CANNAINVESTOR Magazine September / October 2016 - Page 52

The competition in Colorado has reduced the retail price of the lowest priced cannabis flower to around $100 per ounce in the Denver area. The wholesale price in the state has dropped to around $1000 a pound. It’s questionable whether growers can generate a profit selling at $1000 a pound and whether retailers or dispensaries can generate a profit selling flower at $100 per ounce.

This pressure on Colorado’s cannabis industry, based on supply, demand and pricing have increased the demand for value-added products that have a substantially greater profit margin. These include premium strains, various extracts, and edibles. I’ve concluded that the future viability of Colorado’s cannabis businesses is to a large extent, dependent on these value-added and higher-margin products.

In every state, a significant challenge is finding a satisfactory business location. Many local jurisdictions, through zoning and business licensing regulations, have made it difficult to obtain locations. In an advanced cannabis state such as Colorado, many local jurisdictions have banned cannabis businesses completely; others may allow growing or processing, but not the retail sale. This adds an entire set of challenges for cannabis entrepreneurs.

Compounding the difficulty in obtaining a satisfactory location is the inability of many building owners to lease to a cannabis business. Because of the illegality of cannabis on a federal level, If the building owner has a loan from a commercial bank, the loan provisions often do not allow leasing to an illegal business. This severely limits potential locations for cannabis entrepreneurs.

Dispensaries and retail stores also have an IRS issue. Section 280E of the Internal Revenue Service Code, states:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”