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By Duane Craig
October 8, 2018
As more states approve marijuana businesses operating within their borders, there is a growing cadre of contractors finding regular work serving the industry. Here are the aspects that make marijuana construction unique and the possible risks to prepare for.
Cannabis construction opportunities are geographically dependent. You find them in states that have legalized medicinal or recreational marijuana, or both.
It Has Two Primary Construction Opportunities
One opportunity lies in building the grow operations. These setups fit well into converted warehouses and other unused structures by relying on artificial lighting. Other marijuana businesses set up in greenhouses and use solar power with natural lighting. These projects are "systems builds," requiring you to source and install systems and technologies as a major aspect of the work. In some instances, you work with manufacturers to make their systems fit within the restrictions of the space.
These growing operations need a lot of technology, from in-floor heat to irrigation, fertilizing systems, environmental controls, water purification, water recovery, odor control and filtered ventilation. They require lots of power and water, and they frequently install equipment for extracting THC, CBD, and terpenes. There is also continued interest in edible products that have marijuana in them, so many grow operations are now also including kitchens.
Besides doing the initial construction, there are opportunities in doing future build-outs. According to the growers network, 24 grow operations they surveyed plan to increase their operational space by almost 20 million square feet through 2019.
The second construction opportunity is in retrofitting existing space for cannabis storefronts. These retail establishments often need specialized construction for security as well as for compliance with state and local laws.
It Requires Special Financing
Banks are steering clear of marijuana business financing, both for construction and operations. That's because any property used to grow, distribute, sell or deal with marijuana in any way is subject to seizure. Marijuana companies use various other tools for raising investment money; they may opt for going to hard money lenders, using venture capital, and leasing from real estate trusts.
There's a Little Issue With Taxes
Section 280E of the Internal Revenue Code prohibits you from deducting business expenses related to Schedule I and Schedule II controlled substances. Because marijuana is still a Schedule I substance at the federal level, anybody who carries out a trade or business related to trafficking in cannabis, can't deduct their expenses. There are also instances where these state-legal businesses have tax burdens bigger than their net profits. Even in the best of cases, the tax rates for these companies can be as high as 70 percent. As long as this issue persists, investment will be hobbled, and payment risks for contractors will stay higher.
It's Not Really, Totally Legal
Cannabis is an illegal Schedule I drug under the Controlled Substances Act. So, it's not really legal to possess it, cultivate it, sell it, or even to use any space to grow it or manufacture it into products. Plus, the federal government can seize any property connected to marijuana.
So far, the federal government has taken a hands-off approach in states that have legalized aspects of cannabis. That comes courtesy of Obama-era guidance issued by James M. Cole, the deputy attorney general in 2013. Cole's memo outlined the federal government's priorities related to marijuana. It put the focus on protecting minors, preventing criminals from gaining revenue from the trade, preventing interstate commerce of marijuana, and preventing marijuana from being used as a cover for other illegal drug activities.
The current Department of Justice backtracked on that policy in January 2018, saying it would "return to the rule of law" related to cannabis to "…disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country." Later, the DOJ refined its stance, saying it would not "waste its time or money on "small" or "routine" marijuana cases, but will instead focus on bigger fish in the context of marijuana, like drug cartels and larger drug rings and conspiracies."
Nobody knows how U.S. Attorneys will interpret and act on the new guidance. Furthermore, there's always the chance the federal government will take a stronger approach to enforcement that could devalue any business involved with marijuana in any way.
According to Albert B. Wolf, principal at Denver law firm Wolf Slatkin & Madison PC, there are at least three cautions when it comes to doing business with marijuana businesses. You need to be cautious about relying on mechanics' liens in the event of nonpayment. Remember that you're working in a riskier payment environment—accepting cash as payment for construction services poses complications.
Builders are finding ways to reduce risks associated with cannabis construction and are supporting the industry's momentum. However, there is a learning curve that requires getting a deep understanding of how to consolidate all the needed systems. Many suppliers are fairly new businesses, so the research and development effort promises to keep builders in a constant state of learning.
Eventually, if the legal and tax issues get sorted out, the builders who get in on the ground floor and dedicate the necessary talent to keeping up with the industry should have a promising line of business for the foreseeable future.
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