Regulation of Water and Energy in Illinois’ Adult Use Market


Illinois Takes Energy and Water Usage Head-On

One component of the cannabis industry that often gets left out and forgotten is the environmental impact of cultivating marijuana.  Growing, especially indoors, requires considerable amounts of both energy and water. And both of these are resources that are in high demand and short supply.  Given this, as the prohibition on marijuana is lifted, and more states legalize adult-use cannabis, these states will also find that adopting environmental regulations and requirements will become more and more necessary. Illinois is a perfect example of what we are talking about, as requirements were included in the bill that recently legalized adult-use cannabis, addressing certain environmental resources – specifically energy and water, and that they be used in an efficient manner. 

Section 20-15 subsection (23)(b) of HB1438 specifies that the lighting power densities for cultivation space cannot exceed an average of 36 watts per gross square foot of growing space canopy; HVAC units must be high-efficiency ductless split HVAC units for grow operations with less than 6,000 square feet of canopy; HVAC units must be in variable refrigerant flow HVAC units for grow operations with more than 6,000 square feet of canopy; cultivation facility must use automated water systems; cannabis cultivation water runoff must not have more than 20% runoff during watering events. Cultivation facilities must report their energy and water usage to ensure they are not using more than the law allows.

 Illinois is leading the country in its regulation of cannabis by requiring marijuana growers to adhere to the strictest energy and water usage guidelines out of any state that has so far legalized cannabis for medical or adult use purposes. This is because, while most states do have an environmental impact section on their cultivation applications, there is little to no enforcement as regards purported approaches to mitigating environmental impact post-licensing, or in the course of a cannabis business’ actual operations. States tend to simply award more points to applications with strong environmental plans, which can create an incentive to have a thorough environmental impact section, but follow-through on these plans is not required. In Illinois, however, cultivation facilities will be required to actually follow the energy and water restrictions explained earlier in this post. Energy and water usage must be reported to hold the license holders accountable if they are wasting resources. A license holder who does not follow the restrictions risks having their license revoked.

Business Considerations Meet Public Health

 While we tend to think about the cannabis industry as a space for businesses to positively contribute to public health (for instance, by making marijuana accessible via lawful means to the masses), there is more to consider here than the impact of cannabis itself. For instance, in Denver in 2018, almost 4% of the city’s total electricity was used to grow cannabis. Not only that, but after legalization in Oregon in 2015, there were seven reported blackouts due to cannabis cultivation. Illinois is trying to get ahead of the game and prevent blackouts from happening by implementing these tight energy restrictions. Energy Associates, a consulting firm specializing for decades in analysis of environmental impact, reports that roughly 3% of the electricity used in California is taken up by the medical production of marijuana. The Northwest Power and Conservation Council estimated that indoor cannabis cultivation in Washington, Idaho, Oregon, and Montana could require energy equal to a city of 200,000 people. And yet, energy is not the only resource that cannabis requires large amounts of in order to grow. Tremendous amounts of water are also required. In the North Coast region of California it was found that “an estimated 22 liters (L) of water or more per plant per day are applied during the June-October outdoor growing season.” That equals approximately 1.4 acre-feet of water per acre of crop making marijuana is the third most water intensive crop (tied with corn and almonds) grown in this region of California. Given these statistics, it is understandable that states are beginning to focus on the environmental impact of growing cannabis and seeking ways to mitigate this type of impact, beginning with caps on water and energy usage. 

 What trends can we expect to see?

We can expect many more states to follow suit in the vein of energy and water conservation, as many states, such as California and Massachusetts, are also looking at how to limit stressing natural resources and decreasing environmental impact when growing cannabis. Another state that requires cultivation facilities to limit their energy usage is Massachusetts. Its law, Question 4 which was passed by the voters but later rewritten as H.3818, is a little less strict than Illinois’ and is focused on the number of watts being used. The law limits cultivation facilities with more than 10,000 square feet to 36 watts per square foot of canopy and limits those with less than 10,000 square feet of canopy space to 50 watts. Illinois’ law limits ALL cultivation facilities, regardless of size, to an average of 36 watts. California also has regulations regarding the amount of water than can be used when growing marijuana. California is one of the few states that requires growers to obtain a water right to irrigate their marijuana. Growers are prohibited from diverting water from April 1 – October 31, meaning that water must be diverted from the stream during the wet season and stored offstream for use during the dry season. Growers are encouraged to obtain a Cannabis SIUR, which is a small appropriative water right (less than 6.6 acre-feet per year). 

