Playing The Lottery: Medical Marijuana Businesses Battle For Licenses

Note: This story is part two of a two-part series examining how medical marijuana licenses are having a sudden and dramatic effect on the local economy. Read part one of the series here.

The sudden availability of medical marijuana licenses in northern Michigan is jolting the local economy, not only ramping up real estate prices but turning licenses into hot assets – with business owners willing to go to extraordinary lengths to obtain them.

In both Traverse City and Acme Township, officials are using a lottery system to distribute some or all of their licenses. Both communities had the option to use a “merit-based” system instead, but officials say that approach relies on subjective staff reviews and could prompt applicants to sue over perceived unfair decisions. “It’s fraught with opportunities for challenges and litigation,” says Traverse City Clerk Benjamin Marentette.

A lottery system is ostensibly fairer: Applicants are given forewarning of a lottery date months in advance, submit their paperwork, then attend a public lottery where names are drawn for licenses from the pool of qualified applicants. Acme held its first lottery in spring 2018: Of 20 total licenses available in five different categories of marijuana businesses, 15 were issued through the lottery. Another two were issued after the fact, with all of the township’s growing, processing, and dispensary/retail store licenses now spoken for. Only one secured transporter and two testing laboratory licenses are still available in Acme.

Traverse City has unlimited licenses for all but its retail/dispensary licenses; those are capped at 13 and will be distributed by lottery on May 3. While both communities took steps to prevent parties from gaming the system, applicants are still discovering creative loopholes to increase their odds of getting a license. Acme didn’t forbid business owners from submitting duplicate applications in its rules, nor did it ban multiple individuals from the same group or company from all applying for the same license. Accordingly, several drawings in Acme’s lottery had duplicate applications from the same person or business entity. That skewed the likelihood some applicants would be awarded licenses, a scenario officials didn’t anticipate while drafting the rules.

In one district – Acme’s A-1 agricultural district – 22 applications were submitted for two available growing licenses. Township Planning & Zoning Administrator Shawn Winter estimates 16 of those applications belonged to individuals or LLCs with ties to a group called Acme Greenworks LLC. An entity from that group ending up winning both licenses in the lottery. On Monday, the township’s planning commission approved site plans for a 22,360 square-foot growing facility for Acme Greenworks LLC on the southwest corner of Bates and Hawley roads that will use both licenses. It’s the first project to reach the site plan approval phase for a medical marijuana facility in the township.

Duplicate and triplicate applications were also submitted by several groups for dispensary lottery drawings, according to Winter. But the market got even hotter after the lottery: Acme’s rules allow licenses to be transferred, and/or the ownership structure amended, with a new application and application fee. The application fee in Acme Township is just $500 – significantly lower than Traverse City’s $5,000 fee. Multiple lottery winners have amended their applications to change owners or locations after the drawing, according to Winter. In one case, documentation of a wire transfer payment between the lottery winner and a new owner was included with the paperwork. Though he declines to state the exact figure, Winter says the payment for the resold license was between $50,000 and $100,000.

All these scenarios are legal under Acme’s rules – just not what the township intended, Winter acknowledges. In Traverse City, the higher application fee combined with a requirement that applicants go through state preapproval first – an often lengthy and costly process – could cut down on some of those workarounds. Acme, which doesn’t require state preapproval, received nearly 60 applications for its 20 licenses in the first lottery. Traverse City has yet to receive any lottery applications for its 13 dispensary licenses, though staff have been working with applicants and anticipate a stream to start arriving soon.

Traverse City also forbids duplicate applications, limiting submissions to only one from a “true party of interest” – meaning spouses, business partners, or members of the same LLC can’t double up on submissions. Those who win licenses and want to later amend their ownership structure – a potential loophole for selling or transferring licenses – will have to pay another $5,000 and submit a new application. Both Acme’s and Traverse City’s fees are non-refundable, even for those not selected in the lottery, so each duplicate or transfer application represents accumulating costs for entrepreneurs.

Still, some individuals are motivated to spend whatever it takes to obtain a license. Both Marentette and Winter say that while municipalities try to prevent lottery flooding or resale markets, at a certain point, it’s not the government’s job to interfere in the private market. “We don’t meddle with the free market in other industries,” says Winter. “I’ll be the first to say our system isn’t perfect, but we went through months and months to try and find a fair system. This is our first time going through it, so it’s normal there would be unforeseen circumstances.” Winter says township officials will likely revisit Acme's rules before the next lottery (licenses must be renewed annually or they revert to the township; annual lotteries will be held when there are more applications than available licenses).

The licensing process also consumes an intensive amount of staff time: Winter estimates he spent “80 percent” of his time on the lottery in the months leading up to the drawing last spring, and says he still receives 4-5 calls per day about medical marijuana licenses. Marentette also says Traverse City’s $5,000 application fee doesn’t come close to covering the actual cost of staff time for working on the complex license applications. He echoes Winter’s sentiments when it comes to the city's role in distributing licenses for the new industry.

“The way we structured it was to try and prevent (cheating) from happening without overregulating. But it’s not perfect, if perfect is defined by completely preventing a secondary or third market from happening," he says. "It’s not really the city’s place to concern itself with what happens in the market per se. Our role is to make sure that public health, safety, and welfare are protected.”