, Dr. Vernon Proctor, operated multiple makeshift clinics across the state including locations in Flint, Grand Rapids and Lansing. Out of the 136,097 medical marijuana applications the state processed in 2015, Proctor’s signature was on 21,226 of them, according to a report in MIRS

LEGAL LIMBO

Even as the ranks of medical marijuana cardholders grew in the years after the 2008 referendum, a series of legal decisions continued to stifle the growth of Michigan’s fledgling medical marijuana industry. 

Between 2010 and 2016, the Michigan Supreme Court ruled on at least 11 cases concerning medical marijuana businesses and individual rights, writing regulations for the budding industry on a case-by-case basis. 

That included a case that began in 2010 when Mount Pleasant-based Compassionate Apothecary, owned by Brandon McQueen and Matthew Taylor, was closed as a public nuisance. 

While in operation, the dispensary charged license members a fee to rent storage lockers where their excess marijuana was held for sale to other member patients. McQueen and Taylor took a cut of the sale price of the marijuana as a fee, but claimed that because the sales were between two patients, they did not own the drugs. The appeals court disagreed. 

In Michigan v. McQueen, the Michigan Appeals Court ruled that while “delivery” and “transfer” of medical marijuana were literally covered under the Michigan Medical Marihuana Act, “sale,” which the court defined as “delivery or transfer plus the receipt of compensation,” was not. Furthermore, after the Michigan Supreme Court heard the case in 2013, it found patients to be permitted only to engage in “marijuana-related conduct” that pertained to their own medical conditions and not the conditions of different patients, ending legal sales between licensed patients. The ruling sent shockwaves through the industry, leading to a string of raids and closures across the state, including Overholt’s Mid-Michigan Compassion Club in Grand Rapids. 

At the time, the state had approved more than 96,000 patient registrations, according to a Reuters report. 

The pace and precariousness of the state’s court system spurred cities and townships across Michigan to decriminalize the drug. That included Grand Rapids, which passed the charter amendment to decriminalize marijuana in 2012, four months before the raid of Overholt’s dispensary. 

The effort to decriminalize marijuana in Grand Rapids, initiated by the political action group DecriminalizeGR, was a crucial catalyst to statewide legalization, according to Silva. 

“That’s what really built a lot of our community here, getting the people out to knock on doors,” he said. “All of those steps are definitely in the path to legalization and they’re all important public policy steps for cannabis, but they also reflect very different attitudes and, in fact, aim to solve different problems.” 

For example, he said, the campaign for medical marijuana was about access for patients, whereas the campaign for decriminalization focused on stopping the arrest, prosecution and imprisonment of people for the crimes associated with cannabis. Each step caused voters to rethink their definition of the drug.

“It showed a change in people’s attitudes that even if they weren’t 100 percent ready to think these guys should be able to grow a thousand plants or something, they were open to the idea that we should probably stop destroying people’s lives over an ounce of this shit,” Silva said.

After the success of DecriminalizeGR, Silva was hired as the first campaign manager and treasurer of MILegalize. While the group failed to put legalization before voters in 2016 after former Gov. Rick Snyder changed the rules for the collection of petition signatures, MiLegalize partnered with The Marijuana Policy Project, a Washington D.C.-based nonprofit, to get the issue on the ballot in 2018. 

The resulting Coalition to Regulate Marijuana like Alcohol (CRMLA) brought together powerful funders and stakeholders in the state, including the ACLU of Michigan, the Michigan chapter of the National Organization for the Reform of Marijuana Laws (NORML), and the Drug Policy Alliance.

“MILegalize is kind of like the grassroots,” Silva said. “We wouldn’t have been able to even get to 2018 without the MILegalize infrastructure, which the CRMLA utilized heavily. Ultimately, what helped was everybody knew that this was the only way to make it happen.”

