Getting Into Cannabis Industry Costs A Lot Of Green

May 24, 2017

By legalizing recreational marijuana, Nevada voters have opened up the door for new businesses eager to serve this growing market.

But as Reno Public Radio’s Noah Glick reports, getting into the retail cannabis game comes at a high cost.

“This is where the magic happens,” says Aron Swan, general manager for Silver State Relief, a medical marijuana dispensary, producer and cultivator in Sparks.

Aron Swan (right) gives a tour of the sales floor of Silver State Relief, where he is the general manager.
Credit Michelle Matus

“So these are all of our flower samples here. We have purchased some on the wholesale market, but 90 percent of what you see here we have grown ourselves,” he says.

Silver State Relief is one of nearly 200 medical marijuana license holders in Nevada and has plans to serve the newly legal retail market.

“So going forward for the recreational side, this will be a hallway,” Swan says. “We will put a six foot door in here to pass through the recreational side.”

A construction crew is busy expanding the existing building, which is nestled in between a gas station and a sandwich shop.

“We are adding on. It’s simply because the capacity of the building right now is such that we can’t really handle an anticipated recreation customer base,” Swan says.

That base is projected to be significant. According to the Marijuana Business Daily, nationwide sales of retail marijuana are estimated at more than $2.5 billion this year alone.

But that opportunity comes with significant challenges.

Because banks won't accept marijuana deposits, Silver State Relief customers must pay in cash. That's why this ATM lives on the sales floor.
Credit Michelle Matus

“We are cash only. You can’t get a bank to accept marijuana deposits,” Swan says.

Because it’s still federally illegal, financial institutions with FDIC protections are hesitant to get involved.

“Until we can get more banking in more states, it’s going to be a difficult thing for business owners to handle all of that cash.”

That’s Scott Jordan. He’s the director of business development at Dynamic Alternative Financing, a Colorado-based firm that helps cannabis companies in that state find financial lenders and partners.

He says with limited options for capital, cannabis companies are forced to look for private investment, which comes at a premium.

“Prices and rates are going to be higher, because private money costs money,” Jordan says. “With the exception of real estate being in the single digits, you’re looking at rates that are going to be anywhere from the low teens to the high teens, depending on risk.”

On top of that, there are additional state regulations and some hefty fees that could hamper momentum.

Construction is underway at Silver State Relief, a medical marijuana dispensary in Sparks that plans on serving the new legal retail cannabis market.
Credit Michelle Matus

For one, the law states that to apply for a retail marijuana establishment license, companies must first be operating in good standing within the medical marijuana industry.

Stephanie Klapstein is the spokesperson for the Nevada Department of Taxation, the agency charged with regulating retail cannabis.

“So it’s the folks who have a proven track record of compliance in the industry, and that’s really who we’re opening it up to,” she says.

Scott Jordan says one of the biggest challenges for cannabis companies lies within IRS Code 280E, which limits the expenses that companies in the drug trade can deduct from their federal tax return.

“Roughly 25-30 percent of your expenses, which are personnel, rent, all of the advertising, all of the normal types of expenses that a business has, are unable to be deducted,” he says. “So what happens is they pay their taxes on a higher amount of gross profit than they would if they were a normal business.”

That IRS code was introduced back in the ‘80s to limit the amount of deductions made from companies engaged in the illegal drug trade. Marijuana, being a Schedule I Controlled Substance under federal law, is still subject to this rule.

Aron Swan with Silver State Relief says this is the single biggest financial challenge.

Aron Swan (left) speaks about the challenges of running a cannabis business, such as tax code, limited access to capital, and uncertainty around federal enforcement.
Credit Michelle Matus

“I can even understand the banking, the federal oversight. The banks that are FDIC-insured, they’re nervous,” he says. “But the IRS code…we are a legitimate business, we are sanctioned by the state, we are well-run by successful business people, and it makes it so difficult to operate and be profitable.”

Swan says he understands that operating in this industry is a privilege, and he’s not sure what the future holds.

But for now, he’s doing all he can to be ready for retail cannabis sales, which start on July 1.