Canopy Expansion: The Wait Is Over
Washington State Now Allows Cannabis Producers to Own Multiple Licenses
Last week the cannabis industry received much anticipated news: producers are now allowed to own up to three licenses, expanding their canopy to amounts initially allowed when the licensing process first began.
In 2013, hundreds of Washington residents applied for a license to producer cannabis, choosing one of three types of licenses, tiered by the amount of square foot canopy growing space allowed. Each person was able to apply for up to three licenses, meaning that a single person could be licensed to grow up to 90,000 square feet (if they held three tier 3 licenses) of cannabis. The licensing window closed and the Washington State Liquor and Cannabis Board (the “WSLCB”) discovered that if it allowed all of the applied licenses to go forward, the licensed canopy space would greatly surpass the 2 million square feet of canopy space it had originally set as the maximum amount to be allowed within the State.
The solution to the canopy issue was allow each person to only utilize one of the licenses that was applied for and on February 19, 2014, the WSLCB issued Board Interim Policy BIP-02-2014, limiting licensees to only one license per person or entity. Many licensees had structured their business plan and projections around the utilization of more canopy space than was ultimately allowed and have been waiting to expand, realizing the full potential of their initial business plan.
On Wednesday, August 9, 2017, the WSLCB gave notice that BIP 02-2014 has been rescinded and canopy expansion will now be allowed. Current licensees (and folks looking to get into the business) can officially apply to own up to three licenses, maximizing canopy space depending on the tier of the licenses.
In order to take advantage of this new rule, licensees cannot apply for a new license, but rather may purchase an existing license through the purchase of the licensed entity or through an assumption of the license. As always, the WSLCB must approve the purchase of the license and the new owners individually prior to the actual transfer of ownership or assumption of the license. The purchase of an existing licensed entity is accomplished through a Change In Governing Person Form, which will begin the vetting and approval process with the WSLCB. During this process, the LCB will require a Purchase and Sale Agreement and a Bill of Sale, among other documents like a lease and floor plan. The assumption of the license is accomplished by filing a new business license application and marijuana addendum for the purchasing company. A Purchase and Sale Agreement and a Bill of Sale are also required by the WSLCB during the license assumption process.
This expansion is great news for the industry. However, the notice also provides that co-location of producer licenses will not be allowed. Presumably this means that each license will need its own “licensed premise” a defined term which essentially means the floor plan that has been submitted to and approved by the WSLCB. By disallowing co-location, licensees will need to lease additional space, have separate log-in stations, have separate employee badges and incur other overhead expenses for its second and/or third location. Additionally, if the same labor force is working in more than one licensed premise, the employer must be registered as a farm labor contractor with the Department of Labor & Industries. Without the allowance of normal deductions thanks to Internal Revenue Code Section 280E, purchasing additional licenses will most likely be an expensive endeavor.
Even though the purchase of additional licenses may present a few challenges and upfront expenses, growing more product will mean larger yields and profits. As long as the proper business structure is in place so that the licensee is operating in a manner which maximizes certain business efficiencies, additional licenses will be worth the wait.