So how are these various states’ policies governing energy requirements and limiting the consumption of natural resources through legislation and regulation the most sustainable solution on our industry’s horizon? Does it make sense to assume that limitations on consumption alone will provide an adequate basis for the growth of what has been called the most robust and opportunity-driven market since the inception of the internet? Innovation seems to be key as well. Companies who are adept at not only cannabis licensing, but research and development in the sustainable technologies sector seem also to be leading the way. Stay tuned for more blog posts from Pistil + Stigma to learn more about this burgeoning aspect of the cannabis industry, and for ways that entrepreneurs and investors can get involved.

Illinois Social Equity Program & Licensing


Blazing a Path 

History was made in Illinois in its 2019 legislative session. It is the first state to legalize recreational cannabis through legislation, rather than a voter-approved ballot measure. History was made yet again with the in-depth and broad social equity program included in the legislation. If the program is as thorough as the bill indicates it is supposed to be, it is going to be the most inclusive social equity program in the country to date. Marijuana Policy Project calls the state’s social equity program “the biggest step forward in social and criminal justice reform anywhere in the country, inside or outside the issue of cannabis reform.”

The Minority Cannabis Business Association (MCBA) released findings from the Social Equity Report group earlier this year. The group studied Los Angeles’ social equity program and the findings were not ideal. Areas where the city is lacking are in educational services, long-term success, and a community reinvestment fund. As is the case in many municipalities that have a social equity program, it was found that some shareholders exploit the applicants for their equity. Regarding Los Angeles, MCBA Board Member, Kayvan Khalatbari, stated “Politics and well-funded special interests have dogged Los Angeles’ implementation to the point that its intended outcomes are not being met and communities long harmed by the War on Drugs remain on the sidelines.” It is impossible to know how successful Illinois’ social equity program will be, but the state seems to have addressed certain areas where other states have failed. For example, non social equity license holders are required to offer training, funding, or mentorship to social equity applicants. The state is also reinvesting funds back into the community through the Restore, Reinvest, and Renew Program (R3 Program). Not only that, the state of Illinois is attempting to make reparations for the War on Drugs and how it has affected communities of color and lower income communities by offering incentives to license holders to employ people from these communities. Illinois Governor Pritzker has stated, “As Illinois continues its path toward putting equity at the forefront of the state’s new adult-use cannabis expansion, it’s important to create opportunities in communities that have been hardest hit by the war on marijuana. Not only will social equity applicants receive points on their applications, but many applicants will also get grants, technical assistance, low-interest loans and fee reductions and waivers. Taken together, these efforts will do more than any other state in the nation has done to focus on equity.”

Since the legalization of medical cannabis in 2013, over 40,000 patients have been registered through the state-run Medical Cannabis Pilot Program. Medical patients can purchase up to 2.5 ounces of cannabis during a 14-day supply. The product can be purchased from one of the 55 licensed medical dispensaries throughout the state. These 55 dispensaries have had a total of $185 million in sales since the medical program launched in 2015 and the state’s 22 cultivation centers have had a total of $105 million in sales during the same period. How will the sales of recreational cannabis impact these numbers? Will we see a sharp spike in sales upon legalization to only see it level out down the line? With a population of almost 13 million people, it is believed that the market in Illinois could shape up to be one of the biggest in the country. It is estimated that in the 4th fiscal year of recreational sales, the state could generate up to $375.5 million. That’s a lot of money, but what is the state planning on doing with all of it? Invest it back.

