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September 17, 2018

Companies, advocates say marijuana firms are agreeing to excessive host community payments

PHOTO/MATTWRIGHT ProVerde Laboratories in Milford expects to begin testing adult-use cannabis samples later this summer.

Cannabis testing lab ProVerde Laboratories has been operating in Milford – at 420 Fortune Boulevard – for four years, ever since the state legalized the medical use of marijuana.

The company would love to jump into the recreational marijuana business, but it first needs to secure a host community agreement with the town.

“We've been struggling with that a bit,” said Founder Chris Hudalla.

The company and Milford have yet to agree on terms of an agreement but have been discussing it for about three months. According to Hudalla, that's because the town is asking for a very significant financial outlay of cash as part of the agreement.

According to Hudalla, industry advocates and lawmakers, ProVerde's situation is similar to other companies and entrepreneurs looking to jump into the state's newest industry as cities and towns ask for what they call exorbitant cash payments and services, which advocates say don't comply with the law.

For now, the Cannabis Control Commission won't review the agreements to ensure compliance with the law, as the state's adult-use cannabis regulating board voted 4-1 last month against a proposal by Commissioner Shaleen Title to review the documents.

In addition to a local 3-percent sales tax, the state law legalizing the use and regulated sale of cannabis says municipalities can ask for up to 3 percent of a marijuana establishment's gross sales as part of a community impact fee – provided the town can back up those requests with documented expenses.

However, many signed agreements reviewed by WBJ appear to include other payments in addition to that 3-percent cap.

“This issue is important because if no one enforces the limits, that undermines the explicit intent in the law to ensure that small businesses are included in the newly legal marijuana industry,” Title said via email. “There may be requirements for them to make payments that exceed the limits that small businesses can't afford.”

Asking for 60% of revenues

Testing labs like ProVerde have razor thin margins and are one of those businesses not able to afford impact fees, Hudalla said.

Besides, the facility located in an office park along a busy road has largely been a quiet neighbor. Essentially, the company owes the town nothing for additional services rendered as a result of its operations, Hudalla said.

“That excessive cost for us is basically zero,” Hudalla said.

Hudalla said the town kept asking for a similar kind of payment to the $250,000 annual fee agreed to with marijuana grower Sira Naturals. Town Administrator Richard Villani did not return a call seeking comment for this story.

“That might be 60 percent of our marijuana revenues,” Hudalla said.

After months of what Hudalla called frustrating negotiations, the company was informed the Board of Selectmen will discuss the company's proposed terms at its Sept. 17 meeting, but approval still isn't a done deal.

Moving the company or filing a lawsuit would be too expensive with no adult-use revenues, Hudalla said.

James Smith, a partner with Boston law firm Smith, Costello & Crawford said the young industry – which has yet to generate any revenue – is forced into contracts he feels aren't legal.

“We don't have any leverage on our side of the table,” said Smith, who represents two dozen marijuana companies.

More than 200 communities in the state have either banned or temporarily halted the industry within its borders in some capacity, and finding a city or town with pot-friendly zoning is hard enough. Companies only begin negotiations on a host community agreement after financial investments are already made on a location, Smith said.

“It's not like I can take my 7-Eleven and go to the next town over,” Smith said. “These businesses are under a lot of pressure to get these stores open.”

Since host community agreements are a required piece to even apply for an adult-use marijuana license with the Cannabis Control Commission, cities and towns can essentially hold up the process if a company won't agree to pony up the cash.

This issue seems destined for litigation, Smith said.

“At some points, this will be in the courts, inevitably,” he said. “But right now, there's very little money in the business.”

Funding charities and welcome signs

In a WBJ review of 13 host community agreements in Central Mass., eight include payments potentially above the 3-percent limit or not relating to a facility's operations. Others include flat fees, payments to charities or funds to be used at the municipalities' discretion.

