OLCC’s Decision to “Pause” Processing of New Recreational Marijuana License Applications Favors Stakeholders Seeking to Sell Their Oregon Legal Cannabis Business
The impact of the OLCC’s Decision to “Pause” Processing of New Recreational Marijuana License Applications, and the Possible Closure of the Application Window, May Result in a Perceived Uptick in the Value of an Oregon Recreational Marijuana Business.
Portland, OR–The OLCC announced last week that it will be de-prioritizing processing applications for recreational marijuana licenses submitted after June 15, 2018, stirring significant panic among prospective stakeholders who may have a difficult time meeting the sudden and short deadline set by the OLCC.
Not a Closure of the Application Window. The June 15, 2018 cessation of processing new recreational marijuana applications is not a closure of the application window, and, the OLCC will in fact continue to accept recreational marijuana license applications after the June 15, 2018 deadline. Additionally, the OLCC is obligated to process the applications it receives until the application window closes.
Change in Financial Interest or Business Structure. In addition to startling prospective recreational marijuana stakeholders who are grappling with schedules that may not align with the OLCC’s surprise June deadline, the decision jolted existing Oregon recreational marijuana licensees that are considering, or are in the process of, selling all or part of their legal marijuana business.
Fortunately, the OLCC announcement made it clear that their newly stated primacy towards servicing existing marijuana industry applicants and licensees is inclusive of changes in business structure, ownership, or financial interest, so it appears everything from cash calls to selling your enterprise will not be negatively impacted by the decision. Per the OLCC’s news release, “In addition to processing new license applications, the OLCC is obligated to service its existing licensees through license renewals and changes in business structure filings…”
Reading the Tea Leaves. I’m guessing Oregon’s recreational marijuana license application window will close in 2019. The announcement to delay processing new applications for recreational marijuana licenses also included a fairly overt statement from agency director Steve Marks that appears to set the stage for regulatory changes to Oregon’s recreational marijuana program in 2019.
Considered together; the delay in processing of new applications, the abrupt timing and the language the OLCC used in its press release, and the type of statutory remedies available, it seems clear that some potentially significant fixes are in store for Oregon’s recreational marijuana program.
Impact on Oregon Marijuana Business Value. I frequently refer clients to marijuana industry attorneys, and, for at least the last year, most of those attorneys have been discouraging engagement of Oregon’s recreational program, often citing licensee saturation and supply chain related issues.
And I have seen a bit of a dip in the selling price of turnkey Oregon recreational marijuana businesses over the last year. I attribute this dip mostly to the reality of a significant oversupply of marijuana flower inventory, and how that oversupply impacts the profitability of marijuana producer licensees, but also because of the almost nonstop cycle of bleak local and national news about Oregon’s recreational marijuana program. These increasingly frequent news articles, some with wildly inaccurate claims regarding wholesale pricing, have contributed to an uptick in predatory buyers seeking to communicate lowball offers and trolling for distressed stakeholders.
Value Impact of Pausing Application Processing. Inherently, pausing the processing of new marijuana license applications should boost the primacy of acquiring a turnkey marijuana business among prospective recreational marijuana stakeholders. That alone should put an upward pressure on the value of an Oregon recreational marijuana business. Given that it currently takes at least five months for the OLCC to even assign an investigator to an application it has received, the news that an application submitted after June 15 will possibly endure an even slower path to licensure will surely encourage prospective stakeholders to include the acquisition of a turnkey marijuana business in their engagement strategy analysis.
Even if the pause in processing new applications creates some breathing room for the OLCC, the applications that pile up during this pause, especially if there is a rush among prospective stakeholders to submit new applications because they feel the application window will close in 2019, may create even longer application processing wait times than currently exist. This presents yet another compelling reason for a prospective stakeholder to prioritize the acquisition of a turnkey Oregon marijuana business, over that of a from-scratch implementation.
While the OLCC’s stated rationale for pausing the processing of new recreational marijuana applications is ostensibly driven by a desire to speed the cadence with which current stakeholders are being serviced, inclusive of those almost 1000 producer applications and 260 retail applications already pending in the OLCC’s application queue, the announcement also alluded to some type of regulatory changes in 2019.