Restore, Reinvest, and Renew Program 

As more states are beginning to roll back their prohibitions on cannabis, they are beginning to look at how they can better their communities with the revenue they’re receiving from the legal sales of this once illicit drug. This is where the Restore, Reinvest, and Renew Program, more commonly known as the R3 Program, comes into play. The R3 Program is designed to apportion 25% of the leftover tax revenue to improve communities that have been devastated by violence and have been disproportionately impacted by historical economic disinvestment (see HB 1438 for more on this). The funds will be used to reduce gun violence through intervention and prevention, improve re-entry programs for people in the criminal justice system, and support programs oriented towards social well-being. The program will provide planning and implementation of grants, technical assistance, and civil legal aid to people living in designated R3 areas. HB 1438 requires that these areas be decided by a board of oversight that has been convened in accordance with specifications for membership also laid out in the aforementioned legislation. This Board has been formed and is currently in the process of calling for and reviewing relevant studies undertaken by the state for the purpose of assessing rates of disinvestment, violence, gun injury, unemployment, child poverty, and state prison commitments in relation to tax revenue that may be returned, or re-invested, into these communities.

Social Equity Meets Entrepreneurship

Another avenue offered by HB 1438 in terms of progress for communities harmed by the War on Drugs is entrepreneurship. Illinois’ social equity program will not only fund initiatives that expand education and job readiness, but it allows residents of the state who might not otherwise meet the rigorous application qualifications required by traditional legalization efforts, to apply for cannabis business licenses. The benefits of this are that individuals and families who have been most impacted by “black” market will be empowered to participate in and profit from that market now that it is legal. In Illinois, social equity applicants must apply with a holding of at least 51% ownership and control by one or more individuals who have resided for at least 5 of the preceding 10 years in a Disproportionately Impacted Area, or have been arrested for, convicted of, or adjudicated delinquent for any offense that is eligible for expungement under HB 1438.

Another way to qualify as a social equity applicant is to have at least 10 full-time employees, at least 51% of whom currently reside in a Disproportionately Impacted Area or have been arrested for, convicted of, or adjudicated delinquent for any offense that is eligible for expungement.  The upfront costs – application fees, licensing fees, attorney fees, acquiring a physical location, training – can oftentimes deter small startup companies from applying, which makes it difficult for the marketplace to be inclusive, let alone make what many consider to be valid reparations. In Illinois, however, the state has pledged to assist with startup costs for social equity applicants through the creation of a $30 million low-interest loan program. This $30 million fund will be seeded from medical cannabis businesses who are now applying to participate in Illinois’ adult use market. Rather than paying a licensing fee, they will pay a fee into the cannabis business development fund. Another way the state plans to encourage social equity applicants to apply is to apportion 20% of the total points for the applications for social equity purposes. This gives social equity applicants an advantage and can help the overall score if the applicant is lacking in another section of the application. Lastly, both the non-refundable and the refundable portion of Illinois’ adult use application fees may be waived by 50%. These measures are crucial as often, application fees alone can be daunting and deter many people from applying.

 

Illinois Recreational Licensing Process


Illinois is shaping up to be one of the most competitive and inclusive recreational markets in the country. When recreational cannabis was legalized earlier this year, Illinois became the first state to accomplish legalization through legislation rather than a ballot initiative. Charlie Bachtell, CEO of Cresco Labs, estimates that the Illinois recreational market will be four to eight times the size of the current medical market in the state. Medical sales are around $130 million per year, while the estimated recreational revenue is around $1.6 billion per year. The bill, HB 1438, makes social equity integral to Illinois’ recreational licensing process.

The map to the left shows the 17 BLS regions where the 75 conditional dispensary licenses available in the first wave of applications will be awarded.

Medical License Holders Applying to Enter the Recreational Market

The 55 operational medical dispensaries will have the opportunity to apply for a recreational dispensary license before new businesses will be allowed to apply. These license holders are considered “early applicants” and will have the opportunity to begin selling to recreational customers on January 1, 2020 either at their original location or at an approved secondary location. This won’t come cheap to the companies, however. Medical dispensaries will pay around $260,000 for a recreational license, while medical cultivation centers will pay up to $750,000 for a recreational license.

The licenses awarded to early applicants do not count as part of the number of licenses that will be awarded to new businesses entering the market during the first and second wave of applications. The early applicant licenses do, however, count toward the total number of licenses that are available at any one time for each license type.