In November 2018, voters passed legalization 56 percent to 44 percent, making Michigan the only state in the Midwest to allow the recreational adult use of marijuana. (Illinois has since passed legalization, which will take effect on Jan. 1, 2020.) The Michigan Regulation and Taxation of Marihuana Act allows individuals 21 years of age or older to possess, consume, transport or process limited amounts of marijuana or marijuana concentrate.

Now, eight months later, the state’s marijuana industry still remains stuck in limbo as regulators, municipalities and businesses prepare to move forward. 

“We’ve really come a long way on it and it’s amazing,” Silva said. “I understand you have to be conciliatory when you win the war, but the war on drugs is over, and it’s time for our side to act like it. When you win the war, you don’t go around apologizing to everybody. You tell them to get in line.”

NEW SHOOTS EMERGE

It has taken the state government a decade — as much time as it took advocates to win support and pass overarching marijuana legalization — to nail down statewide rules and regulations for the medical facilities that were legalized in 2008. 

Only recently has the state caught up with the backlog of medical marijuana business license applications allowed under 2016 state law. As a result, the first state-licenced medical marijuana dispensaries, or “provisioning centers,” are just now opening across West Michigan.

Muskegon-based Agri-Med LLC was one of the first companies in 2017 to apply for a business license under the Medical Marihuana Facilities Licensing Act, but the company had to wait until June of this year to celebrate the opening of its first Park Place Provisionary branded dispensary. 

“The problem we had was when we got our prequalification, we didn’t have a place to put our business because no one around here had an ordinance in place,” Tracy Powers, vice president of Agri-Med, told MiBiz at the recent grand opening of the provisioning center in Muskegon.

The state charges a $6,000 application fee for provisioning centers, and Agri-Med will pay between $10,000 and $66,000 in an annual assessment, depending on the number of total licenses, according to the Michigan Department of Licensing and Regulatory Affairs (LARA). Agri-Med paid $365,000 in 2018 to purchase the Park Place building at 1922 Park St. in Muskegon for its provisioning center, according to property records.

Even as local communities continue to catch up with their own regulations of marijuana-based businesses, Gov. Gretchen Whitmer abolished Michigan’s Medical Marijuana Licensing Board in favor of a more “streamlined” application process to help ensure companies don’t have to wait as long as Agri-Med to get opened. 

The executive order created the Marijuana Regulatory Agency (MRA) within the LARA, a move marijuana-industry advocates described as a game changer for expediting the licensing process. 

“One of the first things we did as an association was to advocate for a more streamlined licensing process, to disband the medical marijuana licensing board,” said Josh Hovey, spokesperson for the Lansing-based Michigan Cannabis Industry Association, a nonprofit trade group that advocates for legal cannabis businesses and cannabis issues in the state.

“We’re really thrilled that Gov. Whitmer has heard the concerns of the industry, and the staff at the state have had an open ear to listen to our ideas on how we can have a more successfully regulated industry,” Hovey said. 

Under the prior scheme, applicants for medical marijuana business licenses faced lengthy delays since the licensing board only met monthly and was unable to keep up with the rush of applications, said David Harns, communications manager at LARA. The newly created MRA has helped clear the backlog of applications.

“The medical marijuana applications are being handled as they come in now,” Harns said.

In May, the first full month the MRA took over licensing, it reviewed 213 medical marijuana license applications. The licensing board abolished by Whitmer previously considered about 95 per month.

PATCHWORK OF RULES

While the state government has taken action to streamline licensing, medical marijuana businesses still face a patchwork of local regulations, with some municipalities opting out of allowing the industry entirely. In other cases, cities and townships have allowed growing, processing and transportation companies within their boundaries, but have prevented retail operations from opening. Many communities that have opted in also prohibit medical marijuana businesses near residences, churches, schools and other similar facilities.

The city of Muskegon created a marijuana overlay district, which allows growers and provisioning centers to operate in a special district off Seaway Drive that had been dotted mostly with abandoned and underutilized industrial facilities. The city opted not to cap the number or type of medical marijuana business licenses that get approved, so long as space in the overlay district allows. 

