The sublease seemingly gives a route into the Arizona leisure hashish marketplace for firms exterior of the state

With the launch of the adult marijuana market in Arizona in January, insiders predict strong growth in the number of companies outside of the state using a backdoor method to enter the burgeoning leisure industry: subleasing space in large grow or manufacturing facilities.

The practice will allow nongovernmental brands – and to a lesser extent Arizona marijuana startups – to enter what is expected to be a large and rapidly growing market.

The Retail Marijuana Business Factbook 2021 business will have sales between $ 250 million and $ 300 million this year and grow to $ 1.3 billion to $ 1.5 billion by 2025.

According to Arizona cannabis regulations, the 130 existing marijuana business license holders – and the upcoming 26 social justice licensees – can apply for recreational permits to operate both grow and production facilities to supply their store fronts.

These grow and production centers have no size restrictions, which means that any license holder can build them as big as they want – and then rent out space to other companies that want to grow cannabis, manufacture their own food lines, or manufacture other products.

Of course, this isn’t a new phenomenon in Arizona: Tempe-based multistate operator Harvest Health & Recreation has been renting space at some of its facilities since 2017.

However, the advent of the new recreational market is likely to accelerate the trend as more companies outside of Arizona look to enter.

“There will be a large number of manufacturing centers in Arizona that will provide incubator-like space for brands from Colorado, Oklahoma or California,” predicted Demitri Downing, founder of the Arizona Marijuana Industry Trade Association (MITA-AZ).

“Smart businesses will come in and either buy or sublet one (130 of the licenses) to position themselves for large manufacturing or cultivation centers in Arizona – to prepare for interstate trade – lack of size constraints,” he said.

“It’s a tremendous opportunity.”

How it works

Steve White, CEO of Harvest, said his company has sublet space at some of its facilities to about 20 companies over the years. They were mostly cultivators, but some manufacturers were also involved.

He assumes that interest in the practice will increase.

“For people who are serious about starting a business, this is a really easy alternative given the licensing cost,” said White.

“You will see people from other states looking for different ways to get into the market, and you will have a choice of either leasing a license or spending more than $ 20 million to get your own license.

“There are very few people who can say, ‘I’m only going to raise $ 20 million.'”

It’s up to every company to get a license holder in Arizona, and not all companies in the market have the space to share.

Harvest is the largest licensee at 19 and its inventory needs are met without using all of the growing and manufacturing permits associated with each of those licenses, White said.

Therefore it only makes sense for Harvest to sublet unused facilities.

The market price for space is typically $ 35,000 to $ 55,000 per month for different sizes of space, White said, and he estimated that 50 to 60 of Arizona companies are already sublet space at some of their facilities.

And White noted that some companies do differently structured deals with licensees – for example, by exchanging equity in their companies for space – rather than paying a monthly or annual flat rent, which Harvest prefers.

Downing said he knows of some licensed operators who plan to build such facilities in order to take advantage of the sublet option.

Therefore, the options for non-state corporations are likely to increase in the near future.

“The owners rent them for a total of $ 30,000 to $ 80,000 a month,” Downing said.

He added that some companies have sublet entire facilities from licensees and then sublet some of that space to other unlicensed marijuana companies.

High barriers to entry remain

The hard part of getting a business like this up and running is structuring a sublease that will please both parties’ licensees and convince them that the agreement is not coming back to bite them.

“Ultimately, our license is at stake no matter who you bring to operate,” said Ryan Hurley, Copper State Farms in-house attorney, who holds four marijuana business licenses in Arizona.

This means that potential violations of the law or industry rules by a company sublet space from Copper State or Harvest or others could become a major concern for the license holder, Hurley said.

This is one of the reasons Copper State has largely stayed out of the sublet game so far.

“Whichever way you close the deal, at the end of the day it’s our license and compliance on the line, so I tend to be pretty careful,” Hurley said.

In addition, capital requirements remain pretty high, Downing and White said.

A number of companies have tried to sublet and have failed.

“I’d say $ 500,000 and a track record in another state. This is primarily who these offers appeal, ”Downing said when asked how much cash a company should have available and what profile licensees are looking for in potential tenants.

“It’s not that easy just stopping by for a mom and pop shop or an old-school OG that used to be on the black market. They are generally not welcome because people are concerned about compliance. “

For the same reason, subletting is not necessarily a guaranteed route to success.

Hurley said it was easy to see how a new business sublet space from a licensee could do more than the actual licensee.

This could lead to unwanted competition that can easily lead to sour grapes or even a legal battle.

“All sales go through the same license at the end of the day. So are you competing for shelf space? Sometimes those interests don’t match, ”said Hurley.

But the practice is going nowhere, added Hurley.

“It has definitely accelerated because the market has gotten bigger, more people want to come in, other established brands from other states that are sophisticated are looking at this,” he said.

“I think it is likely to increase, at least in the short term. I just wonder how successful many of them will be. “

John Schroyer can be reached at [email protected].

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