New Businesses Applying to Enter the Recreational Market 

New businesses will have the opportunity to submit applications for conditional dispensary licenses by December 10, 2019. The applications to apply for a conditional dispensary license in the first wave of applications were made available on October 1, 2019, and licenses will be issued by May 1, 2020. There will be 75 conditional dispensary licenses awarded in the first wave of applications, spread across 17 geographic regions, with a large majority being apportioned to the Chicago-Naperville-Elgin region. The second wave of applications will include 110 conditional dispensary licenses and will be awarded by December 21, 2021. The fee for applying for a conditional dispensary license is $5,000 and a registration fee of $60,000 if awarded an adult-use dispensary license. A conditional license does not permit the license holder to “purchase, possess, sell, or dispense cannabis or cannabis-infused products until the person has received an Adult Use Dispensing Organization License.” Applicants are not required to have a location secured when applying for a conditional dispensary license and have 180 days after receiving the license to secure a location. Once they have secured a location, passed an inspection by the Department, and paid its registration fee, the applicant will receive their Adult Use Dispensing Organization License. At this point, they will be able to legally obtain and sell cannabis. This will reduce the costs of entering the industry by giving applicants extra time to secure a location and can reduce some of the upfront costs and stress. The maximum number of dispensary licenses allowed at any time is 500.

The state will also issue up to 40 craft grower licenses and 40 infuser licenses by July 1, 2020 and another 60 craft grower licenses and 60 infuser licenses by December 21, 2021. The bill describes a craft grower license as “a license that permits a business or organization to cultivate, dry, cure, and package cannabis and perform other necessary activities to make cannabis for sale at a dispensing organization or use at a processing organization.” So how is a craft grower different than a cultivation facility? Size. A craft grower is only allowed to be up to 5,000 square feet of canopy space while some cultivation facilities are over 30,000 square feet of canopy space. An infuser license allows a licensed business to “directly incorporate cannabis or cannabis concentrate into a product formulation to produce a cannabis-infused product.

Similar to what has occurred in California, the state of Illinois is currently contending with the issue of local municipalities attempting to prohibit recreational businesses from opening their doors in their neighborhoods. Naperville has already stated they will not allow recreational cannabis businesses, and other municipalities are considering that option as well. One of the most significant regions that have banned recreational sales is the Loop and the Magnificent Mile in the Central Business District in Chicago. Both the Loop and the Magnificent Mile attract substantial tourism for the city. The question is, how will the banning of recreational sales affect tourism for this part of Chicago? There are already over 25 municipalities across the state that have stated they will not allow recreational sales. And some locations, such as O’Fallon, will be taking the decision to its voters through a referendum on the 2020 general primary ballot.

One of the most arduous aspects of securing a cannabis business license is finding a physical building to operate in. Zoning restrictions at the local level, combined with the possibility of landlords being averse to cannabis businesses operating on their property, despite cannabis businesses operating in compliance with state law, can create challenges for applicants. Illinois’ conditional dispensary license application does not require applicants to have a storefront secured when applying, and applicants will have 180 days to secure a building after being awarded a conditional dispensary license. If an applicant cannot secure a location within 360 days of being awarded a license, the license will be rescinded and given to the next highest scorer. However, physical buildings are difficult to find and secure in 180 days, particularly when local zoning regulations are at play and one is competing with other licensees who are seeking viable real estate in the same BLS region (for more on BLS regions, see map above). With that said, it is recommended to already have several locations in mind if not secured before submission of a conditional dispensary license, and it will be essential to have secured a location within a very specific timeframe in order to keep and operationalize a license once it has been won.

While the Illinois market is estimated to be one of the largest in the country, it will also be competitive and expensive. Application fees range from $5,000 to $100,00 depending on the license type. While there are social equity licenses available, they are even more competitive and are only available to applicants who meet certain qualifications. Everyone is waiting to see how many businesses apply and where those businesses are attempting to open their doors. With only 47 dispensaries permitted in the entire Chicago-Naperville-Elgin region, it is sure to be competitive as Chicago is the most populated city in the state and Naperville has banned recreational sales.

Thanks to blog.chicagocityscape for mapping Illinois’ BLS regions (see http://bit.ly/32F4kJc) and stay tuned for more info on Illinois’ process. Also, feel free to reach out to info@pistilandstigma.com for more information or inquiries as to the availability and scope of our services.