Agri-Med’s Park Place Provisionary set up shop in a former freight and trucking facility in the overlay district. Powers said the company is in the process of obtaining a growing license to use warehouse space behind the provisioning center to produce its own medical marijuana.

“Then we will have a lot more control over not only the product, but the pricing,” Powers said. “We’ll still buy from other processors and growers, but it gives us the ability to control our costs and control the quality.”

While Muskegon has welcomed investment from the medical marijuana industry, other communities across West Michigan have taken a much more complex approach to how they regulate the businesses. 

That’s especially true in Grand Rapids, where officials created new zoning to allow the businesses in certain areas of the city and impose distance requirements between establishments. The businesses must apply for a special land use permit, with the city creating a lottery to determine the order in which the Planning Commission considered the applications. The process also allowed applicants to gain an advantage by having majority local ownership, which city officials hailed as a way to prioritize locally owned marijuana businesses.

Local advocates and marijuana industry insiders have called into question the fairness of the system in Grand Rapids because some companies have found ways to make the lottery system work more in their favor by paying for multiple applications on numerous properties. For example, Battle Creek-based Humble Roots LLC submitted 20 proposals for provisioning center sites across Grand Rapids, each of which required a $5,000 application fee and the company to own, lease or have an option to purchase each property, as MiBiz reported in April. 

“That’s why you see the multiple applications for us. … It was about increasing our probability of success in that city specifically,” Ben Migdal, co-founder of Humble Roots, said at the time. He described the company as a “bootstrapped, smaller startup.” 

Local marijuana advocates have said the lottery system and points process effectively pushed locals out of true majority ownership of marijuana businesses in Grand Rapids.

MARKET FORCES

Although cannabis businesses increasingly have more certainty around their operations from a state and local regulatory perspective, some industry veterans who’ve worked nationally caution new entrants against having grand illusions of a green rush of profit from medical marijuana. 

In other states that have legalized, marijuana sales have yielded increased tax revenue year after year. The first year of marijuana sales in Colorado resulted in more than $67 million in taxes, licenses and fees, which grew to more than $266 million last year. In 2018, California’s cannabis excise tax generated $345 million in tax revenue. 

Hilary Dulany has been involved in the cannabis industry for more than a decade. Dulany started the vaporizer line AccuVape Inc. in Lansing, which she moved to Oregon after the state legalized recreational marijuana in 2014. Last November, Nevada-based Freedom Leaf Inc., a group of hemp businesses that focus on health and wellness, acquired AccuVape.

Dulany helped open a marijuana grow operation while in Oregon, which she described as an extremely saturated market for cannabis businesses. As she observed multiple companies close their doors, Dulany set her sights back on Michigan, where she and her business partners have been approved for provisioning centers in Sturgis and Emmett Township. 

Even as her partners aim for vertical integration and work to add more locations in Battle Creek and Bay City, Dulany offers a word of caution for people looking to make a quick buck in the still volatile industry. 

“I don’t think people are prepared for what the industry is going to look like once all these businesses are actually open, functional and producing a product,” she said. “Right now, there’s just a couple of locations here and there.”

With more than 284,000 medical marijuana patients, Michigan is the second-largest medical marijuana market in the nation. Medical marijuana shops generated more than $56 million in sales from October to March, according to data from Metrc, a system Michigan uses to track cannabis products from seed to sale. 

Dulany encourages local elected officials to seek input from people who have worked in the marijuana industry before deciding on regulations that could create an unstable market. She cites Bay City with its 50 medical marijuana business licenses as a prime example. 

“Who needs 50? Who needs 50 McDonald’s or who needs 50 Taco Bells in a city?” Dulany said. “It’s going to be the people that know how to run their businesses really well who are going to succeed.”

That’s why Dulany thinks local municipalities should judge applications by merit. She’s hopeful new emergency administrative rules around recreational adult-use cannabis from the state Marijuana Regulatory Agency will serve as a framework for local elected leaders still working through their own regulations.

