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With over 20 states currently allowing medical marijuana programs and the possibility for more states to pass and expand medical marijuana laws in the near future, many investors are evaluating the costs required to enter into the business.

In considering this investment, it’s important to realize the initial and recurring costs involved with starting and operating any business, as well as the extra expenses applied solely to the medical marijuana industry.

As there are different laws and costs per state, it’s important to do your own research; however, available numbers from different states have been used to give you a general overview.

First, does the state allow you and your possible partners to own a dispensary?

Many states are requiring background checks for all of the investors and operators of the business, with disqualification for certain previous felony charges. Some states also specify a required minimum number of years as a resident for all persons involved. Also make note that several states, such as Massachusetts and Illinois, are severely limiting the maximum number of dispensaries, which greatly reduces the chance of getting a license.

Promoting your marijuana-related business is a unique challenge as well.  For instance, many major websites such as Facebook and Google will not allow marijuana-related companies to advertise. This forces dispensaries, marijuana doctors offices, and other marijuana-related business to advertise on marijuana-related websites like AZmarijuana.com or Hemp American Media Group’s sites.  Another problem faced by marijuana-related business is finding quality employees that are willing to work in a federally-illegal business. The website 420careers.com is a marijuana jobs board where employers can post marijuana industry jobs for free, as well is the marijuana classifieds section on this site.

With the District of Columbia proposing guidelines for their recently-passed medical marijuana law, some recent numbers are available. Let’s take a look at D.C. to make some rough cost estimates.

Government Fees Specific to the Medical Marijuana Industry

  • Initial processing fee for a dispensary – $5,000
  • Annual fee for a dispensary – $10,000

There are additional costs if you’re going to grow your own marijuana, instead of purchasing from a wholesaler:

  • Initial processing fee for a cultivation center – $5,000
  • Annual fee for a cultivation center – $5,000

Some states, like Colorado, are requiring retailers to grow 70% or more of their marijuana, which may make it mandatory to pay the extra cultivation fees.

Additional Costs:

  • Annual fee for your partners (Each director, officer, member, incorporator, or agent) – $200
  • Annual fee for each Manager – $150
  • Annual fee for each employee – $75
  • Transport permit – $25

Once you add in the cost of growing your own marijuana, or getting it from a wholesaler, successful California dispensary owners estimate the total cost of marijuana-specific taxes and the acquisition/ production of the marijuana as 60% of their total revenue.

However, we are not done tabulating investment costs just yet. Aside from the medical marijuana start-up costs, there are the basic expenses of starting and running a business, which include:

  • Your facility – Are you going to rent, lease-to-own, or purchase/ build your building?

First of all, make sure that you know where your city’s zoning requires you to place your business. Some cities, like San Diego, are now mandating undeveloped, industrial areas. Many states are also requiring that the dispensary be located a certain distance from schools, playgrounds, pools, etc.

If you’re going to rent, you’ll first have to find a landlord who doesn’t have a stigma about renting his property out for a marijuana business. In Washington, D.C., the average retail rent, as of 2009, was roughly $35 per square foot a year. Supposing you rent a modest-sized dispensary of only 1,500 square feet, that works outs to a monthly rent of $4,375, or $52,500 annually. Add another $4,375 up front for the security deposit.

If you’re going to purchase the property, or build a new structure, there are numerous considerations, the least of all finding a lender. The chances of finding a medical marijuana-friendly banker who is willing to loan you money is slim, but if you do, you’re still going to have to present a detailed business plan, pay an average business loan interest rate of up to 8-10%, and put money down on your investment. Most dispensaries are opting for either combining their directors’ savings to create their start-up capital, or operating as part of a larger California conglomerate.

Also figure in the costs of repairing and updating your building to reflect your business concept, as well as additional utility, furniture, and landscaping expenses.

  • Are you going to operate as a sole proprietor, using your social security number as your tax number? You will not have personal liability protection should things go poorly and you end up owing money. There are the liability-sheltering options of incorporating as a Limited Liability Corporation (LLC) or a Sub-Chapter S Corporation, where you & your partners share the income, losses, and consequently, the taxes, on your individual income tax forms. Of course there are fees for incorporation, starting at $800. Also, some states are requiring dispensaries to be non-profit corporations, which will cost even more to incorporate.
  • If you’re going to have partners, there will be additional costs involved by using a lawyer to draft up your legal agreement. By the way, be prepared to write some checks to an accountant as well; you better have good books if you’re ever audited by the IRS.
  • One of the largest expenses for any business is payroll. The District of Columbia’s proposed regulations specify that two employees must be on location during all hours of operation, anywhere from 7am to 9pm, seven days a week. Even at a more modest number of 10 hours a day, a dispensary paying two employees minimum wage would still pay $1,155 a week, or $60,060 a year. And remember, soon you will be required to provide health insurance for all of your full-time employees. At some point, you and your partners will also have to get paid.
  • Security is a huge concern. Growers in California are constantly bombarded by thieves. The price to hire an off-duty police officer is approximately three times that of a security guard, at $55.00 an hour, or $220,000 a year. For an average security guard, at $18.00 an hour, you’re still making an investment of $72,000 a year. The District of Columbia is also requiring video cameras & an alarm system.
  • You also have to insure your crop and your facility; depending upon the details, insurance carriers in Denver estimate the premiums to start at $15,000 a year.
  • All that’s guaranteed in life is death and taxes” . . . and you will definitely pay them. According to the information on irs.gov, a corporation with a net profit of $200,000 a year will pay a tax of 39% (possibly 3% to 4% more next year). Yet, if you are involved in an LLC or S Corporation, your personal liability could be as low as 12% to 17% of your net profit, depending on the number of investors. Depending on which state you are operating in, you will also have to incorporate possible local, county & state sales taxes into the cost of your product.
  • Make sure you also figure in enough operating capital; one of the biggest reasons for businesses’ failures is not enough money to maintain the business until it starts making a profit. This could be anywhere from a couple months to several years.

After you add up all those costs, you are definitely at an initial $300,000 to $500,000 investment just to operate for the first month alone.

Remember that money should not be your only concern; you & your partners will need to make a huge ‘sweat investment’ to start a business, let alone within stringent state guidelines, in order to make it profitable.

Of course, you also need to realistically consider how much income you will have. At a going rate of $350 an ounce, a business would have to sell 1,400 ounces a year to make $500,000 in total revenue, before expenses. With an average of 1 to 2 ounces a month per medical marijuana patient, our fictitious business needs around 80 customers a month, or a gross revenue of $42,000 a month, just to break even.

Make sure you survey your market & evaluate the maximum limits of the law. For example, D.C. is only allowing 95 plants per dispensary, and only 300 patients a year.

Before getting into the trade, it’s important to realize that it is still illegal by Federal law. Although the Obama administration & state legislatures have effectively reduced actions by the Drug Enforcement Agency (DEA) in medical marijuana states, operators who are not abiding by the guidelines are being arrested by the DEA.

The best advice on entering the market now is to have as much capital as possible, and surround yourself with specialists who already have experience and business acumen. Touring several existing facilities will also give you much-needed knowledge in formulating your successful business plan.

Related Topics

Arizona Dispensaries Map

Arizona Marijuana Doctors

Arizona Marijuana Classifieds

 

 

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