In Ayer, Central Ave. Compassionate Care, a cultivator, manufacturer and retailer already operating in the medical pot industry signed an agreement with the town with the company paying $30,000 for the town's Youth Works Program, $2,500 to charities, $6,500 to a DARE program at the Ayer-Shirley Regional School District, $1,500 for a fire safety program with the fire department and up to $12,000 for the material and installation of a “Welcome to Ayer” sign.

In Medway, cultivator CommCan has agreed to pay $100,000 in annual payments in addition to payments already in place via a 2016 agreement for the company's medical operations, including $25,000 annually for any municipal purpose, $10,000 a year for a youth program at the town library and another $10,000 for a drug testing program.

According to the law, host community agreements can't be longer than five months, but the town's agreement with CommCan says the deal will extend for an additional two years if the two sides can't agree on a new contract.

Town officials in Medway and Ayer told WBJ the agreements were negotiated in good faith and ultimately agreed to by both sides. They have a good working relationships, the officials said.

In Athol, cultivator MassGrow agreed to pay an annual fee of 3 percent of its gross revenues or $75,000, whichever is greater. Other agreements include $30,000 to three charities and $20,000 for legal and technical assistance.

Cultivator 1620 Labs, also in Athol, has agreed to pay the greater of 3 percent of its gross revenues or $10,000.

In Hudson, prospective retailers Temescal Wellness and Native Sun Wellness have agreed to pay 3 percent of their gross annual sales to the town for both adult-use and medical pot as well as an annual $10,000 donation to charity.

Preparing for legalization's impacts

Hudson's Executive Director Tom Moses said Temescal and Native Sun will receive the tax benefits from the charitable donations, not the town.

Pointing to the mere existence of the 3-percent impact fee, Moses took issue with industry advocates and the law's writers who say there won't be any detrimental effects of legalization.

If there is no impact from legalization, advocates and lawmakers shouldn't have allowed the impact fee at all, he said.

“To me, that's disingenuous,” he said.

Moses, serving on the fiscal policy committee of the Massachusetts Municipal Association, is pushing to liberalize the use of funds from adult-use marijuana companies. That included a letter to the Cannabis Control Commission, taking issue with the agency's interpretation of the law limiting use of such funds.

“You do your best to negotiate the best revenue stream coming in,” Moses said. “That's what anyone in business or government does.”

That feeling is consistent among town officials attorney Smith has negotiated with.

“Everything I've done in the last six months, the town starts off at 3 percent,” he said.

When a city or town asks for a flat fee instead, Smith does all he can to talk them down from that number, but the industry already held back by the CCC's slow rollout is eager to get started.

“For the most part, they're signing it,” Smith said of his clients. “Again, we have no leverage.”

The “clearly stated” law

On the flipside, communities like Uxbridge have heeded the CCC's guidance and have asked for less than 3 percent from the smallest marijuana businesses.

Blackstone Valley Naturals is proposing to operate a microbusiness where it will grow and produce cannabis products and sell it to other companies, agreed to a community impact fee of 1.75 percent.

Gibby's Garden, another Uxbridge microbusiness proposing similar operations to Blackstone Valley Naturals, will pay only a 1.25 percent impact fee.

Even a larger business like Xiphias Wellness wanting to operate an Uxbridge medical and adult-use grow facility and dispensary will pay a 3-percent impact fee from adult-use sales, “as long as the fee is reasonably related to the costs imposed upon the town” by the facility, the agreement reads.

Likewise, proposed retail site Caroline's Cannabis will pay Uxbridge a 3 percent fee and nothing more.

Uxbridge Town Manager Angeline Ellison even said the town and companies will evaluate if projected costs are actually even incurred by the municipality.

“We need to make sure we can validate that,” she said, citing language in the law requiring any financial demands from the town to be documented.

For Uxbridge, staying within the scope of the law was simple.

“It's very clearly stated,” Ellison said.

Read more

Cannabis tester ProVerde inks agreement with Milford

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