In what was jokingly called a “green rush,” investors not long ago stampeded into Florida to gain entry to what was expected to be one of the nation’s most lucrative marijuana markets.
The competition swelled after Florida voters three years ago broadly legalized medical marijuana.
But even as the possibility of legal recreational pot looms on the horizon, the bidding war for medical-marijuana licenses in the Sunshine State has fizzled.
“There’s nothing wrong with the market in Florida. It’s just that nobody wants to put millions and millions of dollars into the ground,” Alan Brochstein, managing partner at New Cannabis Investors, told The News Service of Florida in a recent telephone interview.
The buzzkill stems from a variety of factors.
But, according to many industry experts, pending litigation that could upend Florida’s cannabis industry is at the top of the list.
The Florida Supreme Court is poised to consider an appeals court decision that found the state’s “vertical integration” system requiring medical marijuana operators to grow, process and sell cannabis and derivative products ran afoul of a 2016 constitutional amendment that backed legal medical marijuana.
Other lawsuits in the pipeline are challenging eight licenses handed out in April by Florida health officials to resolve litigation by a pool of applicants --- known as “one-pointers” --- that lost out in the first round of licensing in 2015, after the state authorized low-THC marijuana. Lawmakers in 2014 approved the non-euphoric version in anticipation of the 2016 constitutional amendment allowing full-blown medical marijuana.
While nearly all of the original licensees have “flipped” ownership over the past four years, just two of the eight “one-pointers” has found a buyer, according to sources representing license holders and investors.
The legal challenges have injected a chill into sales of the newest licenses, but investors also are reluctant to plunk down tens of millions of dollars to purchase “paper” licenses that will require as much or more of an investment to build out new operations that will vie against established, branded competitors with existing and loyal customer bases.
For example, Quincy-based Trulieve, the largest of the state’s 22 licensed medical marijuana operators, is responsible for more than half of the state’s medical cannabis sales. Last week, Trulieve sold nearly 600 pounds of whole flower marijuana for smoking --- more than three times its nearest competitor.
A sharp downturn in cannabis stocks on the Canadian stock exchange, where many of the U.S.’s largest marijuana companies trade --- including those doing business in Florida --- has also helped to stamp out sales of the state’s marijuana’s licenses.
“The capital situation has nothing to do with Florida. It’s just what’s going on, and it’s just unfortunate for these paper holders in Florida. They’re kind of SOL because this isn’t going to be fixed any time soon,” said Brochstein, a national marijuana industry investment analyst who is based in Texas.
A recent decision by cannabis behemoth Cresco Labs Inc. to back out of a $120 million deal to buy Jacksonville-based VidaCann illustrates the dilemma facing would-be investors and existing operators.
VidaCann, one of the state’s first medical marijuana operators, has up-and-running greenhouse and processing operations. The company has existing dispensaries scattered throughout the state.
But in a news release announcing it had backed out of the deal, Chicago-based Cresco said the decision was made “to conserve cash as it works to accelerate top and bottom-line growth.”
Instead of the Florida acquisition, Cresco said it intended to focus on “deploying resources” to markets in Illinois, Pennsylvania, California and Nevada.
Cresco’s decision was another signal that marijuana “angels,” who even earlier this year were willing to continue plowing money into expanding Florida operations, are now seeking proof that their investments are turning a profit.
“At this point nobody wants to buy the paper because they can’t raise the capital to build it out,” Brochstein said. “If you’d gone back three months ago and listened to a lot of these companies, they were really excited about building out in Florida.”
A Republican-dominated Legislature that’s been leery about marijuana has also made investors skittish. Some legislative leaders are pushing caps on the amount of euphoria-inducing THC in medical marijuana, a proposal strenuously opposed by patients and the industry.
Marijuana operators “want to be regulated,” said attorney John Lockwood, who represents license holders.
“But they want to see their regulations match up to what other states are doing. So when you see a state that has regulations that are substantially different from other similarly situated states, then all of a sudden that state gets looked at in an unfavorable fashion,” he said.
Litigation issues, uncertainty over the valuations of medical marijuana licenses and questions about the future of recreational marijuana “have created a perfect storm of uncertainty for people to invest significant amounts of money,” said Louis Rotundo, a lobbyist who has been involved in Florida’s marijuana industry since 2015 and is an owner of one of the “one-pointer” licensees.
“It is quite obvious that we’re in an evolving marketplace,” Rotundo said in a telephone interview. “Because the return on investment has been minimal in some cases … it has caused investors to say, regardless of the true valuation (of a license), when can I get my money back. That has made a lot of them very nervous.”
Despite the halted sales of licenses, Florida’s market is “viewed very positively,” according to Brochstein.
Nearly 300,000 patients have been authorized for medical marijuana, and the number of patients keeps climbing.
“It’s been improved. It’s been growing very rapidly. There’s a reasonable chance that it’s moving towards legalization (of recreational marijuana). So everything’s good,” Brochstein said.
Companies linked to two of the state’s medical marijuana operators --- MedMen and Surterra, which does business under the name Parallel --- are backing a proposed constitutional amendment that would legalize recreational marijuana. They’re hoping to get the measure on the November 2020 ballot.
Dan Russell, a lawyer whose clients have included medical marijuana operators, “one-pointers” and others, points to a less cash-intensive proposition for cannabis investors interested in Florida: hemp.
After Florida authorized a statewide hemp program, investors are scrambling to capitalize on a nationwide craze for products containing hemp-based CBD. While marijuana remains illegal under federal law, Congress last year decriminalized industrial hemp as an agricultural product, allowing states like Florida to begin regulating the plant that’s been around for 10,000 years.
“The (medical marijuana) industry as we know it as has changed so significantly from a few years ago that flipping a license now for tens of millions of dollars to get into a market that already has seasoned competitors that are already built out is really challenging. Investors have seen others struggle with that expense,” Russell told the News Service. “I think they’re looking at other opportunities, and they would certainly include hemp if they’re interested in this space just because the CBD market is red-hot at this moment.”