“The release of the rules provides local municipalities and prospective licensees with the information they need to decide how they want to participate in this new industry,” MRA director Andrew Brisbo said in a July 3 statement on the rules.

Stakeholders have about four months to evaluate the rules, as the state plans to take applications for recreational marijuana businesses starting Nov. 1. Applications for recreational marijuana business licenses will follow the same two-step process that the MRA uses for medical licenses. 

The new rules allow for existing marijuana businesses to have their recreational licensing process expedited, something Dulany and other advocates have fought for, because those owners have already invested into the industry and are familiar with Metrc.

Under the rules, recreational marijuana retailers and medical provisioning center licensees can operate at the same location, with physically separate inventories. The rules also provide for new types of licenses, such as temporary event licenses, microbusiness licenses and licenses for designated consumption facilities where adults can consume marijuana but not buy it.

Another significant difference between medical and recreational is that there are no capitalization requirements for recreational licenses, and fewer financial documents are requested from applicants.

Recreational applicants also are required to submit a social equity plan that details a strategy to help promote participation by people in communities that have been disproportionately affected by marijuana prohibition.

“We see that as a positive thing for encouraging social justice, and making sure that the industry is reflective of the entire population of the people in Michigan,” said Hovey at the Michigan Cannabis Industry Association.

The new rules will remain in effect for six months and can be extended for another six months. The agency still must determine some rules, like whether potency limits for recreational use will differ from medical marijuana, among other details, Hovey said.

The rules also mean local municipalities need to formally opt in or out of allowing recreational marijuana businesses by Nov. 1. Many communities have opted to allow the businesses, with others taking a wait-and-see approach as they work through medical marijuana regulations.

Agri-Med’s Powers is holding out hope that Muskegon will opt into allowing recreational marijuana businesses and keep the same overlay district it formed for medical marijuana. The company has an advantage in getting licensed for recreational sales because it’s already involved in medical cannabis. 

“If Muskegon doesn’t opt in and we’re sitting here with a medical license but we’re not allowed to apply for a recreational license, it puts us at a disadvantage,” Powers said.

WHO CAN PARTICIPATE

Despite the MRA’s action around regulating the recreational cannabis industry, some marijuana advocates and pioneers of the legalization movement say they still feel they’re at a disadvantage.

That includes Overholt, who has a felony conviction stemming from the raid of his original Grand Rapids dispensary in 2013. Michigan law prohibits all felons from getting a license for state-sanctioned marijuana businesses.

“I’m screwed,” he said. “I can’t get a license at the state level. Here we have licensed businesses coming around the local area and the people that were on the forefront that drove this to get here are all ineligible.”

While Overholt sits out the industry and hopes for expungement, he is leasing his land and equipment to seven licensed medical growers, including his wife. The outdoor farm will yield between 375 and 450 pounds of cannabis this summer, depending on the weather. Like most crop growers in Michigan, they had a rough start this unseasonably cold spring. 

“Just like all farmers, our yields will be off 25 to 30 percent,” he said. 

From a retail storefront in Sheridan, about 12 miles east of Greenville in Montcalm County, Overholt also is serving the industry via AAA Hydroponics LLC.

Even though statewide regulations on cannabis remain uncertain, Overholt said he is no longer frightened of late-night raids. 

“The first few times, I felt just like anybody else would feel. I was scared, couldn’t talk, sweats, the whole nine yards,” he said. “As more people got confident behind me and more people are participating, it got easier. When you go to court, you get that weird feeling in your stomach; no matter what you’re there for or whether you’re the plaintiff or the defendant, it’s the same feeling. But now, I don’t get that anymore because the will of the people spoke pretty loudly.” 


MiBiz food and agriculture news coverage is supported by Dan Vos Construction. For more information, visit danvosconstruction.com. This sponsorship is advertising. It has no effect on editorial consideration in MiBiz.

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