Value Impact of Closing Oregon’s Recreational Marijuana Application Window. Per Section 3 (b) of OAR 845-025-2040, Production Size Limitations, “On an annual basis, the Commission will evaluate market demand for marijuana items, the number of person applying for producer licenses or licensed as producers and whether the availability of marijuana items in this state is commensurate with the market demand. Following this evaluation, the Commission may amend this rule as needed.“
Oregon’s recreational marijuana program rules obligate the OLCC to annually review the recreational marijuana program in a context inclusive of market equilibrium. Given our current surplus of inventory, and how that surplus will be impacted by the additional approximate 1000 producer license applications already pending in the OLCC’s application queue, and in addition to the producer applications that pile up after June 15 2018, it seems that 2019 is ripe for the closure of Oregon’s recreational marijuana application window.
At that point, the only path into Oregon’s recreational marijuana industry will be the acquisition of all or part of an existing operation.
The closure of Oregon’s recreational marijuana license application window, which could not happen earlier than 2019 and only after a legislative session that included a formal modification as required by OAR 845-025-2040, is an easy and obvious first step towards ameliorating what is a fairly dire situation if you’re currently an Oregon farmer trying to make a living selling marijuana flower. But it isn’t a silver bullet solution to our current oversupply situation, and remedies that don’t involve a reduction in marijuana flower production are elusive.
We’re producing a lot of marijuana for a state with 4 million people. Last month, the OLCC acknowledged that almost 900,000 pounds of marijuana from the 2017 harvest went unsold. While that number is oversimplified and slightly inaccurate, because it fails to reconcile the fact that big chunks of that 2017 inventory was from outdoor harvests entered into the MTRC system late in the year and, therefore, 2018 sales would be an important part of that supply chain picture, it nonetheless proves what many Oregon producer stakeholders already knew, that there is a significant surplus of high-quality marijuana flower in Oregon.
So far, the OLCC has issued over 500 recreational retail licenses and about 1000 recreational marijuana producer licenses. As a reference point, Washington’s marijuana program, a state with 8 million people–twice as many as Oregon–has about the same number of recreational retail licenses (about 500–capped at 576), and about the same number of producer licenses (just over 1000) as Oregon’s program. Like Oregon, Washington marijuana producers struggle mightily with an oversupply of marijuana flower inventory, an especially tenuous position in a state that also prohibits vertical integration.
Counting all current and pending Oregon recreational marijuana licenses, and even if Oregon recreational marijuana applications ceased being accepted right now, Oregon’s marijuana program would still see twice the licensed producers as Washington and about 200 more retail licenses than Washington.
Closing Oregon’s recreational marijuana application window will add value to an existing Oregon recreational marijuana business. The application window closure would restrict engagement of Oregon’s program to only acquisition strategies, and its dampening impact on the current oversupply situation should imbue both current and future stakeholders with optimism regarding the viability of a profitable Oregon recreational marijuana business.
Impact on Buyer/Seller Negotiations. Currently, prospective Oregon recreational marijuana licensees have been able to use the option of ramping up an operation from scratch as a foil as they negotiate the acquisition of turnkey Oregon marijuana businesses. Conversely, Oregon recreational marijuana business sellers have had to temper their negotiations with prospective buyers in the context of an application window that was still open, albeit slow, and any value proposition presented to buyers was inevitably compared to the cost of ramping up an operation from scratch.
That negotiating chip is no longer available to buyers. Even with the application window still open, the excruciatingly slow process of licensure post June 15, 2018 will lesson the gravitas of a buyer’s pitch comparing the cost of a turnkey acquisition to the from-scratch start up of an Oregon recreational marijuana business. The further, undefined, slowing of OLCC processing of new applications for Oregon recreational marijuana licenses, and the threat of the outright closure of the recreational marijuana license application window, removes a significant negotiating parameter that favored the buyers, shifting potent negotiating leverage to sellers.
If you’re currently a distressed stakeholder considering selling your Oregon recreational marijuana business, things have likely improved for you in terms of negotiations with buyers. If you are not a distressed stakeholder, I think you are in an even stronger position and the potential value of your Oregon recreational marijuana business should increase significantly over the next 6 to 12 months.
If you are considering selling all or part of your Oregon recreational marijuana business, or if you’re looking to acquire an additional Oregon recreational marijuana business, the Green Rush Advisory Group currently has a very active platform for connecting legal marijuana business buyers and sellers.
